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Tag Archives: Churning

THE DREADED TAX SEASON MAY SAVE YOU

02 Thursday Apr 2015

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Accountant, Arbitration, Broker, Broker-Dealer, Brokerage Firm, Churning, Discretionary Account, Fiduciary Duty, Investments, Securities Attorney, Tax Season, Unauthorized Trading

While many see tax season as a dreaded time of year, it provides investors with an independent review of their trading. All too often an unsuspecting investor has no idea that his/her account is being improperly traded. When preparing your taxes, your accountant reviews your investment losses and gains as well as the amount of trades taking place in the investment account. This review can often be the first line of defense to identify and stop improper trading in your investment account.

When a broker improperly trades an investment account, whether by unauthorized trading, unsuitable recommendations or trading the account excessively to generate commissions, there is a means to seek recoupment of the losses. Investors may commence an arbitration before the Financial Industry Regulatory Authority (“FINRA”) to recoup their losses, and in certain instances, have six years to file a claim.

Common causes of action relating to improper investing include:

  • Unauthorized trading – Unauthorized trading occurs when a broker and/or investment advisor trades an account without seeking express authorization prior to the transaction. Unless the account is discretionary, before every trade a broker and/or investment advisor is required to contact the client and seek the investor’s approval for the trade.
  • Unsuitable trading – A broker and/or investment advisor is responsible for recommending only those securities which fit a client’s investment objective, age, investment background and financial security. Purchases of speculative, low priced securities are not suitable for every investor nor is buying concentrated positions in one stock or sector.
  •  Churning – Churning takes place when an account is excessively traded for the purpose of generating commissions for the broker and/or investment advisor.   This is exemplified by multiple trades per month, in many instances the account’s value decreases due to the commissions generated from the trading.
  • Fraud/Misrepresentation – This occurs when a broker and/or investment advisor intentionally misleads the investor, or omits to inform the investor of important information relating to the trading in the account. The result of this fraud/misrepresentation results in the loss of an investor’s portfolio’s value.
  • Fiduciary Duty – In certain instances the broker and/or investment advisor and the employing bank has a duty to invest, be it buy, sell or hold an investment pursuant to the client’s investment objectives. Failure to comply with such duties can result in losses to a broker or trust account.

Take time over the course of the next few weeks, when the information is gathered and centralized for review, to make sure your broker is working for you, not against you.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact us at (800) 998-7705 or email

When The Consequences Outweigh the Risk

19 Monday Jan 2015

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Accountant, Arbitration, Broker-Dealer, Brokerage Firm, Churning, Compliance, Customer Complaint, FINRA, Investor Complaint, Mandatory Arbitration, Securities Fraud, Stockbroker, Suitability, Unauthorized Trading

It is not difficult, doing the right thing. There are rules regardless of what game in life you’re playing. Ignorance is no defense.

Unfortunately, just as the simplicities of the day, the “Pleases” and “Thank Yous” have fallen by the wayside, so too has the mindset “I will work hard and succeed.” Instead, today is about the quick fix, the shortcuts and unfortunately, the cheating and the breaking of the law.

For those who are taking the shortcuts, who are cheating others to get ahead, chances are you’re going to be caught, and it will cost you more than you gained. For those stockbrokers who are trying to cheat the system, by making the unauthorized trades in a client’s account, trading the account for the purpose of generating commissions or making an unsuitable recommendation to a client, there are consequences.

These consequences come in many forms, one of which is an arbitration claim. Stockbrokers are registered with the Financial Industry Regulatory Authority (“FINRA”). When a customer opens a trading account, there is an arbitration requirement that mandates any claims relating to the trading in the account to be filed before FINRA’s dispute resolution. Depending upon the dollar amount of the losses, FINRA will provide (at a fee) one or three arbitrators to hear the case. The filing fee for the complaining investor is relatively small and in most instances the attorney handling the cases take the matters on a contingency basis (attorney does not charge on an hourly rate, but takes a percentage of any money recovered).

Pursuant to FINRA rules, an investor has six years from the date of the trade to file a claim against the broker. Once an arbitration claim has been filed, FINRA has streamlined discovery, a process in which the parties exchange documents prior to the actual arbitration. Pursuant to FINRA rules, there are certain categories of documents deemed “presumptively discoverable” and must be produced if they exist. While the burden of proof is always on the person bringing the claim, FINRA appears to do all it can to assist the investors in bringing their claims to a hearing.

For the broker who is looking to make a quick dollar, say a $500 commission on an unauthorized trade, and then another, and then another, the legal fees associated with the defense of the claim can be up to ten times the original commission. And this does not account for any award assessed by the arbitrators, the FINRA hearing fees assessed by the arbitrators or the possibility of punitive (punishment) damages.  An arbitration award is regularly converted into a judgment by the courts, and if not paid, the investor can go after your income or assets to collect on the judgment.

