Investment fraud has been a problem forever and disingenuous brokers are consistently coming up with new, innovative ways of conducting investment and stock fraud. One type of fraud that is receiving more attention right now is “churning.” Brokers essentially inflate the number of transactions and the amount of trading in which they are engaging in a particular client account. They do this to inflate their own commission or incurred client fees despite negligible, if any, benefit to the consumer.
The way that brokers make a living is by charging a commission for each trade they conduct for a client. The commission is basically the fee for their time and expertise and when a broker is honest and above-board, this is a reasonable way to compensate them for their hard work. Now, it is important to note that you pay commission to a broker regardless of whether you make money on a portfolio – which is why churning has come about in some cases. Realistically it would be easy enough for a broker to claim perfectly reasonable trading – but perhaps a bad week of not turning a significant return – to justify the extra activity.
This is why stock churning can be difficult to prove – but nevertheless, when a broker indulges in excessive trading in a client’s portfolio that is clearly not in the course of regular investment activity such activity is considered illegal and the broker is said to be involved in a churning scam and can be prosecuted as such. You need an experienced stock broker churning lawyer to prove these cases in most instances.
As stated, churning can be harder to prove than some instances of stock and securities fraud. To prove that a broker has conducted a churning scam on your account, you need proof that the broker him/herself actually conducted the trades, that there were more than a normal amount of transactions and that they were clearly carried out without any regard to the profitability and interest of the client.
Excessive trading, when being gauged for the purposes of proving that a churning scam has taken place, can be determined by mathematically evaluating the ratio of the total amount of stock purchases made to the total amount of money invested by the client. By looking at this, the so called turnover rate, you can see any unusual increase in broker activity. Additionally, you can divide the commissions of the broker by the average client account value. This is a good practice in which to engage even if churning is not taking place so that you can see if your relationship is profitable.
Brokers have what is called a “fiduciary duty” to each of their clients and this includes managing their client accounts in alignment with their client’s wishes; keeping clients abreast of each completed transaction; informing clients of market changes and how those changes may affect their interests; protecting their client’s interests; and explaining the pros and cons and impact of any investment strategy they adopt in relation to a client account. If they fail to meet these guidelines they have violated that client trust and they may be liable for suit. You should contact a stock broker churning lawyer to help you get the justice you deserve.