Excessive Portfolio Turnover/Churning

Excessive portfolio turnover, or churning, occurs when a broker engages in excessive trading in a customer’s investment account. A broker churns an investment account in an attempt to generate commissions. To prove that the pattern of trading in the account was excessive, the account statements are analyzed to determine: 1) the annualized rate of return that would be necessary to cover the commissions charged in the account, 2) the number of times the equity in the account was turned over to purchase new securities, and 3) the purchase and sale trading activity that occured in the account. The customer must prove that the broker exercised actual control over the decision making in the account, the trading was excessive, and that the broker acted in reckless disregard of the customer’s interests.

In churning cases, the measure of damages is calculated by comparing the performance of the account with a suitable benchmark, like the S&P 500 index. Moreover, if found liable for churning, brokerage firms are generally responsible for the costs paid by the client to the firm as well as the commissions generated by the broker.

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