Sometimes a stock broker or investment advisor who has discretionary authority over an account engages in excessive trading in order to generate large commissions. This practice is known as "churning," and will provide a basis for claims for state and federal securities fraud, common law fraud, negligence, breach of contract, and breach of fiduciary duty.

Churning usually involves a large number of trades, and certain turnover ratios are sometimes considered to establish a prima facie case. However, because churning is defined as trading that is done to benefit the broker rather than the investor, even one trade can be considered churning if it has no legitimate purpose. For example, if a broker moves your money from one family of mutual funds to another, he must have a good reason for doing so. This is why most brokers use "switching letters" to confirm that the customer wants such a switch made in spite of the fees that will be incurred.

Churned accounts are also often characterized by frequent in and out trades and "wash" transactions. Wash transactions are simultaneous or roughly simultaneous transactions that nullify each other.

In order to prevail on a pure churning claim, the broker or advisor must have control over the account in the form of either discretionary authority or practical ("de facto") control. The broker or advisor has de facto control when, as a practical matter, the investor lacks the knowledge and sophistication to make his or her own independent investment decisions and instead always follows the recommendations of the broker or advisor. It is important to remember that control by the broker or advisor over the account is not necessary for many other types of claims, such as unsuitable recommendations so, even where such control is not present, it is often possible to recover on those theories.

Where you have paid excessive commissions as a result of churning, you have a claim that may be worth pursuing.

DISCLAIMER: Vincent DiCarlo, who authored and maintained this site, has entered government service and, as of September 1, 2008, is no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely those of the author.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo