Churning

If you have an investment account with a stockbroker or brokerage firm, you should know what churning is, as well as how and why it’s done. If you feel that you may have been the victim of churning or excessive trading, you may hesitate to take any legal action, but working with an experienced securities fraud attorney like the team at TorkLaw. While you may not feel that pursuing the issue is worth it, you may be able to recover not only the economic damages of the fraud but associated non-economic damages as well.

What Is Churning?

Churning, or excessive trading is one of the most common ways in which a financial advisor or brokerage commits a breach of fiduciary duty. Churning is an illegal practice where a broker or advisor creates an excessive number of trades on behalf of a customer. This is done by companies that operate with payment for order flow, as well as by those that charge commissions, and it is done to falsely inflate the fees and commissions for the brokerage or advisor that commits the fraud. 

Not only is churning illegal, but it’s also wildly unethical and represents a clear breach of fiduciary duty to the customer. It also can create significant financial problems for the clients of the brokerage that end up paying fees and commissions that they never should have had to pay. Additionally, this can have a negative impact on the investment opportunities of the client and can create tax liabilities and excessive losses. In some cases, excessive trading can wipe out an entire investment portfolio.

How Churning Happens

When a broker engages in churning, they buy and sell stocks or other securities at a greatly inflated rate, generating hundreds and sometimes thousands of trades. The goal is simple when engaging in churning: make more money. The increased rates of transactions generate massive amounts of commissions and fees for the brokerage or advisor. This is a blatantly illegal tactic, and as it puts the broker’s interests ahead of the customers, it also represents a breach of fiduciary duty. 

The SEC, as well as the Financial Industry Regulatory Authority, or FINRA, both have rules and regulations which prohibit churning. This doesn’t mean, however, that churning no longer occurs, it is simply hidden more deeply. Many brokers will try to hide churning by marking the investment as speculation with a very high or aggressive level of risk. 

This way, when the account is traded excessively and is detected, the broker can then argue that the customer knew about the risks that were being taken. This tactic has been used not only by individual and private brokers and financial advisors but also by entire brokerage firms.

The catch, however, is that due to the regulations put in place by the SEC and FINRA, brokers, advisors, and financial firms assume a significant burden of proof. They must prove that the trading strategies covering the trades were actually in the best interest of the customer. Sometimes though, there are cases where a particular account was the victim of churning, and the trades were clearly not in the customer’s best interest.

This helps significantly since even with accounts that have significantly higher risk tolerance than others, the trades used for churning are difficult for brokers and firms to prove weren’t manipulated specifically to gain commissions and fees. No investor in the world is going to legitimately ask that their account be used to generate money only for the broker managing the account, and not for the customer.

Recognizing churning can sometimes be difficult for those who aren’t well-versed on what to look for. One of the ways that brokers mask churning is to keep investments that are doing poorly while selling those with gains. This makes the portfolio appear much healthier than it is, however, the portfolio is shrinking and losing value constantly on trade commissions, and becoming overallocated to badly-performing assets.

What To Do If You’re A Victim Of Churning

The first step is to tread lightly with your investment advisor or brokerage. Not only do you not want to go throwing around baseless accusations, but if you are a victim, you need time to gather documentation and other evidence. 

At this point, you will need to start gathering your documents and evidence. Download and gather together everything you can that pertains to your account. Statements, orders, and account activity downloads. This will be useful when you speak to an attorney eventually. 

Once you have gathered all of your account documentation and information together, you’ll need to speak with an experienced investor fraud attorney, like the ones at TorkLaw. The initial consultation will be the most important for your case, so make sure you have all pertinent documentation and proof handy. They will give you an assessment of your case, and provide their opinion of whether your claim is valid. 

Once you have an attorney, they will not only give you more details on what documentation you may still need to obtain, but they will also take over as your primary point of contact with your brokerage or financial advisor. This is one of the biggest reasons, overall, to work with an attorney. You may feel intimidated by the brokerage, and you may not have any idea where to start when trying to prove their misconduct, but your lawyer will. They will have industry experience and procedural knowledge that you can’t get anywhere else.

Work With A Leading Excessive Trading Attorney

If you believe that your broker has made you or a family member the victim of order churning, you should reach out immediately to the local experts at TorkLaw. Not only can you speak with a member of our expert legal team, but you can discuss the details of your case in a confidential environment. There is no fee for your initial consultation, and if we take the case, we don’t get paid unless you recover compensation. We have decades of experience with investment fraud and recovering compensation for losses.