“Churning” is the term used to describe a broker’s excessive trading of securities in a client’s account solely for the purpose of making commissions – not for the client’s benefit. It’s a violation of the broker’s fiduciary duty to their clients, and it’s against the law.
However, brokers who are accused of churning may have defenses to these claims.
Some potential defenses to churning claims
Every situation is different, but an unhappy client’s allegations may have started the investigation rolling. Depending on the circumstances, here are some possible avenues of defense:
- You were acting on the investor’s instructions. If the investor directed you, as their broker, to engage in frequent trading, you may not be liable for churning. (This is why it’s essential to document all instructions received from their clients to avoid misunderstandings.)
- The investor understood and accepted the risks. If the investor was aware of the risks associated with frequent trading and still wanted to go ahead, you may not be liable.
- Your trades were part of a legitimate investment strategy. If you can show that your frequent trading was part of an actual strategy designed to benefit the investor, you may not be guilty of churning (even if the strategy turned out to be a bad one).
- Your commissions were reasonable. Bespoke services rate higher commissions. If your commissions were reasonable given the level of service you gave your client, that’s not churning.
- The losses were caused by market conditions, not churning. You cannot be held responsible for wild market conditions. Fast trades in response to changing conditions does not equal churning.
It is always wise to remember that each case is unique, and the defenses that may be available to you will depend on the nature of the charges against you, the evidence the prosecution intends to bring, the testimony of financial experts and more. If you have questions about civil or criminal exposure in financial matters like these, please contact the attorneys at Ford O’Brien Landy LLP.
Those who have questions about civil or criminal exposure in financial matters are welcome to contact the attorneys at Ford O’Brien Landy LLP for more information.
Source: Investor.gov (U.S. Securities and Exchange Commission), “Churning,” Accessed April 7, 2023