The stockbroker who thinks no one will notice the cheating is shortsighted. On a daily basis the trading is reviewed by a supervisor and often times a person in the firm’s compliance office. From the investor standpoint, not only does the investor see the trading from confirmations and account statements, but most likely the investor’s accountant is reviewing the trading for the tax purposes.

While it’s a lost art, hard work really does pay in the long run. The consequences simply are not worth the risks.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact Barry at (800) 998-7705 or email barry@bordetskylaw.com.

Be Careful of “Your Own”

15 Thursday Jan 2015

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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BrokerCheck, Churning, FINRA, Investment Responsibility, Investment Strategy, Securities Account Statements, Stockbroker, Suitability, Unauthorized Trading

It happens all the time. People socialize with those they are familiar with, those who speak the same language, those who go to the same church, mosque or temple, and those whose family members are from the same country. This familiarity often times creates business relationships that ordinarily would not exist. And there is nothing wrong with creating business relationships based upon these ties.

But be aware of the instance where you may be taken advantage of by “your own”.  All too often one will give another within the community a trust that is not earned, but given with the thought: “this person would never take advantage of me.” When you hear phrases such as “If [fill in name of another community member] trusts me, you can trust me” or “I’ve known your [father/mother/uncle] for years, don’t worry, I’ll take care of you” take a moment. Stop. Particularly if this person is handling your investments and finances.

There are many phrases that refer to the dangers of working with those you socialize with, and while many are accurate, they are simply excuses as to what you must do at all times: stand up for yourself. Trust is a two-way street that must be earned. You should be comfortable enough with the relationship with your broker to ask a question, be satisfied with the answer, and hold the person accountable for his actions regardless of whether the person is an old family friend or someone you see weekly at church. If the comfort does not exist, bad news…there is no trust.

When this trust extends to your broker, you have a responsibility to yourself. Before investing your hard earned money, do some due diligence on the community member broker other than asking if “Uncle Eddie” thinks the broker is a nice guy. Stockbrokers are registered in a national registry that can be accessed through the site http://brokercheck.finra.org. This site will provide you access to important information such as the broker’s employer, the broker’s work history and any investor or regulatory complaints filed against the broker.   You’ll get a better understanding of who the broker is other then when you’re not seeing him once a week at church or in a social setting.

Your broker has certain responsibilities as to what securities he recommends, the requirement to speak to you before every buy and sell, and to make sure the account is not being traded just for the purpose of generating commissions. However, make no mistake, it is your money the broker is investing and thus it is your responsibility to make sure you are comfortable with your broker and the manner in which he is handling your investments. Whether you are in the beginning stages of investing or some point thereafter, take the time to know what your broker is recommending, follow the investment portfolio on a monthly basis, and don’t be shy to push back where necessary. Simply relying upon the broker blindly because he is a member of a certain community is a surefire way to lose what you have worked hard to accumulate.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA arbitrations as well as before state and federal courts. If you have questions regarding the process, please contact Barry Bordetsky by telephone at (800) 998-7705 or email barry@bordetskylaw.com. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

Treat Your Brokerage Account Like Your Car? Absolutely.

01 Friday Aug 2014

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Arbitration, Broker, Churning, FINRA, Investment Portfolio, Investments, Investor, Newport Coast Securities, Stockbroker, Suitability, Turnover

Believe it or not, your car provides a perfect analogy of how you should handle your investment account and the broker working with you. Most people have little if any knowledge of cars or how they work. Similar to how you have your broker guide you with your investments, you bring your car to your local mechanic.

Cars receive oil changes every 3,000 miles, and when it is time for your oil change, you bring the car to the service station. When getting the oil changed your mechanic tells you instead of every 3,000 miles, you should get your oil changed every 500 miles.   This just doesn’t make any sense, but you decide to go ahead anyway, because in your mind, the mechanic is the one who does this work for a living, so he must know what he’s talking about.

Stop there. If it doesn’t make sense to you, chances are, you are right on point.  You don’t need to be an expert in the field to know when something is simply off.  First thing you should do: ask to speak to the supervisor.  This should be no different with your stockbroker.

The Financial Industry Regulatory Industry (“FINRA”) recently filed charges against the New York broker-dealer Newport Coast Securities and five of its current and former brokers, charging them of “knowingly engaging in a manipulative and deceptive and fraudulent scheme to churn the accounts of some two dozen customers to boost their commissions.” FINRA alleges rampant churning of customer accounts and other misdeeds that caused significant losses to retirees and other investors.

