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Unauthorized Trading, Broker Fraud and Investment Loss

What is Unauthorized Trading?

Before placing an order to buy or sell securities for an investor, a broker or financial advisor must obtain the express permission of that investor. A failure to do so may constitute engaging in unauthorized trading.

If you are an investor whose broker made a trade in your account without your authorization, you may have grounds for a securities arbitration claim to recover any resulting losses.

If you are an investor whose broker has made a trade in your account and you did not provide them with trading authorization, you may have grounds for a securities arbitration claim to recover any resulting losses.

At Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com), our seasoned securities fraud attorneys represent investors whose stockbrokers or financial advisors conducted trades or other transactions without notifying them and/or getting their permission first. Call us at (800) 259-9010 today to request your free, initial case consultation.

How Much Power of Attorney Does a Broker With Trading Authorization Have?

A broker or advisor can obtain trading authorization to purchase and sell securities in a client’s account, which allows trades to be placed without contacting the customer first. Legally, this is a limited power of attorney, applicable only for placing trades in the account.

While investment advisory firms usually obtain signed forms that allow them to trade for their clients, brokerage firms do not regularly allow brokers to have “discretion” over accounts, which often can result in unauthorized trading claims.

Experienced investors know that unless there is written authorization, a broker or financial advisor cannot just place trades for a client without first discussing each order.

However, there are millions of inexperienced investors who have opened accounts in the past decade, including those with little or no background in investing, that do not. These new investors, many of whom have rolled over sizable retirement accounts, may be unaware of the “rules of the road” at investment firms, including those concerning discretionary accounts.

If the client did not give permission for a transaction to be placed, and there was no understanding a trade would be placed, there can be unauthorized trading penalties. The Financial Industry Regulatory Authority (FINRA) prohibits brokers from conducting discretionary trades in the non-discretionary accounts of their customers and the Securities and Exchange Commission (SEC) considers unauthorized trading to be fraudulent conduct.

It is important to note that even if your broker had good intentions when making a trade without your authorization if they didn’t get your permission first then this is unauthorized trading.

Other Examples of Unauthorized Trading
  • A financial advisor notes down an unauthorized trade as unsolicited, which makes it seem as if the trade was the customer’s idea.
  • Making a trade without the client’s consent and then attempting to get the latter’s permission afterwards.
  • Unfortunately, if the customer didn’t complain about the unauthorized trade right away, there are broker-dealers who will try to make it seem as if the investor had approved the transaction.
How Do You Know If You Have Grounds for an Unauthorized Trading Case?

Unauthorized trading claims against a brokerage firm and/or their registered representative are usually brought in FINRA arbitration. As the claimant, you must show that:

  • There was a transaction that occurred in your brokerage account that you didn't authorize
  • You never gave your broker trading authorization to make this transaction for you
  • You suffered financial losses because of the unauthorized trade

An unauthorized trading claim is not the kind of investor fraud dispute that you want to pursue without experienced legal help. Unauthorized trading can be tough to prove. The sooner you retain the services of securities attorneys, the greater your chances of building a solid claim with all necessary evidence that will allow you to recover your losses.

What are Exceptions to When a Broker Can Make a Trade Without Getting the Investor’s Permission First? Discretionary Accounts

When the customer’s account is a discretionary account. This type of account, unlike a non-discretionary account, allows the broker to place trades without getting the client’s approval or consent first. However, the investor will need to have signed a discretionary agreement to document that consent was authorized.

Margin Accounts

In a margin account, a customer is allowed to borrow funds from the broker-dealer to purchase securities. In the event the value of that account falls under the requirements of the broker-dealer, the firm will have obtained in advance the investor's consent to sell securities when needing to cover the margin balance.

Experienced Unauthorized Trading Attorneys

For over 30 years, SSEK Law Firm has represented thousands of retail investors, retirees, institutional investors, and high net worth individual investors in their stockbroker and investment fraud claims. Call our skilled unauthorized trading lawyers at (800) 259-9010 or contact us online.

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