Unauthorized Trading Fraud

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What is unauthorized trading fraud?

Unauthorized trading fraud is when a broker, investment advisor, or other financial professional makes trades or performs other transactions in a customer’s account without the customer’s permission. In general, brokers must get express, written permission from clients to authorize trades before making them. The motivation for unauthorized trading is often a broker’s desire to earn commissions or fees based on the illegal transactions.

There are some exceptions to the requirement that investment professionals get client authorization before making transactions for specific types of investment accounts. In discretionary accounts, customers sign an agreement giving brokers general permission to make trades on their behalf, so individual authorizations for each trade are not required. In margin accounts that fall below a brokerage’s required equity value, brokers can sell customers’ securities without advance authorization to increase the equity in their accounts so that it stays at the required level.

Why is unauthorized trading fraud bad?

Unauthorized trading can violate both federal securities law and professional regulations regarding duties investment professionals owe to their customers. The Securities and Exchange Commission has found unauthorized trading to violate Rule 10b-5’s prohibitions on fraud and deceptive practices. The Financial Industry Regulatory Authority (FINRA), the regulatory body for the securities industry, also has specific rules against unauthorized trading.  

If the products at issue in the unauthorized trading are ones regulated by the Commodity Futures Trading Commission (CFTC) – futures, options, swaps, or commodities – unauthorized trading may run afoul of CFTC regulations.

Aside from the inherent breach of trust, unauthorized trades can lead to losses for customers.

Who is affected by unauthorized trading fraud?

Anyone who invests their money with the help of a financial professional could fall victim to unauthorized trading.

What are some examples of enforcement actions against unauthorized trading?

  • 2020 SEC litigation against four employees of a brokerage firm for unauthorized trades on more than 360 customer accounts that allegedly generated $2.4 million in income for their firm and $4 million in net losses to customers.
  • 2021 enforcement against the head of fixed income trading at a broker-dealer for unauthorized trading that resulted in millions of dollars of losses for the firm.

How can you blow the whistle on unauthorized trading fraud?

Anyone with information regarding unauthorized trading fraud can blow the whistle by making a confidential report to the SEC or CFTC.

 

These descriptions of unauthorized trading frauds are general in nature and do not constitute legal advice. Unauthorized trading is complex and ever-evolving. The attorneys at Whistleblower Partners understand the complicated, constantly changing legal landscape and are happy to discuss any potential matter further.

If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.