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