In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2010, public customer Claimant Kosker, a physician, alleged that Respondent Interactive Brokers wrongfully liquidated his account without giving him time to cure a debit his margin account. The debit apparently rose in connection with Claimant's sizable stock and options positions in Vivus, Inc. ("VVUS"), a biopharmaceutical company. Claimant Kosker sought the following relief from the sole FINRA Arbitrator:
In the Matter of the FINRA Arbitration Between Mark M. Kosker, Claimant/Counter-Respondent, v. Interactive Brokers LLC, Respondent/Counter-Claimant (FINRA Arbitration 10-04107, October 19, 2011).
Respondent Interactive Brokers generally denied the allegations, asserted various affirmative defenses, and asserted a Counterclaim. Respondent alleged that Claimant failed to maintain sufficient equity necessary to satisfy the brokerage firm's margin requirements. The insufficient equity arose in connection with Claimant's position in Vivus, Inc. ("VVUS"), a biopharmaceutical company. Respondent sought $8,162 plus interest, costs, and fees on its Counterclaim.
SIDE BAR: Citing concerns about cardiology issues, possible birth defects, and psychiatric concerns, on July 15, 2010, an advisory committee to the Food and Drug Administration ("FDA") declined to approve Qnexa, a drug developed by VVUS as an anti-obesity drug. The effectiveness of Qnexa was not an issue; rather, the attendant health concerns seemed to dissuade the approval.
When news of the vote was publicly announced on July 15, 2010, VVUS common stock was subject to a trading halt. When trading resumed on July 16, 2010, the shares tumbled from a halted $12.11 to $4.90 and closed at $5.41 per share. Subsequently, VVUS fell as low as $4.69 intraday on July 29, 2010, but then rebounded in the ensuing months.
On October 17,. 2011, VVUS said it resubmitted Qnexa to the FDA. Shares of VVUS closed at $8.55 on October 26, 2011.
The sole FINRA Arbitrator denied Claimant Kosker's claims; and also found Claimant liable and ordered him to pay to Respondent Interactive Brokers $8,202.88 in compensatory damages plus interest at the rate of 10% per annum until paid. Ouch!!! Talk about pouring salt into a very open wound.
Refreshingly, the FINRA Arbitrator offered a detailed explanation for his ruling. The Arbitrator described Claimant Kosker as a "wealthy, sophisticated investor" whose account "severely and precipitously declined," as a result of the FDA's non-approval of Qnexa.
Claimant Koster testified that Respondent notified him of a margin call against his account on July 15, 2010. Whether that phone call happened is an issue disputed between the parties, but according to Claimant, he told the brokerage firm's caller that he, Dr. Kosker, lived on the west coast and could not transfer any funds to his brokerage account until the local banks opened at 9:00 a.m. (Pacific Daylight Time).
Perhaps, after that phone call, Claimant thought that Respondent would at least wait until the next day for receipt of the promised wired funds before liquidating his account to cover the margin call. Of course, if that call never happened, then Respondent assuredly acted appropriately in protecting its capital by covering the outstanding call.
If you talk to enough employees in the margin departments of most Wall Street firms, they're going to tell you that Claimant's line about having the money in the bank, guaranteed, no question about it, and just needing until the next day to wire the funds is - well, lemme clean this up here - baloney.
SIDE BAR: Public customers are legendary for over-extending themselves on margin and always believing that there's some law that requires the brokerage firm to give them so many days notice and so many days to wire funds. Fact is, it's to the contrary - there's no legal obligation to provide notice and if it's given, it's usually merely as a courtesy. When it comes to margin maintenance, it's the customer's obligation to ensure that the account is compliant with the firm's minimum position.
Oddly, in this arbitration, Claimant wasn't slicing the baloney when he represented having adequate funds in his bank account to cover Respondent's margin call. According to the FINRA Arbitrator's commentary in the Decision:
There is no dispute that Dr. Kosker had the cash to make good on the margin call. Nonetheless, Dr. Kosker is an experienced options and margin trader, and had signed margin agreements with other companies in the past. His margin agreement with the broker, like most option agreements, stated that the broker could begin liquidating Dr. Kosker's positions to meet a margin call without notifying Dr. Kosker. That is exactly what the broker did: it immediately began liquidating Dr. Kosker's portfolio to meet the margin call.
The Arbitrator further notes, and it's sort of an admonishment and a sound lesson, that:
Had Dr. Kosker wanted to "cushion" his account more, he could have transferred more cash and securities to his NY account (prior to the FDA's announcement) which would have prevented a margin call. He did not do that. Dr. Kosker could have opened bank accounts on the east coast (prior to the FDA's announcement) so that he did not have to wait for west coast banks to open in order to transfer monies into the NY account and meet the margin call. He did not do that.
Given that the good doctor had sufficient cash reserves to meet Respondent's margin call, one has to wonder whether a bit more patience and old-fashioned customer service might not have saved the day and the customer's future business. On the other hand, the Wall Street of 2010 was not (and is not) the Wall Street of earlier halcyon days when customers and brokerage firms were flush with cash. Since the Great Recession, many firms are quick - or quicker - on the trigger when it comes to shutting down trading or liquidating accounts subject to margin calls. In these days of high-frequency trading, flash crashes, and overall worldwide craziness, prudence is the better option.
Still, that's no excuse for giving a good customer the bum's rush or saying one thing but meaning another. I've had my own personal experience with rude and non-responsive customer service at brokerage firms. Been there. Done that. Here's the FINRA Arbitrator's take on this situation:
While it can be said that this order-taking broker should have made it clear to Dr.Kosker that it would immediately start liquidating his portfolio to meet the margin call and that the broker, notwithstanding Dr. Kosker's wealth, would not wait for the west coast banks to open for Dr. Kosker to cure his margin deficit, the broker did not do so. Under its margin agreement with Dr. Kosker, the broker did not have to notify Dr. Kosker that it was liquidating his account.