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SEC Fraud Defense: Unauthorized Trading Investigations

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Securities brokers and financial advisors invest in stocks, bonds, and other securities on behalf of their clients. An important aspect of acting on behalf of clients is to only engage in securities trades that those clients have authorized. However, what amounts to prior authorization can be fuzzy. This makes the extent of that authorization a potent tool for angry investors to use against their broker if their shares have gone south and their accounts lose money.

Allegations of unauthorized trading are serious. They can lead to intrusive investigations and sanctions by the Financial Industry Regulatory Authority (FINRA). They can even amount to securities fraud, which can be prosecuted civilly by the U.S. Securities and Exchange Commission (SEC) or criminally by the Department of Justice (DOJ). While criminal prosecutions for unauthorized trading are rare, they are not unheard of, and the potential prison sentences are significant.

The securities fraud defense lawyers at Oberheiden P.C. legally represent brokers, financial planners, individual securities professionals, and their corporate firms against allegations of unauthorized trading.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Joe Brown
Joe Brown

Former U.S. Attorney
& Former District Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Lynette S. Byrd
Lynette S. Byrd

Former Assistant U.S. Attorney

Partner

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

Unauthorized Trading Violates Rules and Regulations Pertaining to Securities

Unauthorized trading is an intuitive concept: It is the act of buying or selling securities in ways that have not been authorized by the person on whose behalf the transaction is being conducted.

However, that is where the simplicity ends.

Any securities broker who has actually traded on behalf of clients knows that the practical reality of authorization can be murky. For every client who demands a report for their review and approval before each and every transaction, there are several others who allow far more discretion. While those discretionary accounts allow brokers to buy and sell more quickly and take advantage of fleeting opportunities, it also creates situations where it is less than clear whether the broker had authorization from the client to make the trade. When the trade works out, no one ever says anything. But if it leads to a loss, allegations of wrongdoing may follow.

Such unauthorized trades are prohibited by both the SEC and FINRA, though the SEC violation is on shakier legal grounds than FINRA’s.

FINRA Rule 3260 says very explicitly that, when it comes to discretionary accounts, registered securities professionals are not to use discretionary power unless the customer has provided prior written authorization to its use.

The SEC violation, however, is less explicit.

Like the vast majority of other securities fraud cases, unauthorized trading relies on the extremely broad SEC Rule 10b—5, which operates as a blanket prohibition against fraudulent or deceitful conduct, as well as the use of misleading or false statements or omissions.

Penalties for Unauthorized Trading

Because unauthorized trading runs afoul of both FINRA rules and SEC regulations, securities professionals who are accused of the offense can face separate penalties from each agency. Additionally, if the SEC determines that a white collar crime may have occurred, it can forward the results of its investigation to the DOJ for criminal prosecution.

Should the case escalate into a criminal allegation for securities fraud based on unauthorized trading, the penalties can include a lengthy prison sentence, as well as millions of dollars in criminal fines.

Even if the case does not become criminal, though, the penalties that are on the table are significant. When the SEC pursues unauthorized trading allegations with a civil enforcement action, it will often demand that the alleged victim receive restitution for funds lost in the trade, as well as for the imposition of civil fines. Depending on how many trades are at issue and how much they lost, securities professionals and their firms may be on the hook for many thousands of dollars.

Just because the case does not go into a courtroom, though, does not mean that the repercussions will be trivial. Both FINRA and the SEC can take administrative action against firms or regulated professionals for unauthorized trading. These administrative claims can impose financial penalties and can lead to a suspension or even an outright ban of your securities trading privileges.

Furthermore, accusations of trading securities without the investor’s prior authorization or knowledge can hurt the firm’s reputation, hindering its ability to attract new clients who may be deterred by the allegations. It can also lead to a civil lawsuit by the investor who lost money from the allegedly unauthorized trade.

Defense Strategies Against Allegations of Unauthorized Trading

With this wide variety of penalties on the table, raising an effective legal defense to an allegation of unauthorized trading is essential. Some possible lines of defense to raise are:

  • There was authorization. Lots of claims of unauthorized trading fall into gray areas where the authorization was not explicit, but was nevertheless clear. Many investors who have lost in the trade try to rewrite history and claim that their prior approval was insufficient to make the trade
  • Discretionary accounts. When the trade came from a discretionary account, brokers have more power to act on their own. This can make it more difficult for an allegation of an unauthorized trade to stick
  • Margin accounts. When the cash margin of a client’s account falls below the balance requirements – which are explicitly stated in the brokerage’s agreement – brokers can sell securities in the account to cover the margin. Many investors do not understand that this authorization is implied in the structure of the account
  • Rogue broker. Brokerage firms can defend themselves from allegations of unauthorized trading if they can show that the broker who made the trades did it without the firm’s knowledge and in spite of adequate supervision and safeguards that were put in place to prevent it from happening

Frequently Asked Questions About Oberheiden P.C. and Unauthorized Trading

Q: Who Can Pursue Allegations of Unauthorized Trading?


It can seem like nearly everyone can pursue a broker or his or her firm for making unauthorized trades.

On the behalf of the government, both the SEC and FINRA can investigate an allegation of unauthorized trading. However, if evidence of criminal conduct or fraud is uncovered, the SEC can pass the case off to the DOJ for criminal prosecution.

In addition to these law enforcement agencies, though, private individuals can sue brokerages and their employees for unauthorized trading in an attempt to recover the losses that stemmed from those transactions.

Q: How Do Law Enforcement Agencies Like the SEC Investigate These Claims?


When it comes to unauthorized trading investigations, much of the SEC’s initial activity relies on information and evidence provided by the investor who is claiming to be the victim of the trade. As evidence mounts, though, the SEC will turn to its subpoena power to compel the targeted brokers and their firms to provide additional information and testimony. This development means that the investigation has become a serious one and that it will begin to demand the firm’s attention, pulling it away from its business activities in order to prepare for the subpoena.

Q: Is Unauthorized Trading a Breach of a Broker's Fiduciary Duty?


Typically, yes. A broker’s fiduciary duty to his or her investors and clients requires the broker to act in the client’s best interests. Even if an unauthorized trade works out, the act of going beyond the client’s authorization in order to make the transaction is still something that was not in the client’s best interests.

Q: Can There Be Both an SEC Enforcement Action and a FINRA Investigation at the Same Time?


Yes, both the SEC and FINRA can pursue and punish the same instances of unauthorized trading.

This is an important aspect of the law that your defense should be prepared for. Even if you are able to successfully defend against the SEC’s case, you can still be brought to FINRA arbitration by the retail investor and can still face repercussions there. In many cases, the evidence that you use to defend against one of these prongs of attack are used against you in the other. It is essential to keep this issue in mind when defending yourself on one of these fronts.

Q: Why Doesn't Oberheiden P.C. Call Itself the Best SEC Fraud Defense Firm?


Because we think that is something more appropriate and meaningful for our clients to say. However, with our roster of skilled investigators and highly qualified securities defense attorneys – many of whom have years of experience prosecuting unauthorized trading within the SEC or FINRA – Oberheiden P.C. has accumulated a long track record of success stories in which we have defended our securities clients from some serious allegations. Many of these clients have left stellar reviews of the legal representation that we have provided.

Oberheiden P.C. Defends Securities Professionals and Firms

The securities fraud defense lawyers at Oberheiden P.C. provide legal representation to both individual securities brokers as well as to their firms. Our team of senior lawyers and experienced investigators has helped countless regulated individuals and entities in the past beat back allegations of unauthorized trading or mitigated the damage of a finding of fault.

Contact us online or call our nationwide law firm at (866) 603-4540 to get started on your defense.

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