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Unauthorized Trading

Unauthorized trading is considered purchasing or selling securities in a non-discretionary customer account without prior customer authorization to make the sale or purchase is a FINRA sales practice violation. This does not apply in instances where the stockbroker has received prior written discretionary authority from the customer to effect transactions in the account. In defense of unauthorized trading claims, brokerage firms might frequently argue that verbal discretion was given by the customer as to price and time, or the customer ratified the transaction by not challenging the transaction on a timely basis.

Stockbrokers can buys or sell securities in a customer’s account without the prior consent of the customer only if the stockbroker has received “discretionary trading authority” through a written power of attorney. Nonetheless, even if the stockbroker has received written authorization to make transactions on the behalf of the customer at the discretion of the stockbroker, the stockbroker cannot misuse or exceed that authority by making commissions from excessive trading or “churning”, or unsuitable investment strategies. The transaction is still considered a FINRA sales practice violation or the stockbroker’s breach of fiduciary duty to the investor which subjects the brokerage firm and stockbroker to liability for unauthorized trading or other misconduct.

A FINRA arbitration panel may consider the following factors among others in an unauthorized trading claim:

  • Assertion that unauthorized transactions took place;
  • Broker did not receive permission prior to transactions;
  • Price and time for trading day;
  • Absence of GTC orders in account;
  • Volume of trading;
  • Similar trades in contemporaneous outside brokerage accounts; and
  • Net investment losses for all trades in the security at issue.

To support a FINRA arbitration claim for damages from unauthorized trading a review of the timeline surrounding the transactions at issue is important. A review of trade confirmations in relation to the chronology of prior and subsequent communications between the customer and the stockbroker will help prove the allegations. It is also helpful to make a formal complaint with the branch office of the stockbroker immediately after the trade confirmations are received issue to avoid the appearance of having ratified the transactions at issue due to an untimely response.

The Silver Law Group can help you determine whether an investment loss is the result of unauthorized trading in a brokerage account. If an investor suffers losses as a result of unauthorized trading they may be able recover their losses in a FINRA arbitration claim.


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