Investors Can Sue for Churning
What is churning? "Churning" occurs when a financial advisor excessively trades or transacts business in an account typically for the purpose of generating excessive commissions. In essence, the financial advisor places his/her interest in earning commissions ahead of the client's interest in receiving sound and ethical financial advice.
Churning is an illegal and unethical activity that violates numerous laws, including SEC Rule 15c 1-7. The Financial Industry Regulatory Authority (FINRA) also implemented rules prohibiting this abusive practice. Under FINRA Rule 2111.05(c), a financial advisor who has actual or de facto control over a customer account must not recommend transactions that are excessive or unsuitable.
How to determine if churning occurred in your account? A claim for churning or excessive activity is determined by analyzing the quantity and nature of trading activity in the client's account. For example, an experienced securities attorney can analyze an account's annual turnover rate and the "break even" or "cost-equity" ratio of the account. Over time, the SEC and courts have developed standards that permit a finding of churning per se (on its face), such as a turnover ratio of 1-6X.
How can an investor detect churning in their account on their own?
Although churning by its nature is a deceptive practice and not always readily apparent to the untrained-eye, an investor may be able to notice churning by reviewing their account history for suspicious activity:
A large number of trades and transactions executed in the account.
A large number of trades in seemingly small amounts relative to the overall value of the account.
Substantial commissions relative to the overall value of the account.
The financial advisor does not have a satisfactory justification for placing certain trades.
The "markets" are doing well but your account is declining in value or remaining constant.
If you believe you are the victim of churning or excessive activity in your account, you may need an experienced attorney to analyze your account statements to determine if churning actually occurred. Please contact us today for a free, no-commitment consultation.