Unauthorized trading occurs when a broker sells , buys, or exchanges, securities without the prior consent or authority from the investor. Unless an investor has given the broker discretion to make trades in the account, the broker must first discuss all trades with the investor before executing them. NYSE Rule 408(a) and FINRA Rules 2510(b) and 2020 explicitly prohibit brokers from making discretionary trades in a customers' non-discretionary accounts. The SEC has also found that unauthorized trading violates just and equitable principles of trade and constitutes violations of Rule 10b and 10b-5 due to its fraudulent nature. As one court summed up, no omission could be more material than the failure to inform the investor of his purchases and sales. However, it is important to note that the laws vary from state to state regarding unauthorized trading.
Unauthorized trading can resemble identity theft or a stolen credit card. Yet, a victim of an unauthorized credit card transaction is likely to get reimbursed for any unauthorized or fraudulent purchases. In contrast, when a broker makes an unauthorized trade, many brokerage firms attempt to hold the investor responsible. The brokerage firms often claim that if the investor does not object to the trade immediately, the investor ratified the trade when the investor received confirmations and/or monthly statements reflecting the transaction.
If you believe that you were the victim of unauthorized trading, the attorneys at Gana LLP can help you determine the type of account you own, whether the trade was authorized, and how to proceed against the brokerage firm.