How do You Prove Churning?

Churning can be proven by showing that trades were conducted with the intent to generate commissions rather than to achieve the investor’s financial goals. Victims can seek restitution and hold accountable financial advisors who have breached their fiduciary duty.

Start by documenting a pattern of frequent trades that appear unnecessary or unsuitable for your investment goals. Then, demonstrate that these trades were not in your best interest but rather aimed at generating commissions for the advisor. Comparing your trading activity with industry standards can highlight abnormal patterns.

A California churning fraud lawyer can help investors gather evidence to prove excessive trades and recover losses. Types of evidence used to strengthen a case include account statements, trade confirmations, and any communications with the fraudulent financial advisor.

Gather Evidence of Excessive Trading

If you suspect that your financial advisor was involved in churning or excessive trading, collect evidence. This will help you demonstrate that trades were made excessively and without regard for your best interests but rather generate unwarranted commissions for the advisor. If you work with an investment fraud lawyer, they will gather evidence to strengthen your claim.

Account Statements Showing Trading Activity

These statements provide a comprehensive record of all transactions executed within a specific period. By reviewing these statements, investors can identify patterns of excessive trading that suggest churning.

Key indicators of excessive trading include:

• Frequent turnover of investments
• Rapid buying and selling of securities without a clear investment strategy
• High transaction costs relative to the account’s size and stated investment goals

Comparing these activities with the investor’s financial objectives and industry norms helps establish whether the trades were made in the client’s best interests or primarily to generate commissions for the advisor.

The Turnover Ratio of the Account

The turnover ratio of an investment account is a critical metric for detecting churning. The turnover ratio measures the rate at which securities are bought and sold within the account over a given period.

A high turnover ratio is a strong signal that the account has been excessively traded. This indicates the advisor is likely prioritizing commission generation over the client’s long-term investment objectives.

While a high ratio alone does not conclusively prove churning, it is a crucial piece of evidence that, when combined with other factors, can help demonstrate that an advisor violated their fiduciary duty to the client.

Trade Confirmations Detailing Each Transaction

Trade confirmations document each transaction conducted within their investment accounts. 

These confirmations typically include essential details such as:

• The date and time of the trade
• The specific security bought or sold, including ticker symbols
• The quantity of shares or units involved
• The price at which the transaction was executed
• Any associated fees or commissions

The trade confirmations can help your legal team build a detailed record of trading activity and identify any discrepancies or unauthorized transactions.

Communication Records With the Advisor Discussing Investment Strategies

Keeping a record of conversations where the advisor recommends frequent trades or portfolio changes without a clear reason may prove that the advisor’s primary motivation was to earn more commissions rather than serve the client’s investment goals.

Additionally, if the records show the advisor downplaying or failing to disclose the costs and risks associated with their trading recommendations, this can further support a claim of churning.

Performance Reports and Comparisons With Benchmarks

These reports should show the actual returns generated in the client’s account over time, which can be compared to the returns of appropriate market indexes or other benchmarks. If the client’s account consistently underperforms relevant benchmarks despite high turnover and frequent trading activity, this can indicate churning.

Additionally, performance reports that highlight significant short-term trading gains but long-term losses may also underline churning.

Prove Churning by Establishing Intent

While excessive trading alone may raise suspicions, the advisor’s intent behind those trades must also be established. To prove churning, you must show that the advisor’s primary motivation was to generate commissions for themselves rather than acting in the best interests of the client.

Lack of Regard for Investor’s Best Interests

Instead of focusing on achieving the investor’s stated financial goals and maximizing returns, advisors engage in frequent buying and selling of securities primarily to generate commissions. This practice not only results in increased transaction costs and potential tax liabilities for the investor but also undermines the integrity of the advisory relationship.

By disregarding the investor’s objectives and risk tolerance, advisors jeopardize the long-term growth and stability of the investor’s portfolio. Moreover, churning leads to diminished returns or even losses due to the constant turnover of assets without strategic merit.

Patterns of Trading That Benefit the Advisor Through Commissions

In cases of churning, the investment advisor’s trading patterns often reveal a clear focus on generating commissions. These patterns may include an unusually high volume of trades, especially in short timeframes, with no explanation provided for the frequency of the trading activity.

Advisors may also engage in strategies like in-and-out trading, where positions are opened and closed rapidly to rack up more commission revenue. Another potential indicator is the advisor favoring products that carry higher sales loads or ongoing fees, even when lower-cost alternatives may be more appropriate for the client’s needs.

An Investment Fraud Lawyer Will Help You Prove Churning

When you entrust your life savings to a trusted financial advisor, and they prioritize their profit over your best interest, it undermines the advisor-client relationship. A churning attorney will help you prove excessive trading and build a strong case against the at-fault party.

At Meyer Wilson, we are dedicated to protecting investor rights. We have 75 years of collective experience, so we know how to build an evidence-based claim. Call us today to discuss your next steps during a free initial consultation.