When a stockbroker or financial adviser earns compensation from the purchase and sale of securities on behalf of a client, it can create an inherent conflict of interests. The broker may begin to act in his or her own best interests instead of the client’s, continually trading stocks to generate more commission. This scenario is called churning, and it can cost the client money in unnecessary trading as well as from a poorly performing account.
How to Recognize Churning
There are warning signs that point to churning. Always speak with an attorney before assuming your broker is engaging in excessive trading. As a responsive firm with experience representing clients throughout the U.S. and Puerto Rico as well as Latin American countries like Argentina, Colombia, Venezuela and Mexico, Erez Law can investigate your claim and give you our professional opinion – we specialize in this kind of law. However, knowing what to look out for can help you seek an attorney’s help before you lose any more money. Here are a few signs of unnecessary, excessive trading:
- You receive a high volume of transaction confirmations. Brokerage firms must send you a confirmation after every trade in your account. Unless you are a highly active trader, you won’t receive an excessive amount of confirmations. If your turnover seems high, it’s an indication that your broker may be excessively trading on your account for his/her own benefit.
- Your account value is declining despite an upward trend in the market. More commissions on your account than necessary can erode your account, causing it to underperform according to the market. While a loss doesn’t necessary point to churning, large losses not relative to the market might. This is also true if your account is declining faster than it should in a downward-moving market.
Both of these scenarios may be red flags for excessive trading. Before you lose too much to fraudulent brokers with hidden conflicts of interest, hire an attorney who can help you fight back.
How to Recover Your Churning Losses
To recover damages as a victim of churning, the law requires customers to arbitrate their disputes by filing a Financial Industry Regulatory Authority (FINRA) arbitration claim against the brokerage firm or individual adviser. Give yourself your best chance during this process by hiring an attorney who specializes in broker misconduct. An attorney may be able to help you prove the three elements necessary to bring a successful claim:
- Control. The broker had express or implied control over trading on your account. If you signed a trading agreement with a broker, this is evidence of control. You can also establish control by demonstrating that you always followed the broker’s recommendations (“de facto” control).
- Excessive trading. A churning case depends on evidence of excessive trading on your account. What qualifies as “excessive” depends on your type of account and investment objectives. Proof of churning may be that the trading activity on your account was inconsistent with your financial goals and risk tolerance.
- Scienter. “Scienter” refers to the broker’s intent to defraud you. You must prove that your financial adviser churned your account with the specific intent to defraud you or with a disregard of your best interests.
If a broker looking to maximize his or her compensation cost you money, you have options. Defend your rights with an experienced attorney. To have a chance against the securities defense firms your brokerage company will likely hire, you need an experienced law firm.
Erez Law Can Help
Dishonest or negligent brokers can lose their clients hundreds of thousands of dollars, generating commissions for themselves with blatant disregard for clients’ investments. At Erez Law, we’re dedicated to holding bad brokers responsible for their actions. If a reckless or fraudulent broker ran your account into the ground to serve his/her own purposes, contact us. Jeffrey Erez and his team of attorneys may be able to help you recover some or all of your losses.