Firm Submits Erroneous Trade But Sues UBS For Its Failure To Cancel

March 28, 2012

Lemme see here -- pull handle and then break glass?

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2010, Claimant Source Capital Group sought $1.4 million in compensatory damages; $1.4 million in punitive damages, interest, fees, and costs in connection with Respondent UBS's alleged refusal to cancel an erroneous transaction. In the Matter of the FINRA Arbitration Between Source Capital Group, Inc., Claimant, vs. UBS Securities LLC, Respondent (FINRA Arbitration 10-05540, March 23, 2012).

Respondent UBS generally denied the allegations and asserted various affirmative defenses.

Curiosity Piqued

Hold on for a sec.  Let me read that paragraph above, again.

Claimant Source Capital Group is suing UBS because the Claimant submitted an erroneous order . . . and the theory of this lawsuit is that UBS caused damage by somehow refusing to cancel theerroneous order?  So that's, what?  I made a mistake but your failure to fix it cost me money and you should pay for it?

Okay . . . ummm, who the hell am I to question the wisdom or the logic of any lawsuit? I'm a lawyer. I make money representing clients. Some of my clients may pay me to defend against such a claim.Ka-ching. Some clients may pay me to file such a claim. Ka-ching. Sometimes I love what I do for a living.

Given the somewhat dubious nature of this claim, I eagerly read FINRA's Decision.  I was curious to learn what the precise nature of the erroneous trade(s) were and why the Claimant didn't simply fix its own error by an off-set: You know, enter aBuy order to undo a mistaken Sell; or enter a Sell to undo a mistaken Buy; Sell/Buy 10,000 shares of ABC that resulted from someone entering an order to Buy/Sell 10,000 shares twice when you only wanted to execute one lot; or buy the XYZ and sell the XYC that you bought in error. Essentially, what steps did Claimant take to mitigate its losses following Respondent UBS' apparent refusal to bust the trade(s)?

Fill In The Blanks?

Frankly, this was an intriguing puzzle.  What exactly happened to cause over $1 million in compensatory damages plus a demand for punitives? Firms in UBS' position - Merrill Lynch, Wells Fargo, Morgan Stanley, JP Morgan - have policies that they follow when deciding to bust clearly erroneous trades. If such a customer request is received, depending on the requirements of the executing firm's policies, the erroneous trade may be busted subject to exposure to market risk.  The typical considerations would be the amount of time transpired from execution to the request, the potential disruption to the market, and various regulatory concerns/notices.

So why didn't UBS bust the trade(s) in this case?

I'm not asking for a lot here.  Just some basic background. A bit of detail. And an understandable explanation of the rationale for the Arbitration Panel's ruling.

Unfortunately, I would get none of that.

The FINRA Arbitration Decision informs us that the FINRA Arbitration Panel denied Claimant's claims.

Bill, are you kidding?  That's it?

Hey, waddya want me to do - make somethin' up here?  This FINRA Arbitration Panel titillates us with a case in which the Claimant apparently goofed and submitted an erroneous order, and then sued the executing firm.

What kind of a mistake, you ask?

I got no idea.  Maybe an extra couple of zeroes. Maybe a Buy instead of aSell. Maybe ABZ instead of ABC. Listen, knock yourself out with whatever you want to imagine.

All of which is bad enough except the Panel got in this one last sucker punch on us. Consider this odd little section that managed to find its way into theDecision:


Claimant's Written Supervisory Procedures (WSP's) were not part of the documents when discovery was delivered by Claimant. Claimant claimed that there were no sections related to trade errors. During testimony it came out that there is a section on errors. The section in question with the index was delivered by Claimant at the next hearing session. As a sanction for non-production of a very relevant document, all forum fees are to be assessed to the Claimant.

Furthermore, as part of the findings during this proceeding, the Panel recommends that Claimant be instructed to have training sessions for the CCO, CFO, and all trading desk personnel. It was very clear during the testimony of CCO Fitzpatrick, CFO Newton, and Head Trader Karafa that none of these firm officials had any knowledge of what to do in case of an error.

The Decision indicates that the Hearing Fees solely assessed against Claimant in the amount of $14,550.00.

Bill Singer's Snarky Comment

Ya gotta love these mandatory intra-industry arbitration cases at FINRA.  Not!!!

A Claimant submits some kind of erroneous trade(s) and complains that another firm should have cancelled its order. During the arbitration hearing, the Claimant says that there are no "erroneous trade" provisions in its Written Supervisory Procedures but for the fact that there are. Finally, for reasons not explained, the arbitrators rendered the stunning accusation that the Claimant's CFO, CCO, and Head Trader had no idea what to do when confronted with a trading error.

All of this, the arbitrators had time to inform us about - all of that, but not a single word about the nature of the underlying trade(s) that caused this mess or why UBS refused to bust the trades.

Hey, thanks for nuthin'!

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