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What Is Excessive Trading? | Colling Gilbert Wright and Carter

What Is Churning in Finance?

The term “churning” refers to the act of excessive trading by an unethical broker. Brokers do this because they make a small fee or commission on every trade, which means an unethical broker has an incentive to make a number of small, meaningless trades that pad their accounts but do nothing for you.

Churning is illegal and unethical, but not always easy to spot. If you suspect your broker is churning your account, the stock fraud attorneys at Colling Gilbert Wright can help. With more than a century of combined experience, our knowledgeable stock fraud lawyers know how to identify the signs of churning and how to protect victims from serious losses. 

How Do I Know If My Broker Is Churning My Account?

It can be difficult to know when a broker is engaged in churning. After all, making trades is a key part of a broker’s job, and in certain circumstances, it’s even appropriate for a broker to make a lot of trades. So without a grounding in finance and market dealings, how can you tell if your broker is churning?

One of the most obvious signs of churning involves seemingly frequent sales and purchases of securities. In most churning cases, these transactions will not have anything to do with your long-term investment goals nor do anything to strengthen your portfolio.

Indicators that you may be the victim of churning can include:

  • Your account is underperforming relative to the market: Churning equates to more commissions for your broker, which can quickly eat away at your account. Experiencing big losses, especially in up-markets, can be one of the best indicators that you are a victim of excessive trading. On the other hand, if your account value is declining faster than a downward trend in the market can also be indicative of churning.
  • Mutual fund switching: A mutual fund works best as a long-term hold because it can incur significant trading charges that don’t exist for common stocks. Without a legitimate investment purpose, it is often a violation to switch among funds with similar investment objectives as it can needlessly impose commission charges and increase an investor’s tax liability.
  • Uptick in trading slips: After every transaction, brokerage firms are required to send you a confirmation. If you receive confirmations every week, or multiple times a week, it could be a red flag that your broker is churning your account.

Excessive trading cases are often incredibly complex. Different investment accounts call for different approaches – what may be perfectly natural aggressiveness for one investor could qualify as churning for another. After all, your broker’s strategy must be suited to your specific needs and objectives as articulated at the time you agreed to invest with the broker.

If you have noticed in-and-out sales and purchases on your statement, contact our stockbroker fraud attorneys right away. We will review the details of your case and determine if churning may have occurred. Once churning has been identified, we can take action to protect your financial investments.

How Do I Prove Excessive Trading? 

In order to prove an unethical broker churned your account, your attorney must prove three elements:

  • Control: To prove churning, your attorney must first demonstrate that your broker has control of your investment. Control may be in the form of written authorization or what is known as “de facto” control, as in the case of a novice investor who makes all the trades his or her broker recommends.
  • Excessive trading: Once control is proven, you must show that the broker’s trading was excessive for your investment goals and resources. Determining “excessiveness” can be complicated. It requires determining your account’s turnover rate and cost-equity ratios.
  • Intent: Finally, you must prove that either your broker intended to make excessive trades or that your broker acted with reckless disregard for your best interests. Because these cases can be so complex, churning can often be difficult to prove. 

Our stockbroker fraud attorneys can bring clarity to the situation. We know what qualifies as fraud and we understand how to determine if you’ve been the victim of churning. If we find that excessive trading has occurred, we know how to protect your rights and best interests.

Contact an Orlando Securities Fraud Lawyer Today

If you have been the victim of account churning, excessive trading, or other securities fraud, don’t wait to get help. Our seasoned stockbroker fraud attorneys have the experience, knowledge, and resources necessary to handle these complex cases.

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