Industry Professionals Nationwide
Brokers owe certain duties to their customers. Unfortunately, sometimes brokers try to enrich themselves rather than focus on their clients’ objectives. Churning is an illegal practice in which a broker trades excessively within a customer’s account to get commissions for himself or herself. The commissions may eat up the profit from the transactions or even the initial investment. Federal laws and rules, as well as an investment advisor’s fiduciary duty to clients, prohibit churning. If you are an investor concerned that churning has depleted your account, you should consult a seasoned securities attorney at Varbero Casagrande.Churning
The Securities Exchange Act of 1934 prohibits someone from using a deceptive, fraudulent, or manipulative device or contrivance to complete a securities transaction. Churning, or making excessive transactions to generate commissions, is one such contrivance under 17 CFR section 240.15c1-7, which governs discretionary accounts. This section defines deceptive, manipulative, and fraudulent devices and contrivances to include acts by a broker that are designed to trigger transactions within a customer’s account over which the broker has discretionary power, if those acts are excessive in frequency or size. Whether the acts are excessive is based on the nature and financial resources of the account.FINRA Rules
FINRA regulates the investment industry by setting forth rules that members need to follow, as well as enforcing rules and investigating violations. Under Rule 2111, brokers need to have reasonable grounds to think that a specific transaction is suitable for a customer. Churning involves making transactions for the improper purpose of enriching the broker, regardless of whether the transaction is appropriate for the investor. Accordingly, it may be possible to bring a claim under Rule 2111. This claim may be arbitrated in the FINRA dispute resolution forum.
To establish churning under federal law, your attorney will need to show that the broker had control over your brokerage account, excessive trading occurred considering your financial objectives and the size of the account, and scienter, which can involve an intent to defraud or acting with reckless disregard. Experts can help show that the trading should be considered churning, given these factors. If you can establish a case, you may be able to obtain damages equal to fees and commissions, along with losses sustained due to trades. Investors also can receive compensation for gains that they would have earned, if not for the broker’s actions.
Additionally, FINRA Rule 2111.05(c) provides that churning happens if the same elements are met that are required for a quantitative suitability violation. Quantitative suitability mandates that a member with control over a customer account must have a reasonable basis for believing that a series of recommended transactions might be suitable for the customer, given the customer’s investment profile. Rule 2111.05(c) is considered to codify the case law on churning.State Laws
Brokers and investment advisors sometimes owe a duty of fiduciary care to customers under state laws. A fiduciary duty requires an investment advisor to act in a client’s best interests. Sometimes it can be complicated to determine whether a stockbroker is a fiduciary, depending on their relationship with a client. However, a registered investment advisor who trades in a managed account and receives a percentage of client assets is a fiduciary. While churning may be actionable in some states as a breach of fiduciary duty, it may also be actionable as negligence, misrepresentation, or malpractice. It is important to talk to an experienced attorney who can assess the full scope of your potential claims.Consult an Experienced Stockbroker Fraud Lawyer
If you are considering bringing a churning claim, or if you suspect that there may have been churning in your account, you should consult Varbero Casagrande. We assist clients nationwide. Call our New York Office at: (646) 378-4400, or our Florida Office at: (954) 998-7910 or contact us via our online form. We look forward to discussing your situation in greater detail and explaining how we can assist you.