“Churning” means excessive buying and selling of securities in your account by your broker with the purpose of generating commissions for the broker.
To prove churning, the broker must exercise control over investment decisions in your account. The “control” can be achieved either through a discretionary agreement or by taking advantage of an unalert, disabled or elderly client.
Churning violates Section 10 of the Securities Act of 1943 and SEC Rule 15c1-7. It ia also a claim for “breach of fiduciary duty”, a common law fraud and a common law conversion.
There are several elements of proof needed to prove a churning case:
First, "churning” occurs when a securities broker enters into transactions and manages a client's account for the purpose of generating commissions for his/her benefit;
Second, the trading in the account must have been excessive. This is proven mathematically by “turnover ratios” in the account demonstrating that all capital was turned over about six (6) times or more, although lower turnover ratios may be considered churning, depending on the other facts of the case. The percentage of commissions earned must also have been excessive equaling six (6) per cent of the account value or more;
Third, the broker must have acted to defraud or with “reckless disregarded” for the client’s interests.
A few of the federal and industry rules related to churning include:
- SEC Rule 15c1-7: This regulation states that if a broker acts in a manipulative, deceptive, or fraudulent manner and effects transactions which are excessive “in view of the financial resources” and nature of the customer’s account.
- FINRA Rule 2111: This rule requires brokers to have “reasonable basis” to believe that a recommendation is suitable for the customer based on the customer’s investment profile (which includes factors like their age, other investments, financial needs, investment objectives and experience, and risk tolerance).
Churning also violates a broker’s fiduciary duty and is securities fraud.
If all of these factors are presented, the broker may be held liable for a violation of section 10(b) of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5." “Net our of pocket “ losses are the usual measure of damages. Sometimes, the courts award damages as elated to what a “well managed account’ would have earned in the same period. Considerations like the general rise or fall in the market may also be considered when calculating damages.
Other damages can be added such as commissions on both purchases and sales, unnecessary taxes and missed dividends.Contact Us
If you have been damaged as a result of churning of your account or an unsuitable investment recommendation, Anthony M. Abraham, Esq., PC may be able to help you recover your losses. We have helped many investors recover losses in churning cases. If you wish to discuss your claim with an experienced attorneys, call Anthony M. Abraham, Esq. at (877) 430-4877 or email Anthony@AbrahamAttorneys.com