FINRA is taking action to correct the alleged wrongs of the firm and brokers, and if the firm and brokers are found to have violated both securities law and FINRA rules, there will be be heavy fines issued, as well as the possibility of suspensions and perhaps expulsions from the industry.   This action by FINRA is similar to what the district attorney’s office does with a criminal that steals money from someone.

The present enforcement action by FINRA relating to churning should be a warning to all investors, old and young. Churning is the act of over-trading an account where an exorbitant amount of commissions are generated from the trading.    By way of example, presume an investor has $100,000 in her account. The broker opens the account with a buy of $100,000 of Facebook stock. The broker then repeatedly sells, buys and then sells again the stock twenty times over a one-year period. Each sale is quickly followed by a repurchase.

When one of the sales results in a quick profit, the broker will undoubtedly call and tell you how happy you should be that he made you money on the trade. But did he? Here’s where the churning analysis comes into play. If the broker did not overly trade the position, but rather bought and held, the position would have grown with the market movement of the stock. Instead, the investor’s portfolio has decreased because the broker’s commissions on the buys and sells have actually eaten into the profits in the account, and in many cases simply decrease the portfolio value. The only parties making money on this trading are the broker and his firm.  This type of trading should raise questions – – questions that must be asked before allowing the activity to continue.  And like your mechanic, ask for the broker’s supervisor before things get out of hand with your account.

In addition to enforcement proceedings, FINRA provides investors the ability to bring a civil action against the broker and his employing firm through the arbitration process, a very condensed court-like action. Those who lost money from Newport Coast or any other firm through churning, or other improper acts and omissions, have the opportunity to seek a remedy on their own. Those investors get their proverbial “day in court” in an expedited arbitration process that streamlines both cost and time to have the merits of the claim heard by a panel of arbitrators.

The Law Offices of Barry M. Bordetsky represents parties in arbitrations involving churning, unsuitable trading and other investment related claims. If you have questions relating to investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

 

 

The Importance of The Activity Letter

23 Wednesday Jul 2014

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Activity Letter, Broker, Churning, Compliance, Discretionary Trading, FINRA, Know Your Customer, Securities Arbitration, Stockbroker, Suitability, Supervision, Unauthorized Trading

You have a brokerage account. One day you open up your mail (you are responsible for opening the mail) and find a letter from your brokerage firm. The letter thanks you for being a customer of the firm.  The letter then begins the process of reiterating the trading objectives you selected when you opened the account or when the account information was updated. The letter may contain additional information such as the amount of trades in your account over a three-month period of time or the commissions generated from the account (the money the broker and firm is making from the trading in your account). Most likely the letter ends with a request that you countersign the letter to confirm your objectives have not changed, that you authorized and approve of the trading in your account. In some instances the letter will end with a statement indicating the firm will presume all is okay with the trading in the account unless the firm hears anything to the contrary from you. If written correctly, the letter invites you to call with any questions.

Gee, isn’t this nice, you’re thinking. The brokerage firm is checking in on me.

Actually, the brokerage firm is checking in on your broker. The firm is utilizing a very important tool to determine whether the activity in the account is what you have directed and is suitable for you. The letter is aptly called an Activity Letter.

The Activity Letter seeks to determine, for instance, if you are controlling the account or if the broker is controlling the account. To be clear, while there is such a thing as de facto control, if your broker is calling you and recommending a buy or sell, you are demonstrating a manner of control over your account when you agree or disagree with the recommendation. Unless your account is discretionary (meaning your broker trades without the need to speak to you) the broker must discuss, on the day of a trade, the particular recommendation to buy or sell.

The Activity Letter also allows the firm to confirm, independently from the broker, whether it is your intention to trade your account aggressively, conservatively, or somewhere in the middle. The Activity Letter confirms you are not only aware of the trading in the account, but approve of it as it takes place.

The Activity Letter is an important tool not only for the firm, but also you. In most instances the letter is from a compliance officer, branch manager or supervisor at the brokerage firm. If you have any questions relating to your account, take the opportunity to call and ask the questions. The benefit of the Activity Letter from someone other than your broker is you should not feel uncomfortable with the call, but rather emboldened to make sure your investments are being handled as you have instructed.

When you sign and return the Activity Letter to the firm, the firm is relying upon that information in terms of supervising both the account and the broker. Do not sign something that is not accurate. As I have written in the past, you are responsible for reading a document, knowing its content and will be bound by the terms of the document that bears your acknowledgement signature. An informed investor is a smart investor. If you have questions, whether to the broker or supervisor, take the time to ask them. Do not assume. We all know what happens then.

If you have questions relating to this topic or other investment matters, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

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