We Sue Brokers Who Churn or Excessively Trade Your Account For Commissions
Churning is a violation of federal and state securities statutes, industry rules and regulations and a breach of fiduciary duty to investors under common law.
These trades rarely, if ever, make the investor any money. In fact, the additional commissions raise the break-even point for the investor to the level where the stock must perform at an extremely high level in order for the investor to make any money.
In these scenarios, an investment churning lawyer can review your accounts to determine if excessive trading has taken place and that you have a churning claim against your stockbroker.
What is Churning?
Churning occurs when a broker manages or exercises control over the investment decisions in an account and excessively purchases and sells stocks or recommends that you make an excessive number of purchases and sales of stocks or bonds for his benefit; i.e., commissions!
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Do You Believe Your Dealing with Churning or Excessive Trading on Your Investment Account?
Most investors are incapable of knowing whether churning or excessive trading is occurring in their accounts. That is why it is important to speak with an investment fraud lawyer if you believe you are dealing with churning or excessive trading.
Attorney Pearce handles cases nationwide and provides a complete review of your accounts in order to determine if excessive trading has taken place and you have a churning claim against your stockbroker. He has the experience, and his firm employs the experts who perform a churning analysis of the trading activity in your accounts.
The churning analysis includes calculations of the “holding period” (the average number of days an investment is held before it is sold), the “annual turnover ratio” (the number of times the assets in your account turn over each year), and calculations of the “cost to equity ratio” (the percentage return on your investments necessary to break even after all the commissions are paid). The shorter the average “holding period,” the higher the “turnover ratio” and the greater the “cost to equity ratio,” the more likely your account is being churned or excessively traded.
The rule of thumb for the “turnover ratio” calculation is the 2:4:6 rule; with 2 times being an inference of churning, 4 times is a presumption of churning, and 6 times conclusive of churning. Similarly, a calculation of a “cost to equity ratio” above 15% (meaning you need profits of over 15% annually to break even) in your account is a red flag warning of churning or excessive trading in your account for your broker’s benefit and not in your best interest.
Churning or excessive trading is rarely in the “best interest” of investors at brokerage firms. The SEC recognized this fact when it promulgated Regulation “Best Interest” effective June 30, 2020. The significance of the new rule in churning cases is that investors whose accounts were churned after the effective date will no longer have to prove the broker was in “control” of the account or activity through his/her recommendations to have a valid claim to recover their losses.
The detection of the fraudulent practice and measurement of damages in churning cases can be challenging because the perpetrators of this fraud generally excessively trade accounts when the market is in an upward trend taking many small profits for the investor and many large commissions for themselves. The fraud goes undetected because the account value remains the same or slightly higher month to month. At the arbitration hearing, the broker’s lawyer will try to defend by claiming there are no damages. But Attorney Pearce will prove otherwise by pointing out the lost profits you suffered by the excessive commissions you paid in a rising market as measured by the so-called “market adjusted” measure of damages and argue for those damages along with the excessive commissions, punitive damages, attorney fees and your expenses.
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