by Brian Mahany
Although the stock market has been doing relatively well in recent months, not everyone makes money. For every winner there is a loser. For retired Texan Lloyd Gillespie, he was the big loser while Oppenheimer and his brokers were the winners. An arbitration panel from the Financial Industry Regulatory Authority (FINRA) agreed that Gillespie’s account had been churned and awarded him approximately $1.2 million.
Churning occurs when excessive trades are made in an account. Because stockbrokers are paid a commission on trades they make, there is always an incentive for bad brokers to continually buy and sell in a customer’s account. They make commissions but typically the customer loses money.
Trading costs (commissions) typically eat up 2 to 5% of a portfolio’s value. That means the portfolio has to make at least that amount before the customer breaks even. Every time trades are made, the commissions take a bigger toll on the account’s value. Gillespie says that in a short time period, his brokers made so many trades that the trading costs ate 20% of the value of his account. He also claims that his brokers made unsuitable investment recommendations.
Although Oppenheimer and its two stockbrokers denied the allegations, the arbitrators agreed with Gillespie. They were ordered to pay $848,000 in damages and $174,000 in legal fees. Interest and costs will push the final award well over $1 million.
FINRA arbitration panels are not required to explain their decisions but the award is final and can’t easily be challenged. Most customers sign an arbitration agreement when opening a new account. While some folks feel that the panels are too biased towards the industry, we have found most to be very fair and offer a very quick forum to resolve disputes. The average turnaround from filing to decision is about 14 months. In some courts, the wait could be 5 years or more.
Churning cases are quite rare. Most broker dealers do a better job of supervising their brokers to flag excessive trading activity. As the Oppenheimer award points out, however, they do occur.
The typical FINRA case often involves brokers who fail to take the time to know their customers and understand their needs. Customers are free to buy anything they wish for their portfolio, obviously, but stockbrokers must only recommend stocks that are suitable for an investors account. The so-called “know your customer” and suitability rules offer powerful protection for customers who find their portfolio loaded with worthless or speculative junk.
If you feel that your stockbroker is guilty of churning or if you have been sold unsuitable investments, you may have a claim. Typically claims are handled on a contingent fee basis meaning that no legal fees are due unless the lawyer wins and collects. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). Our fraud lawyers have helped many people get back their hard earned money.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Services available in many locations.