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Unauthorized Trading Attorney

Unauthorized Trading Attorney for Brokers and Brokerage Firms Targeted in SEC Investigations

John W. Sellers
Attorney John W. Sellers
Unauthorized Trading Team Lead
Former DOJ Trial Attorney
envelope iconContact John directly

The U.S. Securities and Exchange Commission (SEC) is cracking down on unauthorized trade. As more retail investors engage brokers to help them invest, and as more novel and complex investment options come onto the market, the SEC is putting its resources behind ensuring that investors know how and when their money is being spent.

Facing allegations of unauthorized trade presents substantial risks for brokers and brokerage firms. In addition to facing the consequences of an SEC investigation, targeted brokers and brokerage firms can face civil litigation (or arbitration) and Financial Industry Regulatory Authority (FINRA) enforcement action as well. As a result, when faced with these allegations, brokers and brokerage firms need to take a strategic and forward-thinking approach to their defense, and they need to ensure that they are making informed decisions based on the advice of counsel.

Experienced SEC Defense Counsel for Unauthorized Trades Investigations

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At Oberheiden P.C., our unauthorized trading attorneys are highly experienced in representing financial advisors, brokers and brokerage firms in SEC matters. In addition to experience representing financial advisors, brokers and brokerage firms as defense counsel, several of our attorneys also have prior experience handling civil and criminal securities fraud cases at the U.S. Department of Justice (DOJ). As a result, we are well-versed in the SEC’s investigation strategies and prosecution tactics, and we are able to take a strategic and cost-effective approach to favorably resolving our clients’ unauthorized transaction and unauthorized trading claims and investigations.

When Is Trading on an Investor’s Account Considered to be Unauthorized Trade?

Unauthorized trading involves buying or selling securities, bonds, or other investment products on an investor’s behalf without the investor’s knowledge and approval. It is considered a form of securities fraud under SEC Rule 10b-5, which makes it “unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce . . . [t]o make any untrue statement of a material fact or to omit to state a material fact . . . [or] engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

Making unauthorized trades on an investor’s account is also prohibited under FINRA Rule 3260. In many cases, the SEC and FINRA will collaborate to target brokers and brokerage firms suspected of engaging in investor fraud. This includes making unauthorized trades involving:

  • Stocks and other securities
  • Bonds and other debt instruments
  • Proprietary products
  • Third-party structured investment products and other high-risk assets
  • Cryptocurrencies (including Bitcoin, Ethereum, and Tether)

Brokers and brokerage firms targeted in SEC investigations involving allegations of unauthorized trading can face civil or criminal penalties under securities law. While the SEC only has the authority to impose civil fines directly, it can—and often does—work with the DOJ to pursue criminal charges against brokers and brokerage firms suspected of defrauding investors. Even in civil enforcement cases, fines can be substantial, and brokers and brokerage firms can potentially face loss of registration and licensure as well. This is why it’s important to speak with an unauthorized trading lawyer today regarding your case.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Examples of Potential Defense Strategies in Unauthorized Trading Investigations

While the anti-fraud provisions of SEC Rule 10b-5 and FINRA Rule 3260 are broad, there are several potential defenses to allegations of unauthorized trading. Depending on the circumstances involved, some examples of defenses we may be able to assert on behalf of brokers and brokerage firms during SEC investigations include:

