They say that everything old at some point becomes new again. That seems to be especially true with cases concerning churning and excessive trading by stock brokers. A form of fraud that seemed to reach its pinnacle in the 1970s and 1980s has made a resurgence and we have helped investors with many of such claims over the past year.
Excessive trading is a violation of many different rules, but is primarily in violation of the FINRA suitability rule. FINRA Rule 2111 states that trades must be quantitatively suitable. Section .05 of Rule 2111 requires that a series of recommendations “even if suitable in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile” and that to define excessive trading factors such as turnover rate and in-and-out trading may provide a basis for finding a violation of quantitative suitability. Active trading greatly increases the risk of a portfolio and is considered by FINRA to be a high risk activity. See NTM 00-62 (describing active trading as extremely high risk even when cost per trade is low)
Excessive trading can be presumed by a high annualized turnover rate. Annualized turnover rate of six or more is generally presumed to reflect excessive trading. In re Rizek, SEC Admin. Proc. File 3-9041, pgs. 20-21, ( The courts which have addressed this issue have indicated that an annual turnover rate in excess of six reflects excessive trading and citing cases where a turnover of three was excessive. ). The level of trading can be excessive and unsuitable for even speculative investors. In re Murphy, SEC admin. Proc. File 3-14609, pg. 21 (level of trading deemed excessive depends on objectives and tolerance, turnover of 6 presumed excessive, and turnover rate of 22 is definitely inconsistent level of risk for even high-risk investors seeking speculation).
Another indication of excessive trading is multiple round-trip transactions for the same option series, meaning that Murphy sold and bought back the same option series repeatedly. Murphy at 21. This is supported by fact that the use of in-and-out trading also support excessive trading under FINRA Rule 2111. Rule 2111 .05(c).
Please contact us if you believe that you have been a victim of excessive trading.