One of the leading types of investment fraud is fraud related to broker misconduct. Many cases of broker related investment fraud are coming to light, where investor-broker trust has been violated, which has resulted in monetary losses for the investors, sometimes going up to millions of dollars.
A broker has a legal and ethical duty to always act in the best interest of his clients, and ensure that they do everything in their capacity to forward a clients portfolio. But many brokers are now indulging in practices, such as misinforming clients about securities, over-trading securities, purchasing inappropriate investments, carrying out unauthorized transactions, and churning scams, to name a few. These are all done to increase the broker’s gain, without any consideration to the client’s interests.
Here’s a detailed look at one of the more common forms of broker related investment fraud – Churning Scams
According to securities law, any unnecessary and increased trading by a broker or investment officer, in a client’s account, for the express purpose of charging extra fees for the broker, and not for the betterment of the client’s portfolio, is referred to as Churning.
All brokers charge a commission on any kind of transaction in the client’s portfolio. So whether you buy some stock or sell some investments, the broker earns his commission, irrespective of whether you have made money or lost money on your investments. This is a standard practice and one that is the norm in most broker-client relationships.
But when a broker indulges in trading in a client’s account, not in the course of regular investment activity, but to generate extra income on the basis of additional commission, then such activity is illegal and the broker is said to be involved in a churning scam.
In order to prove churning, and file a legal claim of broker related investment fraud, an investor needs to prove that the following hold to be true:
When any broker has been given the power to trade on a particular account by the investor, or when the relationship between the broker and the investor is such that the broker can buy and sell securities and other investments without consulting the investor; in such circumstances, brokers take advantage of their total control of a client’s account, and fall into illegal practices of churning.
Determining Excessive Trading
The entire premise of churning scams is that there has been unwarranted and excessive trading in the account of a customer by the broker. But how does one differentiate excessive trading from what is considered acceptable levels of trading?
Excessive trading, for churning purposes, can be determined by evaluating the ratio of the total amount of purchases made to the total amount invested by the client. This is known as the turnover rate of an investment account.
Dividing the commissions of the broker, by the average value of an investment account, can also help to ascertain whether or not churning has in fact occurred. It is necessary to prove that the trading has been unnecessary and excessive, which was not in accordance with the investment objectives of the investor.
Many investor advancement strategies require excessive trading in order to achieve the investment goals. Thus, you need to prove that such was not the case in your particular situation, and that the trading was excessively done for added commissions; only then do you have a legal and valid claim arising out of churning scams.
Currently Indexing Over 75 'BluePages' Covering 1,000+ topics!