INVESTMENT CHURNING: A SLIPPERY SLOPE OF BROKER MISCONDUCT

by Christopher J. Gray on July 20, 2011

in Churning,SEC

The nature of “churning” within an investor’s account is difficult to prove. According to the S.E.C., “churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives.” In short, churning is a form of broker misconduct in which the broker performs excessive trading to generate personal profit. If an investor feels they may be a victim of churning, he should check his monthly statements for numerous stock trades and then contact a stock broker fraud attorney. If you believe you are a victim of churning, contact the law office of Christopher J. Gray, P.C. for information and guidance.

Investment Churning: A Slippery Slope of Broker Misconduct

Although churning is clearly prohibited in both the Securities Exchange Act of 1934, Section 10(b) and the Securities Exchange Commission Regulation 10(b)(5), proving it in arbitration can be a challenge. Two critical factors of determining if churning has occurred are time and frequency of transactions. In addition, the broker must be acting willfully and not in the best interests of the investor. Finally, the broker must be in control of the trades that occurred. If the account is a discretionary account or if the broker is recommending most, or all, of the trades to the customer, the broker is said to be in control of the trades.

A case against churning is one in which the entire picture must be taken into account. A stock broker fraud attorney must analyze a large amount of data because of the high number of trades that occur in churning. Furthermore, the attorney must look at the Annualized Turnover Ratio, the Commission/Equity Ratio, the Total Cost/Equity Ratio, the commissions of the broker and factors that affect broker motivation. Above all, the trades must be done for the benefit of the broker, rather than the investor.

Because of the nature of churning and the difficulty of proving it in arbitration, it is imperative that victims choose their investment attorney carefully. At the Law Office of Christopher J. Gray, if you recover nothing, you pay no legal fees — that's how committed the firm is to recovering your financial losses.

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