Churning is when a broker engages in excessive buying and selling securities in a customer’s account with one goal in mind – generating commissions for the benefit of the broker. It is illegal, as brokers 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, including the SEC Rule 15c 1-7. The Financial Industry Regulatory Authority (FINRA) also has rules to prevent excessive trading for broker gain.
One of the ways brokers 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 asked for.
However, under the rules governing the securities industry, brokers and brokerage firms must be able to demonstrate that the recommended trading strategies are in the best interests of a particular customer. And in cases where an account has clearly been churned, the activity is not in the best interest of anyone, regardless of their investment objectives. And this makes sense, because even if you 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 or brokerage firm.
So, how do you know if your investment account is being churned by your broker? The evidence that proves churning is hidden in your account statements.
It is considered fraud and is both illegal and unethical. In order to mask churning, unscrupulous 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, your portfolio is actually losing money on frequent commissions and becoming filled with poorly performing investments.
Excessive trading is typically determined by evaluating your account's annual turnover rate and the "break even" or "cost-equity" ratio. Typically, an annualized turnover rate of 4 or higher is excessive. Meyer Wilson works with the industries’ best damages experts to analyze your portfolio for excessive trading.
Bringing a Churning Claim to Arbitration
When you bring a churning claim to arbitration, the following will be examined:
Meyer Wilson has decades of collective experience doing one thing: 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 the skill, experience, and resources necessary to do so aggressively and excellently. We have helped clients from all over the country recover hundreds of millions of dollars in lost assets from the firms that handled them with negligent practices, such as churning.
We have helped clients recover over $350 million. Call us or complete our online form to request a free case consultation. Let us help you determine your next move.
