NCJ Number
58055
Journal
Trial Volume: 15 Issue: 6 Dated: (JUNE 1979) Pages: 42-46
Date Published
1979
Length
6 pages
Annotation
FRAUDULENT PRACTICES BY SECURITIES BROKER-DEALERS, PARTICULARLY THE PRACTICE OF CHURNING, ARE DISCUSSED IN AN ARTICLE DIRECTED TO ATTORNEYS.
Abstract
THE PURPOSE OF THE DISCUSSION IS TO ENABLE ATTORNEYS WHO ARE NOT SPECIALISTS IN SECURITIES LAW TO RECOGNIZE FRAUDULENT ACTIVITY ON THE PART OF SECURITIES BROKER-DEALERS AND TO REPRESENT CONSUMERS IN ACTIONS AGAINST BROKER-DEALERS. CHURNING IS THE PRACTICE WHEREBY A BROKER INDUCES EXCESSIVE ACTIVITY IN A CUSTOMER'S ACCOUNT FOR THE SOLE PURPOSE OF GENERATING COMMISSIONS FROM THE ACCOUNT. TO ESTABLISH THAT CHURNING HAS TAKEN PLACE, THE ATTORNEY MUST DETERMINE (1) THAT THE BROKER EXERCISED CONTROL OVER THE ACCOUNT IN QUESTION (EITHER DIRECTLY) BY WRITTEN DISCRETIONARY POWER, OR INFORMALLY THROUGH INFLUENCE OVER AN UNSOPHISTICATED INVESTOR) AND (2) THAT TRADING IN THE ACCOUNT WAS EXCESSIVE. CRITERIA FOR DETERMINING THAT CONTROL WAS PRESENT AND FORMULAS FOR SHOWING THAT TRADING WAS EXCESSIVE ARE PRESENTED. STRATEGIES USED BY BROKERS TO GENERATE EXCESSIVE COMMISSIONS ARE EXPLAINED. THE RELATIONSHIP BETWEEN CHURNING AND THE SUITABILITY RULE-THE REQUIREMENT THAT BROKERAGES, IN THEIR FIDUCIARY CAPACITY, RESTRICT THEIR PURCHASE AND SALE RECOMMENDATIONS TO THOSE SUITABLE FOR EACH CUSTOMER'S PARTICULAR ACCOUNT--IS DISCUSSED. TRADING PRACTICES THAT RUN AFOUL OF THE SUITABILITY RULE ARE DESCRIBED, AS ARE BROKDER-DEALERS' DISCLOSURE OBLIGATIONS WHEN THEY ACT AS PRINCIPALS, RATHER THAN BROKERS, IN TRANSACTIONS INVOLVING A CUSTOMER'S ACCOUNT. IT IS NOTED THAT IN MOST ACTIONS FOR DAMAGES ARISING FROM EXCESSIVE TRADING OR UNSUITABLE RECOMMENDATIONS, IT IS NECESSARY TO SHOW AN INTENT TO DECEIVE, MANIPULATE, OR DEFRAUD (AS OPPOSED TO NEGLIGENCE) ON THE PART OF THE DEFENDANT. SEE NCJ-59494 FOR PART 2. (LKM)