Account churning is a form of investment fraud that occurs when a broker makes an inordinate number of trades in your account in order to garner more commissions for themselves. It is illegal and violates a number of laws and restrictions laid out by the Securities and Exchange Commission (SEC). Brokers and financial planners who are given discretion over investment accounts are able to make decisions (and a profit) on the client’s behalf. Making excessive trades in order to turn a personal profit is unethical and breaks SEC Rule 15c1-7, among other securities regulations.
A broker, brokerage firm, or financial planner should regularly communicate with you (in writing) about what they’re doing with your money. They are legally bound to advise you of every transaction and send you written confirmation. It’s important to watch these closely, in order to spot any signs of potential churning or other unethical management of your money.
If you look at the trades your broker is making and see trades that don’t appear to increase the value of your investment accounts or trades that lower the value of your accounts, this may be evidence of account churning. Your planner or broker may also be making trades for personal financial gain if the trades are out of step with your investment goals.
Keep in mind that if you approve these trades and then realize that they do not align with your investment objectives or suffer a loss, your broker or planner is not necessarily guilty of churning.
Most investors who delegate the work of investing to a broker or firm are not active traders and do not trade very often. If your investment firm, broker, or financial planner is sending you multiple transaction confirmations each week or more than 10 each month, you may have reason to suspect that they are churning your account.
If you have received multiple forms requiring you to provide informed consent for having your mutual fund or annuity switched for another one, this may also be a warning sign, as multiple similar transactions can generate significant commissions for brokers.
You should also be suspicious if the market is trending upward and the value of your account is decreasing or remaining the same, despite frequent trades.
If you are concerned that you broker or financial planner is churning your account to generate more commission for themselves, don’t wait to take legal action. In your complimentary consultation, we can help you evaluate concerning evidence in order to decide the best step forward.
Make Baldwin Mader Law Group your California investment fraud attorneys by calling us at (310) 220-0988, or send us your information to receive a confidential consultation.