Unauthorized trading occurs when an investment professional makes trades in a customer’s account without the customer’s knowledge or authorization. In most circumstances, unauthorized trading allegations involve unauthorized purchases and sales of stocks, bonds, options or other financial products.
Unauthorized trading is illegal – it is considered to be securities fraud under Section 10(b) of the Securities Exchange Act of 1934 by the Securities and Exchange Commission, and a violation of Rule 2010, Standards of Commercial Honor and Principals of Trade, by the Financial Industry Regulatory Authority (“FINRA”).
Customers who have given their investment professional prior, written discretionary authority to make trades in their accounts cannot have a claim for unauthorized trading. In such instances, the investment professional cannot misuse or exceed that authority by making trades for the customer.
Similarly, customers who execute a margin agreement cannot have a claim for unauthorized trading. If a customer has a margin account and the value of the account falls below the investment firm’s collateral requirements, the investment professional is permitted under the agreement to execute securities transactions to cover a margin call without first consulting the customer.
The problem of unauthorized trading arises when the customer does not provide the investment professional with prior, written discretionary authority. For this reason, investment professionals accused of unauthorized trading often claim 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. Although a customer may verbally grant time and price discretion, such discretionary authority does not extend beyond the end of the business day.
The easiest and most effective way for customers to protect themselves from being the victim of unauthorized trading is to closely examine monthly account statements, review all trade confirmations and read all correspondence received from their investment professional. In particular, trade confirmations will show the customer the details about each trade, including the name of the security, whether the investment was bought or sold, the date of the transaction, the commission and/or mark-up or mark-down charged, and the price at which the investment was bought or sold.
It is essential for the customer to review all account statements and trade confirmations in a timely fashion. If the customer waits too long to report an unauthorized trade, the investment firm may deny responsibility because the customer failed to object to the disputed transactions in a timely fashion.
Freiberger Haber LLP can help you determine whether an investment loss is the result of unauthorized trading. The firm will consider, among other factors, whether the investment professional received permission to make trades prior to executing them, the price and time of the trades during the trading day, whether there are GTC orders (i.e., a Good-‘Til-Cancelled order – an order to buy or sell a stock that lasts until the order is completed or cancelled) in the account, the volume of trading, whether there are similar trades in other accounts maintained by the customer, and the net gain/loss for all trades in the security at issue. If you believe your investment professional has made trades in your account without your knowledge or authorization, contact Freiberger Haber LLP to discuss your rights.