“On May 3, 2019, a federal district court entered a final consent judgment against a broker who was charged with defrauding customers by making unsuitable and unauthorized trades and churning customers’ accounts, which enriched the broker at the customers’ expense.” The case was filed by the Securities and Exchange Commission in September of 2017.
Churning is defined by SEC Rule 15c1-7, and is illegal and unethical. In understandable terms, the SEC says, “Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning.”
SEC Rule 15c1-7 makes an exception, which says that churning is not illegal if, “immediately after effecting such transaction such broker, dealer or municipal securities dealer makes a record of such transaction which record includes the name of such customer, the name, amount and price of the security, and the date and time when such transaction took place.”
In the judgment mentioned above, the defendant was enjoined from violating the antifraud provisions of the Securities Act and the Securities Exchange Act and ordered to pay $324,614, consisting of $147,115 in disgorgement, $17,499 in prejudgment interest and a civil penalty of $160,000. The defendant also consented to a Commission order barring him from the securities industry and penny stock trading.
If you suspect that you have been a victim of churning, a complaint can be filed with the SEC. The lawyers at Wilson, Bradshaw & Cao, LLP are not brokers, dealers or municipal securities dealers, so they are able to give you independent legal advice on how to proceed with the SEC to make your claim effective.