Legal Definitions - churn, burn, and bury

The term churn, burn, and bury describes a severe form of financial misconduct by a stockbroker or financial advisor. It refers to a situation where an advisor engages in an excessive number of risky and unsuitable trades within a client's investment account, not for the client's benefit, but primarily to generate high commissions for themselves. This rapid and reckless trading quickly depletes, or "burns through," the client's invested capital, leaving the account with significantly diminished or "buried" value. It represents an extreme breach of trust where a client's financial well-being is severely compromised for the advisor's personal gain.

• Example 1: Retirement Savings Depleted

  An elderly client, nearing retirement, entrusts their life savings to a new financial advisor, explicitly stating a preference for low-risk, stable investments. Over a period of six months, the advisor repeatedly buys and sells highly volatile penny stocks and speculative options, generating substantial commissions for themselves. As a result, the client's account loses over 70% of its value.

  This illustrates churn, burn, and bury because the advisor's excessive and unsuitable trading ("churning") rapidly destroyed the client's retirement funds ("burning"), leaving the account with minimal value ("burying") and jeopardizing the client's financial security.

• Example 2: Inheritance Squandered

  A young professional inherits a large sum of money and seeks a financial advisor to invest it conservatively for long-term growth. Despite these instructions, the advisor executes dozens of short-term, high-frequency trades in complex derivatives and leveraged exchange-traded funds (ETFs) within a few months, incurring significant transaction costs and market losses.

  Here, the advisor's constant, rapid trading in inappropriate instruments is the "churning." The "burning" is the swift depletion of the inherited capital through these unsuitable investments and high fees. The "burying" is the inheritance being largely wiped out, contrary to the client's conservative goals.

• Example 3: Business Investment Ruined

  A small business owner invests a portion of their company's retained earnings with a broker, hoping for steady growth to fund future expansion. Without proper authorization or explanation, the broker engages in aggressive day trading strategies, frequently buying and selling positions in highly speculative tech stocks and foreign currencies, leading to substantial losses.

  This demonstrates churn, burn, and bury as the broker's constant, high-volume trading in speculative assets is the "churning." The "burning" is the rapid erosion of the business's capital due to these risky, short-term bets. The "burying" is the business's investment fund being severely depleted, jeopardizing its expansion plans.