Brokers have a tremendous amount of power to make securities transactions without discussing the transaction in detail with their client. This power is only magnified since their client not only places a great deal of trust in their broker or advisor, but because many of today's investing public is uneducated about the rules and regulations of the industry. In many cases brokers make little effort to inform their investors of some of the basic rules of the industry.
It's not uncommon for people to confuse unauthorized trading with discretionary trading. Discretionary is not the same as unauthorized trading, for discretionary trading is not unauthorized due to the fact that the investor has given their written authority for the broker to make transactions without first speaking with him or her. Therefore, discretionary trading is legal because it has been properly authorized.
In the securities industry, one of the most deplorable acts is unauthorized trading. Even the average person can easily envision what types of abuses could result from a rogue stockbroker who buys and sells securities in an investor's account with little or no discussion with the client beforehand. Unauthorized trading is a violation of 10b-5 of the 1934 Act, every state's securities laws, and it is a violation of FINRA rules. Unauthorized trading also gives rise to claims of breach of contract, breach of fiduciary duty, fraud, failure to supervise, and negligence. When unauthorized trading is unchecked by brokerage firms or when it is intentionally conducted by a stockbroker, it can lead to findings of fraud and it can force the liable party to pay punitive damages.
Authority to make a specified trade is typically given by the investor in a telephone conversation with the stockbroker; therefore, the necessity for excellent communication is profound, especially since the potential for abuse is high if the customer doesn't understand what is happening. An investor can only consent to a trade if he or she fully comprehends what the broker is saying when the broker calls the client to solicit a trade. It is the broker's responsibility to make sure the client understands the securities market, as well the rewards and risks of the proposed investment. The following information is provided within the order ticket and the investor should be made aware of the following when a trade is being made:
- The type of trade, whether it is a buy, sell, or sell short;
- What security is being purchased;
- The exact amount of shares or units being purchased;
- The exact price of the order being entered, unless it's for a specialty market;
- The current price that the security is trading at;
- Whether the trade was solicited or unsolicited; and
- Any other special instructions.
Relevant factors to an investor that may influence whether or not he or she will allow the broker to make an order is the total approximate dollars (including commissions) that the trade will involve, whether the broker is trading other accounts, the degree of risk involved, the tax consequences and commission costs, and the customer's understanding of these factors.
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Unauthorized trading claims rarely occur with legal discretionary accounts due to the fact that the investor granted their authority for the broker to make trades without their discussion. Unauthorized trades primarily occur with non-discretionary accounts. When brokers open legal, discretionary accounts, they subject themselves to a much higher level of supervision. Brokerage firms monitor the trading in accounts and have alerts set up that trigger internal alarms. Evidence of excessive activity may include: numerous trades, unusual trading, consistent losses, one account's commissions make up for a large part of the broker's commissions, high turnover of equity, in and out trading etc.
According to the U.S. Securities Exchange Commission (SEC), unauthorized trading can include rogue trades in customer, client, or proprietary accounts, or they can involve trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be perpetrated by traders, assistants on trading desks, by portfolio managers, brokers, risk managers and even administrative personnel in the firm's back office. In most cases, your broker must receive specific authorization from you in order to buy or sell securities on your behalf. If your broker has made unauthorized trades, then you may have the right to file a claim to recover your losses.
If you believe this has happened to you, it's important that you contact a California securities attorney from The Law Offices of Jonathan W. Evans & Associates. Our legal team has litigated hundreds of securities arbitration claims and tried more than 80 cases to conclusion at the FINRA. Please contact us today to discuss the details of your case and to find out what legal remedies may be available to you.
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