Stockbroker and Financial Advisor Churning Attorney
What is “Churning” or Excessive Trading?
Churning or excessive activity trading when your financial advisor effects transactions in your account generally not in an effort to further your financial interests but instead to further their own financial interests at your expense. Whether a customer security account has been churned or excessively traded is a question of fact, and it peculiar to the account at issue.
For example, it may be, and generally is, inappropriate to buy or trade a mutual fund, Unit Investment Trust or a fixed income security more than once in sometimes over a period of years. However, it may be completely appropriate for an account containing options to trade in and out, many times over, a period of sometimes hours or days. Churning must be judged in relation to a customer’s investment objectives and the market conditions at that time.
Churning is often marked by short holding periods without any appreciable change in securities prices. Churning is often measured by the account’s “turnover rate,” or the total purchases divided by the average value of the account, and the “Goldberg rate,” which is the commissions charged divided by the average value of the account.
The turn-over rate is calculated by dividing the total amount of purchase transactions by the average value of the account over the period being measured. For example, $600,000 worth of purchases over a period of one year in an account having a net value of $100,000 would result in a turn-over rate of six times. If this same account incurred $6,000 in fees, under the Goldberg rate, the account would have had to return 6% simply to break even.
How to Identify Churning
Many courts and commentators, find an annual turn-over rate in excess of 6 to be prima facie evidence of churning. However, churning, must be judged in relation to the plaintiff’s investment objectives and the market conditions at that time. Securities sold a few days after purchase without significant price change must be seen as device to generate commissions. A turn-over rate of 3 may be wholly inappropriate for an account seeking income, but completely appropriate for an account containing options or seeking long term growth.
Accordingly, at the heart of any churning of excessive fees. Many customers review their managed or fee based account, and see many transactions, sometimes in small quantities of securities being brought or sold in their account and suspect that they are the victims of churning or excessive trading. In most cases, they are not. They are not because the broker is not obtaining a commission with respect to these transactions, and there is no scienter or motive to trade the account. Short term trading can raise other concerns, but short term trading in a fee based account is not churning.
Churning is exists when a securities broker engages in excessive trading in disregard of his customer’s investment objectives for the purpose of generating commissions, and consists of three elements, all of which must be present: (1) the trading must be excessive in light of the customer’s investment objectives; (2) the broker must exercise control over the account; and (3) the broker must act with the intent to defraud or with willful and reckless disregard of the customer’s interests.
Many churning cases also include incidents of unauthorized trading, where the stockbroker does not obtain authorization prior to effecting the transactions at issue, margin fraud, where the stockbroker inappropriately uses margin to increase the purchasing power and assets available in the account to churn, and sometimes include excessive mark-ups, and the failure to disclose commissions (or actually fees) earned from the sale of securities with a mark-up or mark-down as principal.
Filing FINRA Arbitration Claims for Trade Churning
FINRA is the Financial Industry Regulatory Authority. FINRA is a self-regulatory association responsible for licensing and regulation of stockbrokers and financial advisors across the country. As part of a stockbroker’s licensing and registration, these financial professionals are required to follow certain rules and regulations including fair dealing with customers, the recommendation of suitable investments, and to refrain from self-dealing or churning.
Stockbrokers and their employers are also required to submit themselves to FINRA arbitration should customers seek to sue them or recover damages form their misconduct.
Call Our Lawyer for Victims of Trade Churning
If you believe that your stockbroker or financial advisor made repeat, unnecessary transactions on your account, you should have your account reviewed to determine if you are the victim of churning. Contact The Guiliano Law Group today to schedule a free legal consultation and learn more about how to seek help as a victim of fraud. Call us today at 1-877-732-2889.
All inquires are confidential, and we offer our services on purely a contingent fee basis, meaning we do not get paid unless we make a recovery for you.
AboutNicholas Guiliano, Esq.
Nicholas J. Guiliano has more than 25 years of securities related experience, and has represented more than 1,000 public customers in claims against brokerage firms for fraud in connection with the sale of securities principally in arbitration before the Financial Industry Regulatory Authority (“FINRA”) Dispute Resolution, Inc. (formerly known as The National Association of Securities Dealers (“NASD”) Dispute Resolution, and the New York Stock Exchange (“NYSE”) Department of Arbitration.LEARN MORE