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Can I sue my broker or financial advisor for excessive trading or churning my account?
Answer: Of course you can. You can sue stockbrokers and brokerage firms in the FINRA arbitration system for damages that occur a result of account churning and excessive trading.
What is churning and excessive trading?
Churning and excessive trading arises when a broker makes trades in a customer’s account with a goal of generating commissions for himself and to the detriment of the customer. The two most common methods for determining whether an advisor has churned or excessively traded a client’s account are analyzing the account’s:
a) turnover ratio; and
b) cost-to-equity ratio.
The litmus test for excessive trading cases has traditionally been the “annual turnover ratio” or (“ATR”). The ATR refers to the ratio of the total cost of purchases made for an account during a specified period of time to amount invested. Franks v. Cavanaugh, 711 F. Supp. 1186, 1191, n. 3, (S.D.N.Y. 1989), modified, no. 88 Civ. 2121, 1989 WL 58085 (S.D.N.Y. May 24, 1989); Frota v. Prudential-Bache Securities, Inc., 639 F. Supp. 1186, 1191. (S.D.N.Y. 1986).
Investopedia defines “portfolio turnover” as:
A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold – whichever is less – over a particular period, divided by the total net asset value (NAV) of the [account]. The measurement is usually reported for a 12-month time period.
See http://www.investopedia.com/terms/p/portfolioturnover.asp (last visited Feb. 18, 2014) (emphasis added).
It has long been said that an annualized turnover ratio of 4 is presumptive of churning; and annual turnover ratio of 6 is conclusive of excess trading. In his 1991 article, “Quantitative Measures and Standards of Excessive Trading Activity,” Securities Arbitration 1991 (PLI) Ch. 17, Professor Stewart L. Brown noted that the origin of the churning formulation set forth above is a 1967 Harvard Law Review Note (“Churning by Securities Dealers,”), which states that, “[i]t is possible to generalize from SEC cases that a complete turnover more than once every two months (i.e., an annual turnover rate of 6) is likely to be labeled excessive, and this conclusion appears reasonable.” Id. at 876; see also Frota, 639 F. Supp. at 1191.
Another measure of excessive trading is the “cost/equity ratio” (the total commissions and fees divided by the average net equity of the account), which calculates how much a portfolio must generate in profit, just to break even. As an example, let’s presume that your broker generated $100 in commissions in your account, and that your average balance in your account was $1,000. You would have a cost-equity ratio of 10% (or 100 divided by 1,000). Thus, your account would have to generate 10% profits just to break even. When a broker is generating cost-equity ratios of 20% or more, it is highly likely that the account is being churned by the broker.
Israels & Neuman PLC has knowledgeable securities attorneys that represent investors who have suffered losses due to the actions of brokers, financial representatives, and financial institutions. We have represented numerous victims of churning schemes in FINRA arbitration proceedings throughout the country.
All of our financial arbitration cases are taken on a contingent basis, meaning that we do not get paid unless we recover compensation for you.
IF YOU FEEL YOU HAVE FALLEN VICTIM TO CHURNING OR EXCESSIVE TRADING BY YOUR FINANCIAL ADVISOR, AND HAVE SUFFERED LOSSES,
Aaron Israels: (720) 599-3505
David Neuman: (206) 795-5798