Account Churning Attorneys Based in New York
When a person chooses to invest, they expect that the broker or financial advisor entrusted with the task of buying and selling securities for them will make prudent and well-informed trades. Unfortunately, financial services professionals do not always act in their clients’ best interests and may make trades purely for their own financial gain. This practice, known as account churning, allows a broker to rack up fees through excessive trading.
If you suspect that your broker or financial advisor made unnecessary trades purely for their own benefit, you should consult a skilled litigation attorney to discuss your options for redressing your harm. Call(877) 905-7671.
New York Overtrading
When a broker in New York or elsewhere buys or sells securities on behalf of a client, the broker typically earns a commission. Account churning is the term given to excessive trading for the sole purpose of earning a commission. Not only is account churning unethical, but it is also a breach of federal rules and regulations. Specifically, the rules set forth by the Securities Exchange Commission bar brokers who have discretionary authority over an investor’s account from acting in a manner that is deceptive, fraudulent, or manipulative by making excessive transactions. Similarly, the FINRA rules provide that a broker or agent must have a reasonable basis to believe that an investment transaction is suitable for an investor’s individual financial goals, knowledge of investment strategies, and risk tolerance.
A high number of purchases and sales of securities may be evidence of overtrading if the transactions do not appear to align with the investor’s financial goals. To prove that a broker should be held liable for account churning, the investor must first prove that the broker had control over the investment account. Control is often present in cases involving margin funds and discretionary or managed funds. The investor and their attorney must then show that there was excessive trading on the account.
Whether trading was excessive will be determined by the type of account and the investor’s goals. One analysis used to determine if a broker has committed overtrading is the calculation of a turnover ratio, which divides the total amount of purchases made in the account by the average monthly equity in the account. The ratio is then annualized and analyzed to determine whether the number of transactions is excessive, given the nature of the account. In some cases, a cost to equity ratio will be employed to analyze whether transactions are excessive. The cost to equity ratio assesses the expense of the trading strategy relative to the funds in an account. The greater the cost, the more likely it is that overtrading will be found.
Lastly, an investor claiming harm due to overtrading must prove that the broker’s sole intent in trading excessively was to earn commissions. Thus, the investor must show that the broker acted with a specific intent to defraud the investor, or with a reckless disregard for the investor’s interests.
Damages for Overtrading
An investor harmed by overtrading may be able to recover the excess commissions that were paid to the broker, as well as any losses that the investor’s account suffered due to the overtrading. Proving that a broker should be held liable for overtrading is a complicated and arduous process. If you believe that you suffered harm due to overtrading, it is critical to retain a skilled securities lawyer to assist you in pursuing your claim.
Excessive trading takes place when a stockbroker or brokerage firm trades beyond an investor’s goals to generate more commissions to their account. This practice is common among dishonest brokers and may be grounds for a civil or criminal legal action. Excessive trading claims are often tied to breach or misrepresentation of fiduciary duty. Brokerage firms or brokers who engage in this act may give inaccurate information to their clients with the hope of persuading them that excessive trading is critical or may fail to inform them about the dangers of excessive trading. There are many federal and state laws that allow investors to make a claim against excessive trading.
Proving Excessive Trading
A claim against a stockbroker or brokerage firm will be successful if an investor can prove a few things, including:
- The brokerage firm or the stockbroker controlled all the activities in the account.
- The activities in the account resulted in excessive trading based on the investor’s investment objectives and risk tolerance.
- If you suspect you have suffered losses as a result of excessive trading, you can bring an arbitration claim against your stockbroker. The securities arbitration panel will analyze a number of factors to ascertain whether the stockbroker had full control of the account, including:
- Prior securities investment experience with the client
- The level of knowledge the client has about the investment strategy
- Client reliance and trust upon the brokerage firm or stockbroker
- Level of client’s sophistication including occupation and education
Penalties of Excessive Trading
Federal and state laws prohibit material misrepresentations and fraudulent behavior related to sales of securities. Excessive trading is a violation of 18 U.S Code Section 1348, Rule 10B-5 of the Securities and Exchange Act of 1934, and many other existing laws. This offense carries different penalties that vary from state to state. It’s worth noting that stockbrokers and brokerage firms can also be charged for falsifying investment documents to conceal excessive trading with a violation of regulations outlawing the falsification of business documents.
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