Securities Arbitration

Types of Claims

Unauthorized Trading

Unauthorized trading is a serious violation of the trust that investors place in brokers.  It occurs when brokers execute transactions on behalf of investors without being granted proper authority to do so.  Pursuant to several securities laws and rules, brokers and their firms must obtain express permission from their clients before making decisions for their clients.  For instance, NASD Rule 2510, enforced by FINRA, prohibits brokers from exercising “any discretionary power in a customer’s account unless such customer has given prior written authorization.”  Violating this requirement constitutes unauthorized trading that can give rise to an investor’s claim for losses.

Other rules also require firms to maintain strict supervision over accounts in which brokers have been granted discretionary authority.  For example, Rule 2510 requires firms to “approve promptly in writing each discretionary order” made by brokers on behalf of their investment clients, as well as to “review all discretionary accounts at frequent intervals.”  A firm failing to properly supervise unauthorized trades is also a violation that may be the basis for an investor’s claim to pursue financial losses.

Additionally, the law greatly increases the duty brokers owe their clients when brokers exercise discretion on behalf of their clients, even if a customer did not grant that authority.  Sometimes brokers and their firms argue investors ratified brokers’ discretionary trades they did not have the authority to make because the investors received investment statements and did not object to the trades in them in a timely manner.  Laws differ somewhat on whether such trades are unauthorized.  In any event, if the broker effectively exercised discretion or control over the account, regardless of whether a customer granted that power, the broker owes the customer a heightened duty of care.  That heightened duty increases the range of brokers’ conduct causing investors losses that may be pursued in claims for damages.

It is important for investors to monitor their account statements and the transactions in them to be vigilant of unauthorized trades.  Unauthorized trades in a customer’s account indicates a broker’s breach of trust and disregard for rules and standards of care, which are red flags.  Brokers exercising discretion, even when unauthorized, make them fiduciaries who must act only in their customers’ best interests.  Brokers may have conflicts of interest when placing unauthorized trades, like generating commissions on high-commission products or per trade commission charges.  Placing unauthorized trades based on the brokers’ own interests breaches their fiduciary duties owed to customers.  Therefore, if investors do not recognize transactions, they should speak up sooner rather than later and ask their brokers questions, documenting all such conversations in writing, with email being effective documentation.

If you believe your broker caused you losses due to unauthorized trading, call Marquardt Law Office LLC for a free evaluation of your potential claim.