What is...

• Securities Fraud?
• Unauthorized Trading?
• Churning?
• An Unsuitability Claim?
• A Breach of Fiduciary Duty Claim?
• A Contingency Fee?

What Is Securities Fraud?

Securities Fraud occurs when your rights as an investor have been violated by your registered representative or broker dealer. Large losses do not necessarily prove broker wrongdoing, thus, losses that are the result of market forces or other considerations should not be considered securities fraud.

What Is Unauthorized Trading?

Unless a customer has given his broker or a third party a power of attorney to make trades in his account without first obtaining his permission, no one can make a trade in the customer's account unless he has first given his prior permission for the trade. A broker, nonetheless, may be able to defend a claim for unauthorized trading based on the legal principles of ratification, estoppel, and waiver. For example, if the customer has allowed the broker to make trades without obtaining his prior consent for some period of time, an arbitration panel or court may find that he ratified the practice.

What Is Churning?

Churning occurs when a broker makes excessive trades in a customer's account to further his own interests instead of the customer's. There is no single formula for determining when churning has occurred. The amount of trading done for one customer may be appropriate based on his sophistication and understanding of what his broker was going to do, whereas the same level of trading may be inappropriate for a less sophisticated customer. Arbitration panels and courts consider objective criteria for evaluating churning claims, including turnover and commissions-to-equity ratios. Generally, churning claims may be made only when a broker has made excessive trades in a discretionary account (i.e., where the customer has given the broker a power of attorney over his account). If a customer, however, can demonstrate that the broker exercised de facto control over the account, he may be able to prove churning even though he never gave his broker a power of attorney over his account.

What Is an Unsuitability Claim?

The rules of various regulatory bodies state that a broker must attempt to learn the essential facts about each customer's needs and objectives. Thereafter, the broker is prohibited from recommending a specific trade or course of trading that is unsuitable for the customer's needs and objectives. If a broker has recommended unsuitable trades for a customer's non-discretionary account or made unsuitable trades in a customer's discretionary account, the broker may be held liable for the losses sustained.

What Is a Breach of Fiduciary Duty Claim?

It has been said that all agents owe their principals a fiduciary duty of complete fidelity, loyalty, obedience, and trust. The courts in each jurisdiction differ about when a fiduciary duty arises in a customer-broker relationship. Some jurisdictions hold that unless the customer has given his broker discretionary powers over his account, the broker does not owe the customer a fiduciary duty. Other jurisdictions find a fiduciary duty in all customer-broker relationships, but limit the brokers duties to those he specifically agreed to perform. For instance, in a typical non-discretionary account, the fiduciary duty would be limited to the execution of the customer's orders and accounting for the customer's funds. Other jurisdictions examine the facts of each situation closely to determine whether the customer reposed sufficient trust and confidence in the broker to create a fiduciary duty. A fiduciary duty is sometimes found when there is a great disparity in the expertise of the parties and the broker has been able to exert substantial influence over the customer due to his superior position. When a jurisdiction has found that a fiduciary duty exists, the customer does not have to prove that his broker intended to breach the duties he owed to him. Negligence will suffice.

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