Ordinarily, your broker must obtain your authorization before making a trade in your account. If your stockbroker makes a trade in your account without your authority, you likely have a claim for unauthorized trading. The requirement to get your authority for trades can be waived by giving your broker written authority to buy and sell securities on your behalf. This does not mean that every trade made under such discretionary trading authority is authorized, however. Even with written trading authority, brokerage firms and brokers must still make only suitable investments.
The following are some of the situations in which any resulting losses might be recovered:
- Lack of written authorization to trade securities without your express approval
- Trades made outside the scope of written authority
- Trades deemed unsuitable in light of the investor’s risk tolerance, investment objectives, and financial circumstances
- Unsuitable types of investments, such as subprime derivatives or auction rate securities
Unauthorized trading might occur through an innocent clerical mistake, the broker’s misunderstanding of a grant of authority, mistaken assumptions as to the investor’s goals, or through fraud. In terms of establishing liability against the broker, it doesn’t really matter. The central questions in a case of unauthorized trading are whether the broker had the right to make trades on behalf of the investor.