Articles Posted in Margin

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered investment losses at the hands of financial and investment advisers who churned and burned their accounts. One of the most prevalent abuses in the securities industry is excessive trading, or “churning” client accounts. This practice, which is forbidden by industry regulators like FINRA and the SEC, is done to generate commissions, almost always at the expense of the client. As the stock market swings wildly during the Covid-19 pandemic, brokers take advantage by trading their clients’ accounts to generate commissions.

Brokers can open the door to churning by asking customers if they want an “active” trading strategy, which gives brokers discretionary ability to trade at will. Unless clients give specific directions on how and when to trade, brokers may take the opportunity to trade excessively and charge needlessly high commissions.

Churning has been the subject of numerous regulatory actions over several decades. Broker Frank Venturelli, a representative for First Standard in Red Bank, New Jersey, was cited by FINRA for excessive trading between 2016 and 2018. According to FINRA settlement, clients lost more than $373,000 during that period. Venturelli was suspended from the industry for 11 months and ordered to pay partial restitution of $30,000 to his clients.

Investors who are exposed to unscrupulous financial advisors are starting to feel some serious pain. If you have lost a substantial amount of money over the course of the last few months, and your account is on margin, it might get a lot worse.  The good news is, your losses may be recoverable by filing a claim through FINRA Arbitration.

Over the last few weeks the stock market has seen some pretty steep losses.  All major US equity indices, the Dow Jones Industrial Average, the S&P 500, the NASDAQ, and the Russell 2Kare all, as of the date of this post, down at least 10% from their late summer/early fall all-time highs – officially “correction” territory.  Even more disconcerting, all of these indices are now down between 4.4% and 11.5% year-to-date.

What our experience in representing investors in arbitration and litigation for almost twenty years  has taught us is in circumstances like this market, with increased short-term losses spilling into a longer-term trend, like a year-to-date loss, is investors who have been overexposed to excessive trading or churning and margin abuses get hammered hard and fast. The previous seven or eight years has marked a perfect storm for brokers to engage in churning and margin trading without consequences because the markets have largely gone straight up since the spring of 2009, with only minor blips along the road. When investors don’t notice losses in their accounts, they simply are not alerted to what their broker may be doing. If your broker trades too much in your account, this generates commissions which eats away at your return. If the trading is done on margin, that only increases the drag on the account because of margin interest. The higher this Cost-Equity Ratio gets, the more your account has to earn just to may for the broker’s fees and commissions. Margin also can exponentially increase the risk profile of an account. Investors may not notice this wear and tear until the market performance no longer keeps up with the cost of the trading, at which point the losses can accumulate rapidly.

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