Unauthorized Trading

When working with a financial advisor or brokerage firm, you tend to place a lot of trust in them to operate in alignment with your best interests. In most cases, there are no ill effects from this, though on occasion we can misplace our trust, and if you placed your trust in a broker who then engaged in unauthorized trading, you may be entitled to the recovery of considerable compensation for the damages caused by the resulting losses. If you have seen unauthorized trading activity on your account, the best first step you can make is to contact an expert investment fraud attorney, like the ones at TorkLaw.

What Is Unauthorized Trading?

Unauthorized trading is transactions that occur when any buy, sell, or exchange order is submitted without the consent of the account owner or investor. FINRA, the Financial Industry Regulatory Authority, has set Rule 2010 that outlines the operational standards for commercial honor and trade principles. The FINRA rule states that unless the investor has given prior consent to the broker, or that broker has been given access to a discretionary account, all trades must first be discussed with the investor before being sent for execution.

Additional FINRA regulations, Rules 2510 and 2020 make explicit prohibitions against brokers or advisors from executing discretionary trades in any non-discretionary investor accounts. The SEC, or the Securities Exchange Commission, also determined that the act of unauthorized trading also goes against Rule 10b, which states that the fraudulent nature of unauthorized trading violates the principles of just and equitable trade.

There are only two commonly acknowledged exceptions to the unauthorized trade rules, which allow a broker or financial advisor to place an order without the prior consent or approval of the investor or client. The first is when the account is created as a discretionary account. The second exception is when the customer has a margin account, and the total value of the account is below the balance requirements determined by that particular brokerage.

Common Types Of Unauthorized Trading

While fraud is always evolving, and there will undoubtedly be new and different ways that investors can be victimized through unauthorized trading activity. The most common forms include:

• Unauthorized buy or sell orders in the client or customer account.
• Highly rigid limits on position exposures, risks, and losses.
• Mismarking positions to hide actual portfolio contents.
• Creating completely fraudulent, non-existent “sham” transactions.

Many potential people can engage in unauthorized trading activity. There are brokers, traders, portfolio managers, risk management personnel, and even assistants to traders that work in the same office. These are all capable of engaging in unauthorized trading.

How Can You Tell If You Have A Claim For Unauthorized Trading?

If you believe you may have a claim for unauthorized trading against your brokerage or a registered financial professional employed by them, you should know ahead of time that it won’t be taken to conventional courts very often, and will generally be brought in FINRA arbitration. 

To have a valid claim, the claimant must demonstrate the following:

• There was at least one transaction that took place in your brokerage account that you did not explicitly authorize.
• You did not give your broker or financial advisor trading authorization or approval for the trade, and it did not occur in the context of a discretionary account.
• The unauthorized trade caused you to suffer measurable financial or bond losses.

The biggest thing you can do for your potential claim is to work with an expert FINRA arbitration attorney, like the ones at TorkLaw. Not only are claims of unauthorized trading relatively difficult to prove, but the sooner you begin working with an attorney the better your chances will be of recovering a larger portion of the compensation you’re entitled to. The experience and knowledge of an arbitration professional can be a priceless asset when bringing your claim.

Are There Times When My Broker Can Trade Without My Knowledge?

As we mentioned, there are two standing exceptions for situations where your broker may execute trades without your express consent. The first is when the account is a margin account, the second is when the account is created as or marked as a discretionary account. 

Margin Accounts

Margin accounts are like trading on credit. They allow an investor to trade with funds borrowed from the brokerage. If the value of the margin account falls below a particular threshold, the brokerage will often make unauthorized trades in an attempt to recover the funds lost to the margin trades. The consent to make unauthorized trades is obtained when the account is opened and funded.

Discretionary Accounts

A discretionary account is a brokerage account that does not require brokers or advisors to obtain authorization for trades. These accounts are funded separately from other trading accounts and will give the broker or financial advisor permission to trade as they see fit. Discretionary accounts may be created that way, or you may be able to give discretionary powers to your broker through the brokerage, how the accounts are handled will vary from one firm to another.

What To Do If You See Unauthorized Trading Activity

Many people become irate at the thought of their broker or financial professional breaching their fiduciary duty in such a way, but the biggest thing to remember is to stay calm, and don’t bring it up with your brokerage. Begin to gather all of the account documentation and order records, then contact an attorney. They will let you know what you’ll need to do from there, and they will help you get the claim started before the brokerage has time to get rid of any evidence.

Get Legal Representation For Your Unauthorized Trading Claims Today

If you or someone close to you has experienced unauthorized trading on their brokerage account, one of the most important things you can do to protect yourself and your financial future is to work with an experienced arbitration attorney. Reach out to TorkLaw today to go over the specifics of your claim in a secure and confidential environment. If we take your case, there’s no money due, and we don’t get paid until you collect or receive a judgment.