Unauthorized trading is simply the buying and selling of securities (such as stocks, equities, bonds, or mutual funds) without discussing with or disclosing the trades to the customer.
Generally, an investor can have two kinds of securities / investment accounts; non-discretionary and discretionary. In a typical non-discretionary account, the broker / financial advisor must consult with and obtain the consent of the customer prior to making any trades in the account. Unauthorized trading occurs when a broker / advisor makes trades in a non-discretionary account without the consent of the customer.
Brokers can also be found liable for unauthorized trading if they trade without authority in non-discretionary accounts while misrepresenting or omitting material facts. For example, the Virginia Securities Act, Va. Code § 13.1-522, prohibits in the sale of a security “by means of an untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading…”
Failing to disclose to a customer the fact that a broker and firm made a securities purchase or sale when they are required to do so is obviously an important a material fact, thereby potentially creating liability for the broker and firm.
Most other state securities acts are similar to Virginia in prohibiting misrepresentations and omissions in the sale of securities. If you believe your advisor has engaged in unauthorized trading resulting in losses, you should contact one of our attorneys as soon as possible.
The Act further makes it unlawful to sell a security while employing “any device, scheme or artifice to defraud.” Va. Code § 13.1-502. The Virginia Securities Act, along with most other state securities Acts, provide for a recovery of reasonable attorneys’ fees and interest in addition to a customer’s damages.
The failure to disclose and discuss trades may also form the basis for a breach of fiduciary duty claim against the advisor and his/her firm. The fiduciary responsibilities of a broker to his/her customer include: “… (3) the duty to inform the customer of the risks involved in purchasing or selling a particular security; …(6) the duty to transact business only after receiving prior authorization from the customer.” Lieb v. Merrill Lynch, Pierce, Fenner and Smith, 461 F.Supp. 951, 953 (E.D.Mich. 1978).
Unauthorized trading is considered fraudulent activity by securities industry rules. Pursuant to FINRA Rule 3260, no member or representative may engage in discretionary transactions in a customer account without explicit written authorization to do so by the customer.
The attorneys at Greco & Greco have filed many FINRA arbitrations over the past 25 years involving a financial advisor’s unauthorized trading in customer investment accounts. If you believe that your broker / financial advisor or brokerage firm has engaged in unauthorized trading in your securities / investment account, please contact Scott Greco for a free attorney consultation.
Our Virginia securities fraud lawyers represent individuals from all states across the country and have decades of experience protecting the rights of customers, and holding securities firms responsible for the acts of their brokers.