Plaintiffs' Personal Injury Law Firm

Was your broker trading in your best interest, or theirs? - Churning -

Investors often assume that when their broker-dealer executes a trade, they do so with the sole purpose of either seeking to take advantage of an investment opportunity for them or to prevent any potential losses. A broker-dealer is under a duty to use reasonable efforts to maximize the economic benefits for their clients in each transaction they execute. Unfortunately, many unsuspecting investors fail to realize that their broker breaches this duty by trading with the purpose of maximizing their own commission, also known as 'churning.'

Churning is the shorthand expression used for a type of fraudulent conduct in a broker-customer relationship in which the broker overtrades a customer's account so as generate sales commissions. This is a relatively common form of misconduct, the lure of which is argued to stems from the way in which brokers are compensated. Many advocates argue that as long as brokers are paid on a commission basis, the temptation exists to execute more trades than less thereby increasing their personal gain. Absent a non-commissioned based form of remuneration, investors must be proactive to ensure that their broker-dealer is truly acting in their best interest. One way of achieving this is by consulting professionals who can undertake a statistical and legal review of their portfolio to ascertain if they are in fact victims of this illusive yet common fraud.

For an investor to successfully allege churning, three fundamental elements must be shown: the self-interest of a registered representative, the effective control by the representative, and excessive trading. A starting point in ascertaining where the broker is guilty of churning is asking the following question: "Was there a reasonable probability that the securities trading would be sufficiently profitable to cover its cost?"

Unlike the duty to recommend only suitable investments, churning deals with the quantity of securities traded in your account and not the quality of the purchased securities. This is assessed through a number of different quantitative analyses that reflect account performance including a statistical analysis of turnover ratios and commission-to-equity and cost-to-equity ratios.

The Securities and Exchange Commission has consistently held that whether or not the customer considers the trading in their account to have been appropriate is not the proper test for determining the propriety of a broker's conduct. The fact that your broker's trades resulted in an overall profit in your account in no way legitimize this serious breach of duty.

To understand the seriousness of this fundamental breach of duty, a broker-dear has been found liable for churning even where the customer received confirmation slips of each transaction and was in weekly contact with their broker-dealer because the broker had traded excessively without informing their customer of the potential hazards involved in such a course of trading.

Earlier this month, the Federal Securities and Exchange Commission (SEC) and the Alabama Securities Commission (ASC) charged an Alabama based broker-dealer in connection with, amongst other accusations, rampant churning of customer accounts. The SEC alleges that Aura Financial Services, Inc., and six registered representatives used fraudulent sales practices and high-pressure sales tactics to convince customers to open and invest money in Aura brokerage accounts, which the brokers subsequently churned. Aura and the brokers enriched themselves with approximately $1 million in commissions and other fees paid by the customers while largely depleting the customers' account balances through trading losses and excessive transaction costs.

As a victim of this common breach of duty, you may be entitled to be compensated for your out-of pocket loss, trading costs and receive the profits that you could have made should you had the well-managed account your are legally entitled to.

The attorneys at Securities Fraud Department of Napoli Bern Ripka LLP are proud to continue the Firm's long-standing tradition for advocating for claimants rights. Our attorneys' and in-house financial analyst are ready to complete a statistical analysis of the trading activity in your investment portfolio and advocate for your legal rights. All consultations are confidential!

The above article does not constitute legal advice but rather serves an introduction to this complex area of law. For more information about churning and your rights, please contact Adam Gana Esq., Senior Counsel - Securities Fraud Department, by e-mail or telephone:

Adam J. Gana, Esq.

Senior Counsel, Sec. Fraud Department

(212) 267-3700

[email protected]