Detecting Improper Portfolio Management Activity

By Seth C. Anderson and Lynn Comer Jones

SEPTEMBER 2005 - Investment accounts can be abused in four primary ways: 1) ineptitude in management; 2) misappropriation of account assets; 3) use of unsuitable investment vehicles; and 4) churning of the account.

Ineptitude in management is difficult to determine. Misappropriation of assets, although easy to quantify, is beyond the scope of this article. The authors will endeavor to provide an efficient overview of suitability and churning. According to S.C. Anderson and D.A. Winslow [“Definining Suitability,” Kentucky Law Journal, 81, no. 1 (1992)], suitability violations involve the use of investment vehicles inappropriate to meet an investor’s objectives. Churning, according to Winslow and Anderson [“Model for Determining the Excessive Trading Element in Churning Claims,” North Carolina Law Review, 6 (January 1990)], involves the excessive trading of investment vehicles.

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