Churning in the context of investment refers to excessive and unnecessary trading activity in a brokerage account by a financial professional. The motivation behind churning is to generate increased transaction fees and commissions for the broker rather than to benefit the investor. If you suffered losses in your portfolio, you can hold them accountable for their actions.
Meyer Wilson has decades of collective experience recovering client losses against the largest, strongest investment firms in the nation. Our firm has devoted itself to serving the victims of investment misconduct. We have helped clients recover over $350 million. Call our investment fraud lawyers or complete our online form to request a confidential case consultation.
What Is Churning?
Churning is when a broker engages in excessive buying and selling of securities in a customer’s account with one goal in mind: generating commissions for their own benefit. It is illegal, as financial experts have a fundamental duty to put the interests of their clients before themselves.
According to the U.S. Securities and Exchange Commission, churning is an illegal and unethical activity that violates numerous laws. The Financial Industry Regulatory Authority (FINRA) also has rules to prevent excessive trading for broker gain.
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How Brokers Try to Hide Churning
One of the ways financial advisors and firms try to mask churning is by making sure that the investment objective for the brokerage account has been marked “speculation” with a “high” or “aggressive” risk tolerance. Then, when the account is excessively traded, the broker and firm often argue that the customer was willing to take those risks and that active trading is what the customer requested.
However, under the rules governing the securities industry, brokerage firms must be able to demonstrate that the recommended trading strategies are in the best interests of a particular customer.
In cases where an account has clearly been churned, the activity is not in the best interest of the investor, regardless of their objectives. Even if they have an aggressive risk tolerance, no customer ever agrees or asks for their account to be manipulated solely for the purpose of deriving profits for the broker.
How to Tell If Your Account Is Being Churned
How do you know if your broker is churning your investment account? The evidence that proves churning is hidden in your account statements.
Excessive trading is considered fraud and is both illegal and unethical. To mask churning, brokers will hold on to the investments in your account that perform poorly while selling off those that are profitable.
In this way, your portfolio can appear to be performing well thanks to the gains you see each time a profitable investment is sold. Unfortunately, you are actually losing money on frequent commissions and becoming filled with poorly performing investments.
Warning signs of broker misconduct include:
- Excessive trading activity
- High turnover rate
- Unsuitable investments
- Lack of communication
- Unexpected fees and commissions
- Poor performance
- Lack of diversification
If you notice any of these red flags, contact an experienced investment fraud attorney to protect your financial security.
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How Is Churning Proven?
Excessive trading is typically determined by evaluating your account’s break-even or cost-equity ratio (measures the annual cost you incur from an investment strategy) and annual turnover rate (calculated by dividing the total annual purchases by the account’s average balance during a year). Typically, an annualized turnover ratio of 4 or higher is excessive.
Meyer Wilson works with the industries’ best damages experts to analyze your portfolio for excessive trading. This collaborative effort highlights our dedication to providing effective solutions for investors.
Our lawyers are nationwide leaders in investment fraud cases.
Bringing a Churning Claim to Arbitration
Most negligence and fraud claims are resolved through FINRA arbitration. The process involves a neutral panel of arbitrators who review evidence, hear arguments, and make binding decisions on the dispute.
FINRA arbitration is known for its efficiency and focus on financial matters, providing a quicker and more cost-effective alternative to court proceedings.
The arbitration panel will consider different aspects before making a final decision.
Turnover
The dollar amount of opening buy transactions as compared to the average net worth or equity of the portfolio. The general rule of thumb is that if your portfolio has a turnover ratio of 400% or four times the average net worth of the account, then churning most likely took place. This calculation is one of the most important factors in these claims.
Control
Another key element is who was in control, meaning the person who decided what to buy and sell, how much, and when to do it. To have a successful arbitration claim, you have to show that your broker or advisor controlled and directed the trading activity in your account.
Commissions and Fees
The examination extends to the commissions and fees incurred through the trading activity. If the investor experienced disproportionately high transaction costs compared to the potential benefits of the trades, it could strengthen your case.
Documentation
The availability and accuracy of documentation play a crucial role in arbitration. Comprehensive records, including account statements, communication with the broker, and documentation of investment discussions, can serve as valuable evidence to support or refute a churning claim.
Breach of Fiduciary Duty
The arbitration process may also explore whether there was a breach of fiduciary duty on the part of the advisor. If it can be demonstrated that the financial professional failed to act in the investor’s best interest, it strengthens the overall case of churning.
You Need Meyer Wilson for Your Investor Claim
At Meyer Wilson, we have the skills, experience, and resources necessary to recover your investment losses. We have helped clients from all over the country receive hundreds of millions of dollars for lost assets.
Our investment fraud lawyers will evaluate your account’s cost-equity ratio and turnover rate to identify any signs of broker misconduct. If they engaged in negligent acts or fraud, we will help you hold them accountable. Contact us now for a no-cost consultation. Let us help you determine your next move.
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