Investors sign brokerage account agreements establishing the rights and responsibilities of brokers to clients. Brokerage agreements for managed accounts give brokers the right to buy and sell securities at will without obtaining prior permission. Brokers are generally paid a fee for managing the account and investing client funds, and the brokers have a fiduciary duty to investors.
Brokerage agreements for other types of accounts do not give broker’s discretion over how investments are made. These agreements instead establish a simple agency relationship, giving the broker authority to take and execute orders from clients. Brokers can make recommendations but are not authorized to buy or sell stocks without client permission. When a broker engages in unauthorized trading in this type of account, this action can have legal consequences- up to and including criminal charges. A New York securities fraud lawyer at Bukh Law Firm, PLLC can provide assistance in responding to accusations of trading without permission.
When is Trading Without Permission a Crime?
When a broker makes trades without authorization, a client could ratify the trades after the fact by simply agreeing to the trade or not complaining when the trades are displayed on account statements. However, even when a client acquiesces after the purchase or sale has been executed, the broker’s conduct is still a technical violation. The broker’s actions may also be a breach of fiduciary duty, which could result in a civil lawsuit. Investors who lose money or sustain damages due to unauthorized trading may sue for negligence; breach of agency; breach of contract; breach of fiduciary duty; and fraud.
Whether the broker’s actions are considered criminal or not depends upon many factors including whether the broker is suspected of fraud or churning, as well as whether the broker is considered to have omitted material facts in connection with the purchase or sale of a security. Arkady Bukh has a long track record of representing clients accused of serious federal and state crimes in NYC TOP RATED ON: SUPER LAWYERS, AVVO, NATIONAL TRIAL LAWYERS
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State or federal authorities must be able to prove wrongdoing beyond a reasonable doubt in order to bring criminal charges for unauthorized trading. Bukh Law Firm, PLLC can provide assistance in helping brokers to argue that there was no intent to defraud and that no crime was committed.
Unauthorized Trading and Churning
Brokers frequently make unauthorized trades as part of an account churning scams. Churning means that a broker makes many trades in order to increase commissions, rather than to make money for the client.
The Securities and Exchange Commission indicates that churning is both unethical and illegal. Churning violates SEC Rule 15c1-7, and is also prohibited by New York Stock Exchange Rule 408(a)-(c) as well as FINRA Rule 2301-2(b)(4)(iii).
Consequences of Unauthorized Trading
Some federal courts have held that unauthorized trading is a violation of Rule 10B-5 of the Securities and Exchange Act of 1934. In Rivera v. Clark Melvin Securities, the court found a 10B-5 violation had occurred because the trader omitted the material fact that a trade had taken place.
Other cases on the federal level, including Rowe v. Morgan Stanley Dean Witter, have held that unauthorized trade violations are not actionable under 10B-5 without proof of misrepresentation or failure to disclose. Your securities fraud lawyer can help you to argue that no material misrepresentation occurred and that there is thus no 10B-5 violation.
Defendants could also face other legal actions related to unauthorized trading, including charges of fraud or embezzlement if client funds were misappropriated to a broker’s account or if the broker intentionally engaged in unauthorized trading to generate commissions. Making a criminal case is difficult for prosecutors in many unauthorized trading situations, but there could still be significant financial consequences associated with civil actions. This means you need an attorney who is not only prepared to represent you in state or federal criminal court but who also knows how to try to protect your financial assets in civil cases.
Getting Help from a NY Securities Fraud Lawyer
Unauthorized trading cases are complicated and you need to get legal advice to help you respond to accusations being made against you.