Churning is a fraudulent practice in which a stockbroker trades a customer’s brokerage account not for the client’s best interest but rather for the purpose of generating commission income for the broker. While the trading in a customer’s account must always be judged by the customer’s investment objective, churning is not an uncommon practice. Frequently, investors do not realize that their account has been churned.
By using Smiley Bishop & Porter’s churning calculator, a customer can take the first step in determining if they have a potential claim against their stockbroker for churning their account. By following the simple steps, the Smiley Bishop & Porter churning calculator will automatically give you a “turnover ratio” which is a mathematical method used to identify accounts which have been churned.
Instructions
Step One:
Get together all of your monthly brokerage account statements for the period of time you think your account has been churned.
Step Two:
Locate the monthly ending value of your account statements. This information usually is set out on the first page of your monthly statement in the summary section of the statement. Brokerage firms use different terms to describe the monthly ending value of your account. Some of the terms brokerage firms use to describe the monthly ending value of your account include: “net equity,” “equity,” “net worth,” or “month end value.” If you have trouble reading your account statement, click on the link “How to Read and Understand Brokerage Account Statements” for help.
Step Three:
Take the month ending value of your account on each of your monthly statements and add together all of the monthly values for each month. Enter that number in Box 1 above.
For example, if the monthly value of your account for
| June, 2011 is: | $185,000 |
| July, 2011 is: | $150,000 |
| August, 2011 is: | $125,000 |
| These months would total | $460,000 |
Thus, under this example, you would enter 460000 in box 1.
Step Four:
Next, enter the number of months the questionable trading has gone on in your account in Box 2 above. (In the June, July, August example above, you would enter the number “3” since a 3 month period is involved.)
Step Five:
Go to the summary section of your monthly statement. Under this section, you should find an entry “securities purchased” or “securities bought” which lists the total amount of your money that was used during the month to buy securities. Add together the securities purchased in your account for each month and enter the total amount in Box 3 above.
If your statement doesn’t contain this information in a summary fashion, go to the activity section of your monthly statement and add together the cost of each security position in your account for the month. Do this for each month. Add together the monthly totals and enter that total amount in Box 3.
Step Six:
After you have entered the information required in Box 1, 2, and 3, click the “Calculate Churning” button above and your turnover rate will be displayed with a preliminary explanation of your churning number.
A turnover ratio is a good starting point for evaluating your account for churning. However, each claim must be evaluated based on how you told your broker you wanted him or her to handle your money. Additional measurements, including “cost equity maintenance factors,” should also be used to fully evaluate a churning claim. Smiley Bishop & Porter uses securities specialists that employ “cost equity maintenance ratios” to further evaluate churning claims.
Smiley Bishop & Porter LLP offers potential clients free phone consultations to help investors determine if their accounts have been churned. For a free phone consultation, contact us at (770) 829-3850 and ask to speak to one of our attorneys.
