Unauthorized Trading: Documentation Requirements and Legal Remedies

What Is Unauthorized Trading?

Unauthorized trading occurs when a broker executes transactions in a client’s investment account without obtaining proper prior approval or consent. This serious form of broker misconduct directly violates the fundamental trust relationship between investors and their financial professionals, as well as core FINRA rules governing broker conduct.

At Patil Law, we’ve represented numerous investors who have discovered unauthorized transactions in their accounts. Our extensive experience in securities litigation has given us unique insight into how to effectively document, prove, and recover damages resulting from this deceptive practice.

Types of Unauthorized Trading

Unauthorized trading can manifest in several forms, each with distinct characteristics and legal implications:

Completely Unauthorized Transactions

In the most blatant cases, brokers execute trades without any discussion with or approval from the client. These transactions typically appear in account statements with no prior communication whatsoever, often catching investors completely by surprise.

Transactions Exceeding Authorized Parameters

In some instances, a broker may have received general authorization to make certain types of trades but then significantly exceeds the scope of that authority by:

• Purchasing more shares than authorized
• Investing in different securities than discussed
• Executing trades at price points outside approved ranges
• Implementing strategies more aggressive than permitted

Discretionary Trading Without Proper Authorization

FINRA rules require specific written authorization before a broker can exercise discretion (making trading decisions without prior client approval for each transaction) in a client’s account. Trading discretionarily without this formal written authorization constitutes unauthorized trading, even if the client was generally aware of the broker’s activities.

Margin Trading Without Disclosure or Approval

Some brokers improperly use margin (borrowed funds) in client accounts without proper explanation of the associated risks or without explicit client authorization for this leveraged trading approach.

Documentation Requirements for Proving Unauthorized Trading

Successfully challenging unauthorized trading requires comprehensive documentation. Our attorneys help clients assemble and preserve the following essential evidence:

Account Statements and Trade Confirmations

The foundation of any unauthorized trading claim is the official record of transactions. We help clients:

• Obtain complete account statements covering the relevant time period
• Secure all trade confirmation notices
• Identify specific unauthorized transactions with precise dates, securities, quantities, and values
• Calculate the financial impact of each unauthorized trade

Communication Records

Documentation of all interactions with your broker is crucial, including:

• Emails and text messages
• Written correspondence
• Detailed notes from phone conversations (date, time, duration, and content)
• Recorded calls (if available and legally obtained)
• Account opening documents specifying trading authorities

Complaint Documentation

Maintaining records of your objections to unauthorized trading strengthens your case:

• Copies of written complaints to the broker or firm
• Notes from verbal complaints (including dates and responses)
• Communications with branch managers or compliance departments
• Responses received from the brokerage firm

Expert Analysis

Our firm works with financial experts who can provide:

• Analysis of trading patterns inconsistent with client objectives
• Documentation of departures from authorized investment strategies
• Calculation of damages resulting from unauthorized activity
• Expert testimony for arbitration proceedings

Legal Standards for Unauthorized Trading Claims

To successfully pursue an unauthorized trading claim, several key elements must be established:

1. Absence of Prior Authorization

The cornerstone of any unauthorized trading claim is proving that the client did not provide authorization before the transaction was executed. This can be established through:

• Lack of written or recorded authorization
• Testimony regarding the absence of verbal approval
• Evidence that the client was unreachable when the trade occurred
• Documentation that the client explicitly rejected similar transactions

2. Timely Objection to Unauthorized Activity

While not always legally required, promptly objecting to unauthorized trades significantly strengthens a claim. We advise clients to:

• Document objections immediately upon discovering unauthorized transactions
• Follow verbal complaints with written confirmation
• Maintain records of all communications regarding objections
• Escalate complaints to supervisory personnel when necessary

3. Damages Resulting from Unauthorized Activity

Successful claims require demonstration of financial harm, which may include:

• Direct market losses from unauthorized positions
• Transaction costs and commissions for unauthorized trades
• Opportunity costs from inappropriate asset allocation
• Tax consequences of unauthorized transactions
• Interest charges from unauthorized margin usage

Legal Remedies for Unauthorized Trading Victims

Our firm pursues multiple avenues to recover losses from unauthorized trading:

FINRA Arbitration

Most investor disputes with brokers must be resolved through FINRA arbitration rather than court litigation. Our attorneys have extensive experience navigating this specialized forum:

• Filing properly documented statements of claim
• Conducting effective discovery to obtain crucial evidence
• Presenting compelling testimony from clients and experts
• Achieving favorable settlements or awards

Regulatory Complaints

In addition to pursuing direct compensation, we help clients file effective complaints with regulatory authorities:

• FINRA regulatory complaints
• SEC investor complaints
• State securities division reports

These regulatory complaints can lead to:

• Additional pressure on firms to resolve client disputes
• Potential disciplinary actions against brokers
• Creation of public records of misconduct
• In some cases, restitution through regulatory actions

Negotiated Settlements

Our reputation for successful FINRA arbitration often enables us to negotiate favorable settlements without proceeding to full hearings:

• Direct negotiations with brokerage firm legal departments
• Mediation through FINRA’s dispute resolution program
• Structured settlements that address tax considerations

Preventing Unauthorized Trading

We advise clients on protective measures to prevent future unauthorized trading:

Written Communication Practices

• Confirm all trading instructions in writing before execution
• Maintain copies of all written communications with brokers
• Send written confirmation of important verbal discussions
• Request trade confirmations for any verbally authorized transactions

Account Monitoring Protocols

• Review all trade confirmations immediately upon receipt
• Reconcile monthly statements with your understanding of authorized activity
• Set up real-time trade alerts when available
• Regularly review online account activity

Clear Investment Parameters

• Provide written investment guidelines to your broker
• Explicitly define any trading limitations or restrictions
• Formally document any changes to investment objectives
• Specify in writing whether discretionary trading is permitted

Contact Our Unauthorized Trading Attorneys

If you’ve discovered unauthorized transactions in your investment account, time is critical. Contact Patil Law today to schedule a confidential consultation.

Our team will evaluate your potential claim, advise you on documentation requirements, and develop a strategic plan to pursue the compensation you deserve.