Customers Should Complain to Stock Exchange, Regulators Say : ‘Churning’ of Brokerage Accounts on the Rise

Times Staff Writer

The most severe abuse of brokerage customers, according to experts in the securities industry, is churning--the vigorous trading of securities in a customer’s account by a broker bent on building up commissions. And it is a problem on the rise, they say, as salesmen come under increasing pressure from their firms to produce more income. (See related story, Part I, Page 1.)

Securities regulators advise that the best defense against churning and other forms of broker fraud is a preventive one--close examination of monthly account statements and transaction invoices to ensure that a broker is not acting contrary to the customer’s instructions.

They also suggest that customers take their complaints, in writing, first to their broker’s branch manager and then to supervisors at the firm’s compliance department.

Customers can also file complaints with the Securities and Exchange Commission or the stock exchange where the securities in question were traded. Complaints to the SEC can be mailed to the agency’s Office of Consumer Affairs, 450 5th St., N.W., Washington, D.C. 20549.


The SEC routinely refers such complaints to the exchanges. Aggrieved customers can write to those bodies at the following addresses: New York Stock Exchange, Enforcement Department, 55 Water St., New York, N.Y. 10041; American Stock Exchange, Hearings Department, 86 Trinity Place, New York, N.Y. 10006; National Assn. of Securities Dealers (for stocks traded over the counter), Surveillance Department, 1735 K St., N.W., Washington, D.C. 20006.

Although a letter to a stock exchange might stir a brokerage to treat a customer’s complaint more expeditiously, officials at the exchanges generally do not represent individual customers in their efforts to get their money back. For that, a customer may have to take his or her broker to court, a move that has been made more complicated by several recent court rulings.

Most brokerage account contracts now include a clause binding the investor to take any such disputes to arbitration, a sort of private trial that benefits the brokerage because in most states--including New York, which governs most brokerage contracts--an arbitrator cannot award punitive damages. Because they involve the chance of a windfall recovery far in excess of the actual loss, the potential of punitive damages has been the main driving force behind customer lawsuits.

The dilemma for aggrieved customers is this: State fraud laws allow punitive damages but can be forced into arbitration. Federal securities violations cannot be forced into arbitration but do not allow for punitive damages.


So, brokerage customers have consolidated their state fraud claims into lawsuits that allege violation of U.S. securities laws and that are filed in federal court.

Such a maneuver yielded the recent $1.5-million punitive award for Helen Aldrich against Thomson McKinnon Securities in federal court in New York City.

A recent Supreme Court ruling states, however, that customers can be forced to submit their state claims to arbitration and their federal claims separately to court. That means a customer might have to pay for two separate proceedings--with the chance of a punitive recovery closed off at each end.

Will the ruling choke off customer lawsuits? Possibly. But securities lawyers say punitive damages are not out of the question. The reason: The court’s ruling also hinted that an arbitration clause might be considered invalid and unenforceable if it is so inconspicuous that a customer does not realize its importance.