Goldblatt Law Firm

Churning One of the most common investor complaints involves what is called churning. Churning is defined as excessive trading in a customer's account for the purpose of generating commissions. To prove his or her case, an investor must show that (1) the broker controlled the account; (2) the trading was excessive in light of the investor's objectives; and (3) the broker acted with the intent to benefit himself through the generation of commissions and to the detriment of the investor. Churning cases usually turn on the question of control. If the broker can show that the investor was making his or her own decisions and the broker was merely following orders, it is difficult for the investor to prevail. However, if the broker is making most of the decisions and there is excessive, detrimental activity, the investor has a legitimate claim. The investor's account statements and the background of his or her investor/broker relationship should be carefully explored before proceeding with a churning claim.

Unsuitability The NASD requires that a broker "recommend a purchase or sale only after determining that the recommendation is suitable for the customer." The NYSE requires that a broker "know his customer before recommending securities." Both rules are designed to ensure that investors have the financial resources to bear the risk of recommended investments and to ensure that brokers communicate with their customers. If an investor loses money after his broker recommends investments that were unsuitable in light of his financial situation and objectives, this is a claim which can be pursued. The investor's level of experience in the market as well as his financial wherewithal are critical issues to be explored prior to filing .

Unauthorized Trading When there is a non-discretionary account, a broker may not make transactions without the investor's knowledge or approval. If the investor has not given his permission to make a trade, either orally or in writing, and loses money as a result of the trade, it is considered unauthorized and may be actionable. A key factor to consider will be the date of the transaction. If it has been months or years since the trade took place and the investor is just now complaining, the claim could be difficult to pursue. However, if the investor disputes the unauthorized trade soon after becoming aware of it, the door remains open for the filing of a successful arbitration claim.

Failure to Execute If an investor gives his or her broker instructions to execute an order, the broker is required to follow those instructions. If the broker ignores the instructions or intentionally or negligently fails to execute the order, a claim may arise. Often times, after a broker fails to execute an order, there will be a sharp increase or decrease in the price of the security at issue. In either case ,the investor may be damaged, either by not realizing a gain or by suffering a loss. A broker must first have agreed to act as an investor's agent before he can be held accountable for failure to execute an order.

Margin Complaints The margin is the amount an investor must deposit with a broker when borrowing from the broker to buy securities. If an investor has been approved to borrow money from the broker-dealer for the purchase of stocks, he or she has a margin account and pays interest on any funds borrowed to purchase securities. The NASD and NYSE require minimum maintenance of margin accounts; both SRO's require that the investor keep at least 25% of the market value of the securities in his or her margin account. Complaints often arise when the broker-dealer liquidates securities in the account without giving the investor prior notice; when the broker-dealer specifies a deadline for the investor to deposit additional funds into the account to avoid liquidation (a margin call) but liquidates the funds prior to the deadline; and when the broker-dealer liquidates the investor's securities after the investor fails to meet a margin call but fails to allow the investor to suggest which securities should be liquidated. Before proceeding with this type of claim, the investor's agreement with the broker-dealer must be carefully reviewed to determine exactly what the rights of the broker-dealer were regarding the liquidation of claims.

Material Misrepresentations or Omissions If a broker intentionally or recklessly misleads an investor or fails to disclose material facts about an investment, a claim for misrepresentations or omissions can arise. This type of claim will generally turn on the comparative credibility of the investor and the broker and the documentation maintained by both. An arbitration panel will also look to the sophistication of the investor to determine if he or she was actually mislead.

Negligence A broker is required to use reasonable diligence in handling the affairs of an investor and to act as a reasonable and prudent broker would act. To succeed in a claim for negligence, it is not necessary for the investor to prove that the broker acted maliciously or intentionally. However, negligence claims are not considered particularly strong and are best brought along with another type of claim.

Breach of Fiduciary Duty Brokers are fiduciaries in relation to their investors. In other words, they occupy a position of trust and confidence, owing the highest degree of loyalty and fidelity to investors. If a broker breaches this duty to an investor, a claim may be pursued, usually in conjunction with or overlapping another type of claim.