Churning

What is churning?

Churning occurs when a stock broker engages in excessive trading of securities in a client’s account for the primary purpose of generating commissions. In some cases, the churning goes undetected for months and even years. By that time, the damage can be substantial, both in terms of excessive commissions and associated tax liability.

 

Is churning illegal?

In addition to being fraudulent and unethical, churning is specifically prohibited under securities laws and regulations, including FINRA’s “quantitative suitability” standard. The FINRA standard provides that a broker must “have a reasonable basis for believing that a series of recommended transactions . . . . are not excessive and unsuitable for the customer . . .”

 

Can I sue my broker for churning?

Investors can bring claims to recover damages when their accounts have been churned. To prevail, an investor is generally required to show (1) that the broker has engaged in excessive trading in the investor’s account; (2) that the broker had actual or de facto control over the account; (3) that the broker received commission- or transaction-based compensation for the trades, and (4) that there was no reasonable or justifiable basis for the trading activity.

“Excessive trading” typically occurs when a broker transacts a large number of small trades in a client’s account. It also encompasses less active trading strategies where the products that are being traded carry high commissions. A common way of proving “excessive trading” is to present quantitative evidence in the form of an account turnover ratio and/or a cost-equity ratio.

The “reasonable basis” requirement turns on whether the broker reasonably believed that the trading activity in the account would benefit the investor. When a reasonable belief is lacking, it is clear that the broker was acting out of pure self-interest. A blatant example of this abuse is when the broker engages in a practice known as “in and out trading,” which is buying and selling the same stock over and over again, often in quick succession, in order to generate commissions.

 

Can I consult with an attorney about churning?

If you suspect that your account has been churned or that you have been charged excessive commissions or fees, Mika Meyers may be able to help you. We regularly evaluate and bring claims on behalf of investors whose accounts have been churned. If you wish to discuss your claim with an experienced attorney who specializes in this area, please call Daniel J. Broxup at (616) 632 8059.