Stock Market Losses: Churning, Excessive Margins, Unsuitable Investments
At some point, everyone experiences a stock market loss. Some significant losses may be attributable to the volatility of the stock market or unscrupulous dealings by your broker. If you suspect that your stockbroker deliberately mislead you or engaged in some of the more common forms of securities fraud, you may be able to recover monetary damages for your losses. The Womack Law Firm in Houston is here to advocate for you. Call 866-397-8032.
Below are some common forms of fraud to watch out for:
- Breach of broker’s professional duties
- Excessive margins
- Short accounts
- Unsuitable investments
- Unauthorized trading
If your stockbroker is conducting transactions without your consent, he or she may be committing stock market fraud. Contact Houston-based attorney Mark Womack at The Womack Law Firm by calling 866-397-8032 for further information and assistance.
Breach Of Broker’s Professional Duties
The vast majority of fraudulent conduct on the part of stockbrokers vis-à-vis their customers — conduct legally designated as fraud — is deemed to be so only because of the special relationship between brokers and customers.
In order for a stockbroker to become registered with the Securities and Exchange Commission, or become a member of a National Securities Association or National Securities Exchange, he or she must agree to follow “just and equitable principles of trade.” Conduct inconsistent with this standard can lead to the suspension or revocation of the offending stockbroker’s license to engage in the securities business. It can also form the grounds for a civil action by the aggrieved customer against the stockbroker.
From the very beginning of the time that the federal and state governments entered the field of regulating the conduct of stockbrokers, high ethical standards were required of every stockbroker. In certain circumstances, one who sells securities to the public implicitly warrants the soundness of statements of stock value, estimates of a firm’s earnings potential and the like.
The significance of establishing a fiduciary relationship between the stockbroker and the customer — a relationship of trust and confidence — is that in such situations the stockbroker owes the customer the highest possible duty of care and loyalty. Any deviation from such an obligation results in almost automatic liability against the stockbroker. As a practical matter, brokerage firms have long sold the public on the idea that the stockbroker is a professional person in whom the customer can have trust. Thus, in virtually every case, the brokerage customer does trust his or her stockbroker, and accordingly, a fiduciary relationship should be found to exist.
Churning is the fraudulent practice whereby unscrupulous stockbrokers induce excessive activity in their customers’ accounts for the sole purpose of generating a large volume of commissions: the more activity, the more commissions, and the more commissions, the more profit for the stockbrokers. After awhile, the investor’s account will be reduced, sometimes very significantly, by the cumulative effect of so many small but regular charges, and there will be nothing left to churn.
Churning has been held to constitute a fraudulent practice, under the federal Securities Exchange Act of 1934. In a landmark churning case, it was determined that where a customer relies upon the recommendations of the broker that the broker is in a position to control the volume and frequency of transactions and the broker, abusing the confidence reposed in him, recommends and induces an excessive number of transactions, involving multiple trading in the same security and switches from one security to another, on which commissions and profits are taken without regard to the needs and objectives of the customer, then there is a device, scheme or artifice to defraud.
In order to establish the fraudulent practice of churning, two basic elements must be established: first, the stockbroker actually exercised control over the customer’s account; and second, the trading activity was excessive. A third element of intent is usually implied by courts when the first two elements have been established.
If you believe that your stockbroker has been churning your account to generate more commissions instead of furthering your investment interest, contact our Houston, Texas, firm for legal advice on recovering your stock market losses.
A margin account is essentially a brokerage account with a line of credit. Based upon the equity in the account, the brokerage firm will allow the customer to borrow funds, using the securities in the account as collateral for the loan. The interest charged for such margin loans is typically anywhere from between one to three points above the prime rate at which the brokerage firm borrows money from the banks.
Thus, in return for nothing more than what is essentially a bookkeeping function, the brokerage firm can earn up to a three percent interest override on money which, in economic reality, is being loaned by the bank to the customer. It is possible that some brokerage firms find margin lending productive of more net revenue than executing commission transactions.
