Written by D. Daxton White• January 4, 2012• 8:55 am• Blog, Securities Fraud

Victim of Excessive Trading?

Have You Been a Victim of Excessive Trading?

Has your account been excessively traded or churned by your financial advisor? If so, you may have a securities fraud claim to recover the damages resulting from Excessive Trading or Churning.

FINRA Rule 2111 requires that broker-dealers must have a reasonable basis to believe the number of recommended transactions within a certain period is not excessive (i.e., that the investor’s account is not being churned). This is commonly called “quantitative suitability.” Essentially, it means that if an account is excessively traded it could not have been suitable for the client because the strategy could only benefit the advisor (through the generation of commissions) and not the investor.

To determine whether the level of trading in an account rises to the level of excessive trading or churning, the customer’s financial situation and investment objectives must be considered. While no one test is determinative in evaluating whether a specific amount of trading is per se churning, to prove such a claim you must demonstrate the following basic elements:

I. excessive trading,
II. control of the account by the financial advisor (you cannot hold a broker-dealer liable for your own excessive trading), and
III. intent by the advisor to defraud the customer.

Examination of Accounts

When an account is examined to determine if the trading in the account is excessive, the type of account that is being analyzed is significant. For example, a high turnover ratio in a day trader’s account is meaningless, whereas the same turnover ratio in a retiree’s account may be considered churning.

To determine whether the trading is excessive in light of the goals of the account, the most often used analysis is the calculation of a “turnover ratio”. A turnover ratio is the total amount of purchases made in the account, divided by the average monthly equity in the account. That ratio is then annualized (by dividing the result by the number of months involved to get a per month ratio, and then multiplying that result by 12). An annualized turnover ratio of 6, which means that the equity in the account was invested 6 times in a year, is often considered excessive trading in the typical customer account.

Control of the account refers to who is actually directing the trading. To prove a claim for churning, you must establish that the registered representative had actual or de facto control over your account.

Intent is often the easiest element to prove. Generally if you can demonstrate the first two elements, the intent to maximize commissions at the expense of the client is obvious.

Recovery of Investment Losses

If you believe that your account has been excessively traded to maximize commissions, the securities attorneys of The White Law Group may be able to help. For a free consultation, please contact the firm’s Chicago office at 888-637-5510.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.

For more information on The White Law Group, please visit the firm’s website at https://whitesecuritieslaw.com.