At the Investment Loss Recovery Group, we have nearly 40 years of legal experience handling cases involving churning, excessive trading, and other forms of broker and advisor misconduct. When brokers or other investment professionals engage in churning and harm an investor for their own benefit, they’re violating the legal and ethical duties they owe to their clients.
As former licensed securities brokers, we know the legal and ethical rules that a broker must follow. We understand that brokers should put their client’s interests before their own. When a broker churns an account, they’re breaching their duties and violating the trust of the clients they serve.
The experienced attorneys at the Investment Loss Recovery Group know how to fight for you and your investments. We started our careers as defense attorneys. That experience allows us to anticipate and counter the defenses raised by brokers and firms.
If churning or other misconduct has harmed your investments, we want to help you recover. Contact us today for a free consultation and advise about your best legal options.
What Is Churning?
Churning, also known as excessive trading, is a type of misconduct where a broker engages in too many transactions for a given investor or portfolio. They typically do this because each transaction generates a commission for the broker. The broker is putting their interest in obtaining commissions above the investor’s interest in having a sound investment. Under U.S. Securities and Exchange Commission (SEC) rules, churning is illegal and an unethical violation of the broker’s duty to clients.
Churning can result in the broker’s commissions taking a high percentage of an investor’s account. These commissions can consume any profit the transactions generate, and if the transactions are not profitable, the commissions can eat up the initial investment. Investors, particularly new ones, may not understand how much these commissions can affect them.
It’s important to note that just because a broker is generating a high number of transactions, it doesn’t mean that the broker is necessarily engaged in churning. If an investor wants the broker to pursue a strategy of short-term trading that generates many transactions, it can be entirely legal for a broker to do so. Whether a high number of transactions rises to the level of churning largely depends on the facts of the investor’s instructions and situation.
What Does Churning Look Like?
It can be hard to identify churning, but there are characteristics that usually appear:
- High turnover rate
- Reduced profit from investments
- Slowly declining investment when the investment’s conditions are good
- Unusual numbers of transaction confirmations from your broker or brokerage firm
How Do You Prove a Churning Claim?
To prove churning under the rules of the Financial Industry Regulatory Authority (FINRA), an investor must prove three elements for a churning claim: control, excessive trading, and scienter (intent).
- Control of an investment account is a key piece of information in a churning claim. The investor must show that the broker had express control over the account or that the broker had implied control over it.
- Express control is shown by agreements or documents that gave the broker control over the account and how it could be used.
- Implied control could be shown when an investor nearly always follows the recommendations of a broker, or when an investor is unsophisticated and is unable to understand what is happening with an account.
- Excessive trading depends on the goals of the investor, the type of account, and investment strategies. Investigators will look at the characteristics such as the turnover rate, investment performance, and other characteristics. They will also look at industry norms and behaviors. Based on the account type, the investor’s instructions, and industry metrics, investigators can usually determine if an account suffered excessive trading.
- Scienter (intent) of the broker is very important in a churning claim. The investor must show that the broker intentionally engaged in misconduct or disregarded the interests of the investor. Information such as the amount of commissions, prior broker and firm activity, and communications by the broker can all help establish intent.
Whether or not churning exists depends largely on the facts of the situation. Communications from investors to brokers, types of accounts, and control over the accounts all factor into the determination of churning. If you suspect that a broker is engaged in churning, contact our attorneys to review your situation.
How to Prevent Churning
There are ways to avoid churning in your accounts. The following tips may help you protect your investments:
- Carefully monitor your investments and set strict limits on the number of transactions you are willing to allow.
- Maintain control of your accounts and don’t allow brokers unrestricted access.
- A flat-fee account that doesn’t rely on commissions may help, but be aware that these accounts come with their own risks.
Always keep your eye on your accounts and don’t assume that your broker is looking out for your interests. No matter how much you trust your broker, understand that their interests and yours may not be aligned. Stay vigilant and monitor your investments.
What Happens If You’ve Suffered from Churning?
If you have suffered from a broker’s misconduct such as churning, you may be able to bring an action to recover your investment. Our attorneys can help you understand the law and explore options for recovery. In many cases, investors will bring an arbitration claim under FINRA’s authority. At the proceedings, you’ll be able to state your claim and pursue recovery.
If churning is proven, you may be able to recover your lost investment. Our attorneys can help you understand what remedies may be available for your claim. Also, FINRA may levy fines against the broker and their firm. These fines can include monetary sanctions, suspension of a broker’s license, or in some cases a complete bar from the profession.
We Know How to Help
The Investment Loss Recovery Group has handled misconduct cases of all types including churning. As attorneys and former investment professionals, we know how to fight for the rights of investors like you. If you believe you’ve been harmed by churning or other misconduct, we want to help you recover. Contact us today for a free consultation.