The U.S. Securities and Exchange Commission (SEC) issued an Investor Alert to help investors identify excessive trading in their brokerage accounts.
The SEC suggests that investors look for these red flags:
- Unauthorized Trading-Investors should be alarmed if there are trades (buys or sells) which you did not authorize
- Frequent Trading-Investors should be wary of frequent in and out purchases of securities.
- Excessive Fees-Investors should be suspicious if the total amount of fees seems high.
Churning– A broker typically earns a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning.
The SEC offers these examples of enforcement actions involving excessive trading:
- In SEC v. Dean and Fowler, the SEC charged two individuals with fraud for churning three customers’ brokerage accounts and for recommending an investment strategy to twenty-seven customers without a reasonable basis to believe that the strategy was suitable for anyone. The customers allegedly opened the accounts after receiving cold calls from the defendants. The SEC alleged that the three customers whose accounts were churned signed account-opening documents that did not reflect the customers’ true investment objectives. For the twenty-seven customers, the defendants allegedly recommended a short-term investment strategy with high per-trade transaction costs and use of margin trading without a reasonable basis to believe that the strategy was suitable for anyone. In particular, the SEC alleged that this strategy was unsuitable for anyone because the frequent trading, combined with high per-trade costs charged, all but guaranteed losses for the customers. According to the SEC’s complaint, the defendants’ purpose was to generate commissions and other costs, and the defendants charged approximately $1 million in costs to the twenty-seven accounts.
- In In the Matter of Paul T. Lebel, the SEC charged an individual for churning several brokerage accounts of four customers. According to the Commission’s settled order, the individual engaged in excessive trading of certain of his customers’ mutual fund A shares (designed for long-term investing) to the detriment of those customers and with no justification other than to generate commissions. The individual was found to have received $50,037 in commissions for these trades.
If you have questions about excessive trading or you suspect that your account has been churned, contact us to learn how you may be able to recover damages through arbitration.
Rex Securities Law , with offices in Boca Raton, FL, and Austin, TX, provides representation to investors nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.
Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.
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