Churning occurs when a stock broker engages in excessive trading within an investor client’s account for the purpose of generating commissions. Since the broker may receive some income from a successful trade, they may try to increase the amount of trading occurring even if it doesn’t directly benefit the client (instead, the churning actually benefits the broker). In fact, churning can sometimes result in significant losses for the client, and can also result in negative tax consequences for them as well.
How can Churning be Avoided?
Churning is generally considered illegal and unethical, and is a violation of securities laws. However, churning is difficult to detect because there is no real set standard for measuring what “excessive trading” is. Generally speaking though, too many sales and purchases of securities in the client’s account that does not square with the client’s financial objectives is the most telling sign of churning.
Churning can largely be avoided by negotiating for a fee-based contract arrangement with a broker if possible, rather than one that is based on commissions. Also, periodic examination of investment portfolios can help with detection of churning. Lastly, requesting for reports and accountability statements periodically can help prevent instances of churning.
Are There any Legal Consequences To Churning?
As mentioned, churning is illegal and can lead to legal claims. Churning lawsuits can result in a monetary damages award to compensate the investor client for any losses caused by churning activities. Also, the lawsuit may cover other breaches of contract, fraud, misrepresentation, or other legal issues.
A broker who engages in churning or similar misconduct can face other legal consequences, such as sanctions from the Securities Exchange Commission or a loss of practicing license. Cases involving widespread instances of churning may also lead to a class action lawsuit as well.
Do I Need a Lawyer for Assistance with a Churning Lawsuit?
Churning lawsuits can involve some complex securities issues and may also involve large amounts of damages. You may need to hire a lawyer in your area if you have any legal issues involving churning or other securities violations. Your attorney can provide you with legal research for your case, and can also represent you in a court of law during important meetings and hearings.
