What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG
Published On: December 14, 2018

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.

Churning or excessive tradingis a form of securities fraud.  The most frequently used metric to determine if your account has been “churned” is known as the 2-4-6 Rule. First, a little math is needed to explain what “turn-over” actually looks like.  If you have $500,000 in your account, and your broker buys a total of $1 million in securities in a given year, your account would have a turnover of 2. If that total amount of trading is $2 million, your account would have been turned over 4 times, and onward from there. The 2-4-6 rules says if your account has been turned-over 2 times in a year, that there is an “indication” of churning. If  the turnover is 4 times, there is a “presumption” of churning.  And a turnover rate of 6 times or more creates a “conclusion” of churning. No matter what your objectives, if your broker is turning your account over 6 or more times a year, you are being ripped off.  See NASD Regulation Inc. Department of Enforcement v. Robert Joseph Kernweis, et al(Disciplinary Proceeding No. C02980024) where the NASD (now FINRA) concluded “an investment objective of speculation does not excuse excessive trading.”

Under most state securities laws, using Illinois as an example, churning or excessive trading is considered a fraudulent act and is a per se violation of the Illinois Securities Law. See 14 Ill. Adm. Code 130.850 which states “No dealer or salesperson shall effect transactions for any customer’s account which are excessive in size or frequency or unsuitable in view of the financial resources of the customer.”

If you have suffered investment losses recently and suspect your accounts may have been churned by your financial advisor, please contact Stoltmann Law Offices at 312-332-4200 for a free, no obligation, consultation with an attorney.


The posting on this site are mere OPINIONS and NOT statements of fact in any way whatsoever. The information should not be relied upon and there have been no findings made against the firms or individuals referenced on this site. In addition, this Blog is made available for educational purposes only and incorporates information from the web as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Stoltmann Law Offices (161 N Clark Street 16th Floor Chicago, IL 60601). The Blog opinions should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.


Chicago Investment Fraud Attorneys Offering Nationwide Representation to Investors

If you have suffered financial losses because of the negligence or fraud of your financial advisor or broker through unsuitable investment recommendations, over-concentration, churning, misrepresenting risks, conversion or selling away, you have legal rights and options to pursue recovery of those losses.

Stoltmann Law Securities Investment Fraud Attorneys