Brokers and investment advisers need the consent of their customers to proceed with the purchase or sale of a security, unless they have written authority to execute trades without consent. When a trade is unauthorized, the broker may be held responsible for any losses. Steve A. Buchwalter is a securities fraud lawyer with extensive experience representing investors throughout Ventura County and elsewhere in Southern California. If you were burned by your broker, you may be able to seek damages.Unauthorized Trading
Prior to buying or selling a security, a broker or investment adviser must obtain an investor’s consent. This may be written or oral, but without the investor’s permission, the broker or investment adviser cannot move forward with a trade. A typical scenario is when a broker calls an investor to recommend a trade, and the investor will either consent to or reject the trade based on the information provided by the broker. A trade made without the investor’s prior consent is considered unauthorized trading.
Brokers, in particular, may engage in unauthorized trading due to the nature of their compensation. They generate commissions by executing purchases and sales. A broker may also execute a transaction if he or she believes the transaction is in the investor’s best interest, but without receiving the investor’s permission. This can happen if the investor has previously relied on and followed the broker’s advice. A broker may also try to convince the investor to accept a trade retroactively, or ratify the transaction. In some cases, a broker will churn an account, or make excessive trades in an effort to generate more commission fees.
Unauthorized trading is prohibited by the Financial Industry Regulatory Authority (FINRA), which independently regulates securities firms. FINRA Rule 2010 states that a member must observe high standards of commercial honor and just and equitable trade principles. This includes making only authorized transactions in their customers’ accounts. Unauthorized trading may give rise to a claim of misconduct, fraud, or breach of fiduciary duty.
Investors should carefully review their account statements each month for unauthorized transactions. If there is an unauthorized trade, the investor should promptly complain to the broker in writing. Otherwise, the broker may argue that the investor ratified, or accepted, the trade through his or her silence.Discretionary Authority
There are limited circumstances in which a broker or investment adviser can make a trade without an investor’s explicit permission. An investor can give a broker or investment adviser written discretionary authority over the account. Discretionary authority is the legal right to buy and sell securities without the investor’s prior consent. A broker or investment adviser with discretionary authority over an account generally has a higher fiduciary duty to an investor.
The customer account agreement between the investor and brokerage or investment advisory firm will specify whether it can make trades without first contacting the investor. If there is no written agreement, the broker or firm cannot make a trade without prior permission. However, if an investor has borrowed funds to purchase securities in a margin account, then there are circumstances in which a broker may sell any or all of an investor’s securities without the investor’s permission, irrespective of whether the account is discretionary or non-discretionary.Resolving a Dispute
Most customer account agreements will include a clause that requires the investor to resolve any dispute with the brokerage or investment advisory firm through arbitration. This is an alternative form of dispute resolution in which a panel of one or more arbitrators decides how to resolve a matter. Although arbitration is less formal than litigation, an investor will still need to prove his or her case to the arbitrator. The process is generally less costly and faster than trial, but most decisions are binding. If an investor did not consent to arbitration, he or she still has the right to request a FINRA arbitration. An investor may also consider mediation, or seek recourse in a federal or California court.Seek Knowledgeable Guidance on an Investment Fraud Case from a Los Angeles Lawyer
Investment fraud lawyer Steve A. Buchwalter is committed to helping residents of Los Angeles and other areas of Southern California. As a former stockbroker with years of legal practice, he understands the nature of securities trading and the complexities of federal and state securities law. We represent clients in Beverly Hills, Pasadena, and Irvine, among other communities. Call us at (818) 501-8987 or contact us online for a consultation.