Margin accounts are probably one of the most misunderstood types of accounts in the securities industry. A margin account is inherently speculative, and as such should not be utilized in an otherwise conservative investment account. It is basically a tool to be utilized in trading and speculative accounts by wealthy customers.
The main objection to this sort of account is that it is inconsistent as far as the long-term objectives of an investment account are concerned. When a customer borrows money on margin, the interest rate is usually from one to three points above the prime rate, which means that in order to make a profit on the margining activity, the customer must make at least the margin rate and then some, just to break even.
If you feel that the margin required by your brokerage firm is excessive, you may be right. Only an experienced securities fraud attorney knows for sure if excessive margins are being required by your stockbroker. Contact our firm for information and assistance.
A short account is one in which short sales take place; a short sale is a sale of a security not owned by the seller at the time of sale. For example, on January 1, a customer makes a short sale of 100 shares of company A’s stock at $10 per share. The reason this is called a short sale is that at the time of sale, being January 1, the customer did not own any company A stock, but rather sold what he or she did not own with a promise to deliver in the future.
What the customer is hoping is that the market price of company A’s stock will decline in value before the customer is required to purchase the 100 shares in order to fulfill the promise to deliver. If the price goes down to $8 per share before February 1, for example, and the customer purchases 100 shares for $800, the customer will make $200 (less commissions, of course) on the transaction.
If, on the other hand, for the purpose of “covering his or her shorts” by delivery, the market price goes up to $11 per share when the time comes to cover the short position by buying in, the customer will lose $100 on the transaction. Of course, if the market price rises to $100 per share, the customer will lose $9,000, or nine times the amount of the original short sale.
It is precisely because of this open-ended liability on the up side that short sales are considered inherently speculative and accordingly unsuitable for investment accounts.
Because the brokerage business is deemed to be fiduciary in nature, which means that the stockbroker must act in the best interests of his or her customers, brokerage firms are required by the rules of various self-regulatory organizations to restrict their purchase and sale recommendations to those which are suitable for their customers’ particular accounts.
According to the rules of the New York Stock Exchange and the National Association of Securities Dealers, suitability is to be considered in the context of the customer’s other security holdings and his or her financial situation and needs. In addition, a stockbroker must use due diligence to learn the essential facts relative to every customer, every order, and every cash or margin account acceptable or carried by the organization.
If a stockbroker recommends an investment that is not suitable for the client, based on the aforementioned criteria, your stockbroker may be liable for your losses. For example, if a stockbroker recommends a variable annuity to a senior citizen investor, knowing full well that he or she has limited financial resources and is relying on an annuity to supplement his or her retirement income to meet monthly living expenses, this may be a classic unsuitable investment case. Contact The Womack Law Firm to discuss your unsuitability of investment or stock market loss.
By law, a stockbroker is required to consult with the customer before conducting any transaction on behalf of the customer, such as the buying or selling of stocks. An unauthorized transaction is one that the stockbroker executed for a customer’s account without the permission of the customer having been obtained beforehand. In this respect, such a transaction is similar to an improperly executed transaction where the stockbroker failed to follow the directions of the customer and either bought when directed to sell, sold when directed to buy, or the identity, amount or price of the security was in error.
Unauthorized transactions such as these can be the result of either a mistake, in which case the stockbroker is simply negligent, or it can arise from a deliberate act, in which case the stockbroker has committed a fraud upon the customer. In either instance, the stockbroker will be compelled to put the customer back into the position in which the customer was before the unauthorized or improperly executed transaction took place.
To reverse an unauthorized or improperly executed transaction, the customer must be conscientious and act immediately upon discovering the impropriety or error. Otherwise, if the customer chooses to wait until future market direction can be ascertained in order to see if a profit can be obtained from the transaction, recovery for any loss that occurred between the time of discovery and the time of complaint will not be recoverable.
Contact Us Now To Take Control Of Your Situation
If you have suffered losses due to churning, excessive margins, unsuitable investments, unauthorized trading, or any other form of stockbroker fraud, contact The Womack Law Firm of Houston, Texas, to discuss the merits of your case with a lawyer. Call 866-397-8032.