  • Investor Authorization – Despite allegations of fraud, in many cases investors have authorized the trades in question. Oftentimes, investors do not realize that they have granted authorization, or they are attempting to recoup losses from a bad investment. While brokerage firms should generally have systems in place to obtain and store documentation of investor authorization, authorization does not have to be formal—and even emails and text messages can suffice for obtaining authorization to legitimize a trade.
  • Trading in Discretionary Accounts – Generally, brokers do not need to obtain authorization for individual trades when trading in a discretionary account. While retail investors can revoke discretionary authorization, they must take the requisite steps to do so. If an investor signed a valid discretionary trading disclosure agreement that was in force at the relevant time, this can serve as a complete defense to unauthorized trade allegations.
  • Trading in a Margin Account – Brokers also have discretion to make trades in retail investors’ margin accounts under appropriate circumstances. This is another area where allegations often arise out of investors’ misunderstandings and frustrations. While brokers and brokerage firms must be careful to ensure that they adequately disclose the risks of trading on margin (as failure to do so can also lead to allegations of securities fraud), having a fully-executed margin agreement in place can serve as a complete defense to allegations of unauthorized trades as well.
  • Adequate Internal Controls – In many cases, brokerage firms will face SEC investigations arising out of individual brokers’ alleged misconduct. While brokerage firms are generally responsible for their brokers’ acts and omissions, federal securities laws and regulations (and FINRA’s Rules) recognize that brokerage firms’ ability to exercise control only goes so far. If a financial advisor or broker makes unauthorized transactions or trades despite a firm’s adequate internal controls, demonstrating the firm’s good-faith compliance efforts may constitute a valid defense.
  • Adequate Supervision – When asserting that brokers who engaged in unauthorized trading went rogue, the brokerage or investment firm must also be able to demonstrate that they provided adequate supervision. Adequate supervision is a key element of statutory and regulatory securities compliance. Hiding trades, falsely marking trades as unsolicited, selling away, and operating outside of brokerage firms’ controlled environments are just a few examples of broker misconduct that may fall outside of the scope of a firm’s supervisory authority.

This list is by no means exhaustive. Despite their seemingly straightforward nature, unauthorized trading cases are often highly complex, and the SEC must prove several discrete elements to substantial civil or criminal allegations. While challenging the SEC’s evidence of any one element can be sufficient to thwart efforts at prosecution, targeted brokers and brokerage firms will often be able to challenge unauthorized trading allegations on multiple grounds.

FAQs: Defending Against SEC Allegations of Unauthorized Trading

How Does the SEC Obtain Evidence in Investigations Targeting Allegations of Unauthorized Trading?

The SEC obtains evidence in investigations targeting allegations of unauthorized trading through several means. Oftentimes, investors (or their lawyers) will provide evidence to the SEC when filing complaints. When conducting investigations, the SEC also relies heavily on its subpoena power to obtain evidence directly from the targeted broker and brokerage firms. Responding to an SEC subpoena is itself a time-consuming and high-risk process; and, upon receiving SEC subpoenas, brokers and brokerage firms should engage an experienced unauthorized trading attorney and law firm immediately.

Is Unauthorized Trading Considered a Breach of Broker Fiduciary Duty?

Generally yes, unauthorized trading is considered a breach of brokers’ fiduciary duty to investors. Brokers’ fiduciary duty requires them to operate in their customers’ best interests; and, even if a broker believes a trade will prove profitable, making the trade without authorization is still considered a breach of trust that impairs the broker-customer relationship.

Does the SEC Settle Cases Involving Allegations of Unauthorized Trading?

The SEC settles all types of securities fraud cases under appropriate circumstances. If it appears unlikely that you or your firm will be able to avoid penalties and restitution liability entirely, our unauthorized trading lawyers may recommend targeting a settlement. If settling makes sense given the totality of the circumstances of your (or your brokerage firm’s) case, we will leverage the available evidence to seek a favorable resolution that limits your (or your brokerage firm’s) total liability and that avoids suspension or disbarment.

Can Unauthorized Trading Investigations Lead to Other Securities Fraud Allegations?

Yes, and this is a factor that requires careful consideration when defending against allegations of unauthorized trading. Even if the SEC’s investigating agents are not able to substantiate civil or criminal charges for unauthorized trading, they may be able to use the evidence they obtain to substantiate other securities fraud charges. Charging excessive fees, churning, withholding or misrepresenting material information, and inadequate supervision are non-exclusive examples of other charges that could flow from an unauthorized trading investigation.

Can Brokers and Brokerage Firms Face Both SEC Enforcement Action and FINRA Arbitration in Cases of Unauthorized Trading?

Yes, and this is another factor that requires careful consideration. Even if a broker or brokerage firm is able to successfully defend against an SEC investigation, the broker or firm could still face liability for unauthorized trading (or other trading violations) in FINRA arbitration. Retail investors can pursue FINRA arbitration regardless of whether the SEC investigates their allegations, and regardless of whether an SEC allegation leads to charges.


Speak with an Unauthorized Trading Lawyer at Oberheiden P.C.

If you or your brokerage firm is under investigation by the SEC for unauthorized trading, our defense attorneys can get to work building a targeted defense strategy immediately. To speak with a senior unauthorized trading attorney at Oberheiden P.C. in confidence as soon as possible, call 888-680-1745 or tell us how we can reach you online now.

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