Unauthorized Trading

Unauthorized trading occurs when a broker sells or purchases a security without an investor’s knowledge and prior authorization, and it is a form of stockbroker fraud and misconduct. A broker cannot buy or sell a security on your behalf without your permission and without your knowledge. For each and every transaction, you must give your broker permission to make the trade unless you granted the broker written discretion to trade your account. If the broker fails to get your permission prior to the trade, the broker engaged in unauthorized trading and has committed fraud and broker misconduct. It does not matter whether the unauthorized trades were for gains or losses; the conduct is still illegal.

Frequently brokers will ask their client for permission to buy or sell an investment “when the time is right” or “when the price is right.” The conversation often goes like this–“I think we should sell XYZ and use the proceeds to buy ABC. Let me watch the market and I will sell (or buy) when the market is right.” This practice sounds normal, and it also suggests that the broker somehow knows when the best time to buy or sell an investment will be. This is commonly referred to as “time and price discretion” and unless the broker exercises the discretion on the day in which it is granted, such discretion must be in written form. See FINRA Rule 3260. Additionally, such discretion must be for a specific security, a specific number of shares, and/or a specific dollar amount. As set forth in the FINRA Rule, and as explained in related Regulatory Notice 15-22, if a broker exercises verbal discretion on any transaction for more than a single day, such discretion is prohibited unless reduced to writing. FINRA considers it a form of fraud. In the event a broker exercises verbal discretion in violation of the Rule, you should be able to undo the transaction and recover any losses from the prohibited conduct.

It is important to note that giving your broker written discretion to make trades on your behalf does not give the broker infinite control over your investments. Additionally, if you give your broker written discretion, such grant of authority must also be approved by the firm, and any time a broker exercises discretion on your behalf must be noted on the Order Ticket, and thus show up on your Trade Confirmation. Additionally, discretion does not change the suitability duties. Brokers must still execute any transactions that are suitable according to your investment strategy. Failure to abide by your investment goals and strategies may still result in an unsuitable recommendation, as well as unauthorized trading, each of which are prohibited.

Often, unscrupulous brokers place transactions in customer accounts without authorization, and then call the client to boast about what a great trade they just made. The broker may tell the client that there was no time to call due to the demands of the market. The broker will then seek to gain the client’s “consent” after the fact. This “after the fact” consent is prohibited. Another example of unauthorized trading is when you and your broker discuss and/or agree on an investment strategy, but the broker then purchases some or all of the securities or funds, without first gaining your consent for each purchase or for each security. Believing that a certain investment is in your best interest and consistent with your investment strategy does not negate the broker’s duty to seek your permission prior to the sale or purchase of a security. Always keep in mind that a broker typically receives a commission on the transactions he/she executes, which may entice them to seek your permission after the fact.

One way to protect against unauthorized trading is to periodically check your account statements and carefully review any notifications or confirmations you receive concerning your investments. If you uncover a transaction you did not authorize, contact your broker or the brokerage firm immediately. A delay in inquiring about or contesting an unauthorized trade could potentially result in your implied authorization of the transaction.

Additionally, be sure to communicate all instructions clearly, and repeatedly if necessary, to ensure that you and your broker have a mutual understanding of any transactions that take place. Keep copious notes of your conversations with your broker in case you need to refer back and confirm any specific conversation or the approval/disapproval of a certain transaction. Again, if you notice any discrepancies or see a transaction you did not authorize, contact your broker or brokerage firm. You may even want to contact the brokerage firm’s compliance department if your broker is not cooperating. It is also a good idea to address any grievances in writing, so that you have a paper trail of your correspondence with the broker and/or brokerage firm. Time is of the essence, and any issues must be addressed immediately.

If you are a victim of unauthorized trading, you can file a FINRA arbitration claim. You may be entitled damages, including any losses you incurred as a result of your broker’s fraud and misconduct. Loss for prospective gains occurring in an upward-trending market may also be available to you, depending on the circumstances.

When you become aware of any unauthorized activity, you must immediately do something about the issue. Either call the compliance officer of the firm to complain, or contact a securities fraud attorney to discuss your rights. We deal with “unauthorized trading” claims on a routine basis, and have helped 100’s of clients that have been victimized by this prohibited conduct.