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Unauthorized Trading

Securities Lawyers Representing Investors in State and Federal Arbitration and Litigation

Investors may leave their investment decisions to brokers or investment advisors who keep up with the market. Other investors may ask to be kept up to date on all transactions. Brokers and advisors should comply with their clients’ wishes regarding control. When a broker or investment advisor makes trades without authorization from the client, the broker or investment advisor has violated industry rules and federal laws that prohibit unauthorized trading. If you have suffered losses because of misconduct by a financial professional, you should consult the securities attorneys at Varbero Casagrande.

Unauthorized Trading

Whether a broker has permission to execute trades on behalf of a client without express permission for each transaction depends on the agreement that the broker reached with the client. Clients with discretionary accounts authorize their brokers with a limited power of attorney allowing for trades. Brokers and their clients can make any arrangement regarding discretionary trading that a client prefers. However, non-discretionary accounts require consent from the client before each transaction. In some cases, investors authorize brokers to make trades at their discretion up to a financial limit. However, if no agreement has been made, the broker would not have the authority to make those trades.

Furthermore, just because you agreed that an account is discretionary does not give your broker complete control over trades. The trades must align with your objectives, or even if they are not unauthorized, trading rules may still have been violated.

FINRA Violations

The Financial Industry Regulatory Authority (FINRA) is a self-regulating body that puts forth rules that members of FINRA must follow. Violations of these rules can constitute unauthorized trading. Under FINRA Rule 4512, brokers have several record-keeping requirements, and these mandate keeping a list of people who are authorized to make discretionary trades. More importantly, under FINRA Rule 3260, no member is supposed to make transactions regarding a discretionary account that are too great in size or frequency, given the financial resources and character of the account. No member may exercise discretionary power over a customer’s account unless the customer has given prior written authorization to the member, and the account was accepted by the member, as evidenced in writing by the member or someone who was duly designated by the member under Rule 3110. Under FINRA Rule 2020, the use of deceptive, fraudulent, and manipulative practices is prohibited. FINRA Rule 2010 requires members to use fair trade principles and high standards of commercial honor.

The circumstances will dictate the pursuit of remedies. If there is a FINRA violation, your attorney may be able to pursue an arbitration claim for damages through FINRA. You can ask for any losses that you sustained due to the unauthorized trading. A party can file an arbitration claim with FINRA if there is a dispute that involves the business activities of a brokerage firm or an associated person.

Other Theories of Relief

Damages for unauthorized trading also can be pursued under other theories. Under federal law, unauthorized trading can be considered securities fraud, and you may be able to pursue a claim under SEC Rule 10b-5. Rule 10b-5 prohibits brokers and investment advisors from engaging in misrepresentations, fraudulent schemes, and deceitful practices when buying or selling securities. When you sue for a Rule 10b-5 violation, your attorney will need to establish investor reliance.

Additionally, you may have a claim of negligence, breach of contract, or breach of fiduciary duty under state law. Each state has created its own laws to define these causes of action and protect the rights of investors. Under New York law, for example, a plaintiff’s lawyer needs to establish that a fiduciary relationship existed and that misconduct by the defendant caused damages.

In some cases, there may be a claim of unsuitability as well.

Consult an Experienced Securities Attorney

If you are concerned that potential unauthorized trading by a financial professional may have affected your accounts, you should contact Varbero Casagrande. We represent investors nationwide in arbitration and litigation. Call our New York Office at: (646) 378-4400, or our Florida Office at: (954) 998-7910 or contact us online for a free case evaluation.

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