Account Churning
Securities Litigation Lawyer Serving New Jersey Residents
Churning happens if a broker is involved in excessive buying and selling of securities in a customer’s account in order to trigger commissions for himself or herself. A broker has to have control over investment decisions in the customer’s account to be held accountable for churning. Often this control is established through a formal written discretionary agreement. If you believe you may have fallen victim to account churning in New Jersey securities litigation attorney Raymond A. Grimes, founder of Grimes Law Firm, can assess your claim. We help individuals and businesses with a variety of legal needs, including litigating business disputes, closing real estate deals, and much more.
Account Churning
Churning, also known as excessive trading, is illegal. When churning is underway there may be high commissions, unmanaged margin interest costs, percentages that are greater than a reasonably accepted historical rate of return for the market, and low overall returns. Often brokers that churn accounts assume they won’t be found out because lots of investors don’t scrutinize their monthly statements for potential fraud. Sometimes brokers will point out losses of certain financial products as the source of a declining portfolio, even though a major cause of the decline is excessive trading fees.
Churning is a form of securities fraud prohibited by Securities and Exchange Commission (SEC) Rule 15c1-7, Financial Industry Regulatory Authority (FINRA) Rule 2111, and other securities laws. An experienced business law and securities litigation lawyer in New Jersey can assess whether these rules may apply to your situation. Under FINRA Rule 2111, a broker must possess a reason to think that the securities transaction or investment strategy he or she is recommending is suitable for a customer based on what he or she knows through reasonable diligence to determine the customer’s investment profile. The profile can include investments, age, financial situation, need for liquidity, investment goals, tax status, investment time horizon, and tolerance for risk. Generally, the elderly have a lower tolerance for risk because if they lose their investments, they may not be able to get jobs to make up for the losses. The broker is supposed to keep in mind your risk tolerance and investment objectives when buying or selling financial products for your portfolio. What the broker buys should be suitable for you as a client, but the number of transactions carried out by a broker should also be appropriate.
Oftentimes churning is evidenced by many purchases and sales of securities that aren’t necessary or are even counter to a customer’s investment objectives. Some claimants use their accounts’ turn-over rates and its break-even ratio to show that there was excessive trading. Generally when there is a turnover rate between 3 and 6, there may be liability for churning. When there is a turnover rate that’s more than 6, there’s a presumption of excessive trading. The cost-to-equity ratio measures the costs of trading in an account and it can be utilized to decide how much an account can reasonably cover trading costs.
Churning is illegal and unethical. Further, churning may violate a number of rules and laws including SEC Rule 15c1-7 and regulations promulgated by FINRA, which is a securities organization that regulates itself. When there is excessive trading, the broker has violated the duty to act in the client’s best interests, and damages may be pursued through litigation or the FINRA arbitration process.
Litigating an Account Churning Claim
In order to establish a claim for broker misconduct related to churning, you’ll need to show: (1) discretionary or factual control, (2) excessive trading either in terms of size or how often trades occur, and (3) scienter or an intent to act fraudulently or not in a client’s best interests.
In order to prosecute a churning claim in New Jersey, your securities litigation lawyer would need to look at a lot of different documents and information including trade confirmations, brokerage statements, account opening documents, and performance reports. Often your counsel will need to retain a financial industry expert to review account opening documents, confirmations, brokerage statements, and performance reports. The expert will have to look through the trading history including all deposits and withdrawals, and commence a forensic analysis. This will assist in identifying and calculating the damages to you may be entitled to.
Consult an Experienced New Jersey Securities Litigation Attorney
If you are concerned about account churning in New Jersey, you should consult an attorney knowledgeable in securities law. At the Grimes Law Firm, we represent account holders in Somerset County and Neshanic Station, and all throughout the tri-state area. Founding attorney Raymond A. Grimes has over 25 years of experience in business law matters including litigation of business disputes, the purchase and sale of small companies, and much more. Call us at (908) 371-1066 or contact us online to schedule a free consultation.
