Churning and Unauthorized Trading

CourtroomStock fraud and securities litigators at Mark Anchor Albert and Associates can both prosecute and defend against churning and unauthorized trading claims, no matter how difficult your case may seem.

A stockbroker “churns” his or her client’s brokerage account when he or she exercises control over the trading and engages in an excessive number of transactions in order to generate commissions. (See, e.g., Costello v. Oppenheimer & Co., Inc. (7th Cir. 1983) 711 F.2d 1361. To prevail on a churning claim, the customer must prove three elements: (1) control of the account by the broker; (2)trading activity that is excessive in light of the customer’s investment objectives; and (3) that the broker acted with scienter, i.e., intent to defraud or reckless disregard of the customer’s interests. Craighead v. E.F. Hutton & Co. (6thCir. 1990) 899 F.2d 485, 489.

An unauthorized trade occurs when a stock broker or agent executed a trade of a security or other investment product without the client’s approval.

Churning claims are unsuccessful when the customer retains control over the trading activity in his or her account. If a broker has a discretionary account, the broker has express control over trading in the account by written agreement, whereby the client has granted to the broker discretion to make trades without obtaining pre-approval from the client on an ongoing basis. The vast majority of accounts, however, are non-discretionary.

Even in non-discretionary accounts, however, a broker, agent or other financial representative may have implied or de facto control over an account. Cf. Hotmar v. Lowell H. Listrom & Co. (10th Cir. 1987) 808 F.2d 1384 [no control by the broker where evidence showed customer owned several businesses and rental property, spoke with broker almost daily, knew how to use broker’s computer, and occasionally rejected broker’s recommendations].) Implied or de facto control usually turns on the level and extent of the customer’s financial sophistication. “The touchstone is whether or not the customer has sufficient intelligence and understanding to evaluate the broker’s recommendations and to reject one when he thinks it unsuitable ....” Follansbee v. Davis, Skaggs & Co. (9th Cir. 1982) 681 F.2d 673, 677. A customer retains control of his or her account if he or she has sufficient financial acumen to determine his own best interests and he acquiesces in the broker’s management. Carras v. Burns (4th Cir. 1975) 516 F.2d 251, 258.

Factors that applicable case law have deemed relevant to a customer’s relative sophistication and control of his or her non-discretionary account include: (a) the customer’s age; (b) the customer’s education; (c) the customer’s business experience; (d) the customer’s prior investment experience; (e) the customer’s investment knowledge; (f) the amount of customer/broker communications; and (g) the extent to which the customer initiated trades (i.e., placed unsolicited orders). See Leib v. Merrill Lynch etc. (E.D. Mich. 1978) 461 F. Supp. 951, 956.

Churning cases often involve family members and friends.