One technique a dishonest stock broker will use to gain extra income is to engage in excessive stock trading in order to reap more commissions on his or her account. This practice is referred to as churning and may be grounds for legal action.
In order to determine if an account has been "churned" an attorney must review the trading record. The case will only have a chance if the attorney can show that the trading activity was excessive. Whether or not churning occurred can be determined in several ways:
1) By calculating the size of the return necessary to cover the expense of all trading activities. If the size of the return does not justify the amount of trading that occurred than it is likely that the account has been "churned".
2) By reviewing the purchase and selling activity in the account. If stocks are sold and bought with seemingly no advantage from the investors perspective, than there is the possibility that "churning" has occurred.
3) By reviewing the frequency of which the equity in an account is turned over to buy securities. Lets say for example that the stock broker was entrusted with $275,000 of the investors money, purchases $175,000 of stock, sells the shares or a portion of them, and than continues to buy and sell so that in the end $1,000,000 of stock has been traded. This would probably constitute "churning". It is important to remember however that determining whether or not "churning" has occurred in an account is not an exact science. The number of trades made is only one factor. Time is the other critical factor. In some instances two or three trades made over a very short time period may indicate that the stock broker is handling an account dishonestly.
In order to build a case against a stock broker who is engaging in "churning" two things must be established.
1) It must be shown that excessive trading occurred in view of the clients wishes and investment goals.
2) It must be shown that the stock broker willfully attempted to defraud the client by not acting in the client's best interests.
When a person strongly suspects "churning" because the trading commissions of his or her account seem excessive, they should consider filing for arbitration against their brokerage.
Submit your case for confidential discussion with an attorney.
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