Churning & Excessive Trading Attorneys — Bakhtiari & Harrison
What is churning?
Churning occurs when a broker engages in excessive trading in an investor’s account primarily to generate commissions, without regard to the investor’s investment objectives or best interests. The harm is not any individual trade — each trade may have appeared reasonable in isolation — but the overall pattern of trading, which generates commissions for the broker while eroding the investor’s principal through trading costs.
Churning is particularly insidious because it is difficult for investors to detect. Account statements show a constantly changing portfolio, which may seem consistent with active management. The commissions and transaction costs are embedded in the trading activity. It is only when the cumulative cost of trading is quantified — typically through expert analysis using industry-standard metrics — that the full extent of the harm becomes clear.
Measuring churning — industry-standard metrics
- Turnover ratio: the number of times a portfolio’s value is turned over through trading in a given period. A turnover ratio above 2.0 is generally considered excessive for most investor profiles. Ratios above 4.0 or 6.0 are strong indicators of churning.
- Cost-to-equity ratio: the amount the account must earn simply to break even after commissions and fees. A cost-to-equity ratio above 20% is generally considered excessive. Ratios above 30% or 40% indicate that the broker is generating returns for themselves at the investor’s direct expense.
- In-and-out trading: buying and selling the same securities within short time periods — days or weeks — generating round-trip commissions without any corresponding investment rationale.
FINRA arbitration panels and courts use these metrics to evaluate churning claims quantitatively. Bakhtiari & Harrison works with financial experts who perform these calculations and present them clearly to arbitration panels.
Control — a required element of churning claims
Proving churning requires establishing that the broker had control over the account — either through a formal
discretionary account agreement or through de facto control, where the investor routinely followed the broker’s recommendations without independent evaluation. When a broker has de facto control, the investor does not need to establish formal discretionary authority — the pattern of the broker’s dominance over investment decisions is sufficient.
California law — additional churning protections
California Corporations Code § 25218 prohibits excessive trading and provides an additional basis for churning claims by California investors alongside federal and FINRA claims. California’s statutory framework provides for rescission — recovery of the original investment plus interest — in addition to out-of-pocket losses, making California law claims particularly valuable in churning cases where commissions have significantly eroded principal.
Frequently asked questions — churning
How can I tell if my account was churned?
Warning signs include: a consistently changing portfolio with no clear investment rationale, high total commissions relative to account value, frequent in-and-out trading of the same securities, underperformance relative to stated investment objectives despite an active trading strategy, and a broker who discourages you from reviewing account statements in detail. Bakhtiari & Harrison can analyze your account statements and calculate turnover and cost-to-equity ratios in a free initial consultation.
Can I have a churning claim even if some of the trades were profitable?
Yes. Churning is about the overall pattern of trading, not the outcome of individual trades. A broker can churn an account profitably — generating significant commissions while the account also appreciates — but the investor would have done far better with a suitable long-term strategy. The damages in a churning case include the commissions paid, the opportunity cost of the trading strategy, and any losses attributable to the excessive trading pattern.
What is the difference between churning and active portfolio management?
Legitimate active portfolio management involves trading decisions made in the investor’s interest based on market conditions, investment thesis changes, or the investor’s evolving financial situation. Churning involves trading primarily or exclusively to generate commissions, without a genuine investment rationale benefiting the investor. The distinction is established through the quantitative metrics described above and through an examination of the broker’s trading rationale for each transaction.
For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.
Contact a churning attorney — free consultation
Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.
Investor cases are handled on a contingency fee basis — no recovery, no fee.
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