Keeping a balanced and up to date investment portfolio is an important aspect of your overall investing strategy. In a dynamic economic market, making the right trade at the right time can protect and maximize your investments.
However, in many cases, investment brokers engage in excessive trading, also referred to as “churning,” in order to maximize their commissions. While it can be difficult at times to differentiate normal and advisable trading patterns from churning, as a rule, your profits or avoided losses should cover the costs of your stock trades. If your broker engages in excessive trading that is of no tangible benefit to you, you may have grounds to sue your broker for fraud to recover your investment losses.
Two of the most common types of churning are mutual fund churning and “wash transactions.”
Mutual Fund Churning
Mutual fund churning involves unnecessarily moving money among two or more mutual funds, in order to accumulate broker fees for each transaction. While there are valid reasons to move investment money from one fund to another from time to time, moving funds unnecessarily is a common form of churning. For this reason, many investment brokers require their clients to provide what is called a switching letter before transferring money among mutual funds.
Wash transactions are rapid, often simultaneous transactions that don’t offer any financial benefit, resulting in a ‘wash’ for the investor, but for increased commissions for the broker.
Establishing Your Case
Churning can be a difficult thing to prove. In some cases, brokers may make a number of rapid trades for valid reasons, such as rapid changes occurring in the financial markets. In other cases, a single unnecessary trade might constitute churning. Usually, the key to establishing churning is to take the entire portfolio into account, along with assessments of your goals and interests, and the reasoning behind the trades. If it can be established that your broker made excessive trades that served no real benefit to you—whether they didn’t mitigate losses or increase earnings, or if the fees incurred by the trading cancelled out any benefits to you—you may be able to recover damages by filing a claim for securities fraud against your broker.
How to Get Help
To thoroughly establish your case, it is essential that you understand and evaluate your stock portfolio in detail with an experienced securities attorney in your area as soon as possible. He or she can help you review your case with you to determine whether churning has taken place, and to help you gather and present the evidence you need in the event that it has.