Churning

Also known as “excessive trading.” Like “Unsuitability,” churning allegations often form the basis for an arbitration award, and it is an issue that any investigator handling cases involving securities issues must understand. A broker “churns” an account when he engages in excessive trading for the purpose of increasing his or her commissions, rather than to further the customer’s investment goals.  For example, Thelma Lou is thirty year old actress with an annual income of approximately $350,000. She entrusted $500,000 to Joe Broker who engaged in some sort of stock transaction virtually every day. Although there was no fraud, Thelma Lou approved every trade, and she realized a significant return on her investment, she would have made as much or more had the money been invested and left alone. The excessive trading served only to enrich the broker, so Thelma Lou would almost undoubtedly prevail if she pursued an arbitration award.

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