Reasonable-Basis Suitability

Securities Litigation Attorneys Representing Clients Nationwide

When a person chooses to invest, they expect that the broker or financial advisor entrusted with the task of buying and selling securities for them will make prudent and well-informed trades. Unfortunately, financial services professionals do not always act in their clients’ best interests and may make trades purely for their own financial gain. This practice, known as account churning, allows a broker to rack up fees through excessive trading. If you suspect that your broker or financial advisor made unnecessary trades purely for their own benefit, you should consult a skilled securities litigation attorney to discuss your options for redressing your harm.

Account Churning (Overtrading)

When a broker in New York or elsewhere buys or sells securities on behalf of a client, the broker typically earns a commission. Account churning is the term given to excessive trading for the sole purpose of earning a commission. Not only is account churning unethical, but it is also a breach of federal rules and regulations. Specifically, the rules set forth by the Securities Exchange Commission bar brokers who have discretionary authority over an investor’s account from acting in a manner that is deceptive, fraudulent, or manipulative by making excessive transactions. Similarly, the FINRA rules provide that a broker or agent must have a reasonable basis to believe that an investment transaction is suitable for an investor’s individual financial goals, knowledge of investment strategies, and risk tolerance.

Proving Overtrading

A high number of purchases and sales of securities may be evidence of overtrading if the transactions do not appear to align with the investor’s financial goals. To prove that a broker should be held liable for account churning, the investor must first prove that the broker had control over the investment account. Control is often present in cases involving margin funds and discretionary or managed funds. The investor and their attorney must then show that there was excessive trading on the account.

Whether trading was excessive will be determined by the type of account and the investor’s goals. One analysis used to determine if a broker has committed overtrading is the calculation of a turnover ratio, which divides the total amount of purchases made in the account by the average monthly equity in the account. The ratio is then annualized and analyzed to determine whether the number of transactions is excessive, given the nature of the account. In some cases, a cost to equity ratio will be employed to analyze whether transactions are excessive. The cost to equity ratio assesses the expense of the trading strategy relative to the funds in an account. The greater the cost, the more likely it is that overtrading will be found.

Lastly, an investor claiming harm due to overtrading must prove that the broker’s sole intent in trading excessively was to earn commissions. Thus, the investor must show that the broker acted with a specific intent to defraud the investor, or with a reckless disregard for the investor’s interests.

Damages for Overtrading

An investor harmed by overtrading may be able to recover the excess commissions that were paid to the broker, as well as any losses that the investor’s account suffered due to the overtrading. Proving that a broker should be held liable for overtrading is a complicated and arduous process. If you believe that you suffered harm due to overtrading, it is critical to retain a skilled securities lawyer to assist you in pursuing your claim.

Suitability Supervision?

Meet with a Seasoned Securities Fraud Attorney to Discuss Your Suitability Obligations Case

If you believe that your broker engaged in excessive trading for financial compensation, you should meet with a securities litigation attorney to discuss your case. Based in New York, the attorneys at Weltz Law have been assisting parties throughout the U.S. in FINRA arbitration and litigation for over 25 years.  Our attorneys will vigorously pursue any compensation that you may be owed for your financial losses. You can reach Weltz Law at 877-935-8952 or via the form online to schedule a meeting regarding your case.

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