Description of Securities Claims

Churning
Essentially, churning is the over-trading of an investor’s account by a stockbroker or financial advisor for the primary purpose of generating excessive commission income at the customer’s expense. As most customers of brokerage firms know, broker commissions are charged when there is any trading activity in the investor’s account. More trades mean more of your money spent on broker's commissions.

This type of investment fraud claim requires a customer to prove:

The stockbroker exercised actual control over trading in the account

The trading activity and the related commissions were excessive

The broker acted in reckless disregard of the investor’s interests

Churning usually occurs where the stockbroker or financial advisor has control over the investment account in one of two situations:
1. The broker or advisor has discretion to trade for the customer; or,
2. The relationship between the investor and the broker or advisor is such that the broker or advisor is the person deciding what to buy and sell in the investor’s account.

Churning is measured by the account’s turnover rate, which is the ratio of the total cost of purchases made in a given period to the amount invested by the investor. Another method for determining whether there has been excessive trading activity is to divide the stockbroker’s commissions by the average value of the account – known as the “Goldberg rate” or “cost-equity maintenance factor”.

In order for trading to be regarded as excessive there must be a disproportionately high volume of transactions, purchases, or sales in light of the investor’s investment goals and financial resources. Generally, churning is marked by short holding periods without any appreciable change in prices of the securities being traded by the broker. In addition, margin accounts and options accounts are often used for purposes of churning.

Mere active trading, without more, does not establish churning since frequent or aggressive trading may actually be consistent with the investor’s investment strategy.

It is important to keep in mind, therefore, that the issue of whether an account has been traded excessively necessarily involves the customer’s stated investment objectives and the type of securities being traded.
The basic measure of recovery for churning is the amount of excessive commissions, with interest. Punitive damages may be awarded to the investor if warranted by the broker’s conduct. Attorneys’ fees may be recoverable as well.

Conflict of Interest/Fraud
Brokers and their firms have a conflict of interest when they simply promote stocks instead of fairly analyzing them.  Over the last few years the large brokerage houses were tempted to promote stocks because, in addition to providing brokerage services, they also have investment banking divisions which depended on lucrative underwriting fees for public offerings of stock.

Negligence
Negligence, in the securities context, is the failure of a stockbroker or financial advisor to act in accordance with the minimum acceptable standard established for those who work in the securities industry. Essentially, a claim for negligence is that the broker or advisor failed to use reasonable diligence in handling the affairs of the customer, and did not act as a reasonable and prudent broker or advisor would have acted. One can describe this as a claim for professional malpractice against the stockbroker or financial advisor.

There are many different types of claims for negligence. Trading desks at brokerage firms can be negligent in the execution of trades, and brokers can be negligent in the handling of investors' orders.

In more detail, a broker or advisor has an obligation to carry out their customer’s instructions with respect to transactions in a reasonable and timely manner. If the broker or advisor fails to do so, the customer may have a claim for any losses incurred as a result of the failure to act.

Unsuitability.The most prevalent examples of unsuitable recommendations by a stockbroker or investment advisor relate to:

Excessive risk. Unsuitable to recommend a risky investment to a customer who is seeking conservative investments or cannot afford significant losses.

Over-concentration. Unsuitable in most situations for broker or advisor to recommend a portfolio that is over-concentrated in a small number of stocks or one asset class.

Illiquidity. Unsuitable for most investors to have a portfolio that is highly illiquid.

Simply put, a broker must have reasonable grounds for believing that his or her recommendation is suitable for a particular investor based on the facts disclosed by that investor about other security holdings, investment experience or sophistication, and net worth, as well as financial situation and needs. This obligation on the part of the stockbroker arises out of the “Know Your Customer” Rule.