Dow's Damage: 13% in Five Days (Photo credit: YoTuT)
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2009, among the causes of action asserted by Claimants were negligence, unsuitability, breach of contractual and fiduciary obligations, and failure to supervise in connection with unspecified stocks and bonds. Claimants sought at least $2,500,000 in compensatory damages, disgorgement, interests, fees, and costs. In the Matter of the FINRA Arbitration Between James P. McGarry and Amethyst Music and Entertainment, Inc., Claimants, vs. Citigroup Global Markets, Inc. and Jack Hochstrasser, Respondents (FINRA Arbitration 09-07114, January 8, 2013).
Respondents generally denied the allegations, asserted various affirmative defenses, and requested the expungement of this matter from the Central Registration Depository records ("CRD") of Respondent Hochstrasser.
The FINRA Arbitration Panel denied Claimants' claims and recommended the expungement of Hochstrasser's CRD. The Panel offered the following rationale:
As to the claim of unsuitability, Claimants alleged that their investment objectives were modest income and preservation of capital. However, Respondent Citigroup's documents indicate that Claimants elected conservative growth with a tolerance for moderate risk. Also, documents from both a predecessor firm and a successor firm showed similar or more aggressive investment objectives.
Further, Claimant McGarry informed Respondents that he was retired and would need about $250,000.00 per year from his investments. In response. Respondents designed and implemented an investment program with a five to ten year horizon and the objective of producing approximately $300,000.00 in after tax income. The portfolio was specifically arranged and managed to suit Claimants' stated financial needs over a period of time. Respondent Hochstrasser encouraged Claimant to stay the course during market downturns, as he expected the plan to succeed over the long term.
Claimant, however, withdrew substantially larger amounts than he had indicated, impeding production of income. Accordingly, Respondents adjusted the portfolio so as to generate additional income. Claimants, however, elected to sell out all equities on November 21, 2008, near a market bottom, rather than wait for a market recovery as advised by Mr. Hochstrasser. . .
When Claimants filed this $2.5 million case, I suspect that they expected the matter to go off with a lot of pyrotechnics - instead, we got a soft pop, some wisps of smoke, and a fizzle. As close to a dud as one could imagine.
Compliments to this FINRA Arbitration Panel for taking the time to provide us with a meaningful rationale for its decision. This panel's analysis offers a number of important lessons for both public customers and industry participants.
For starters, simply tallying up your losses and then throwing out the allegation of "unsuitability," will not carry the day for a customer. As noted in thisDecision, arbitrators may look beyond losses and confirm the desired risk profile of the customer. In this case, the Panel countered the claimants' professed objectives of "modest income and preservation of capital," with a finding that the customer desired a more risky "conservative growth with a tolerance for moderate risk," as memorialized in Citigroup documents.
An interesting aside was that the Panel gave weight to the existence of similar or more aggressive risk tolerance at a prior brokerage affirm where claimants maintained a securities account. That's a bit tricky because Wall Streetadmonishes that a prior history of investment success does not guarantee future performance; and, as such, in a litigation context, customers should be entitled to alter their risk profiles as they age or their circumstances alter. That aside, this Panel placed the prior risk documentation into context with the Citigroup account documents at issue and found some consistency; if the prior documents had reflected less willingness for risk, perhaps the Panel might have reached a different conclusion.
Claimant McGarry presented a somewhat sympathetic figure in that he was retired and purportedly had expressed a need for his investments to generate about $250,000 per annum. Apparently, in consideration of those factors, the respondents alleged that they had created a 5 to 10-year investment program with the objective of producing slightly more than the targeted income. When confronted with the horrific downturn of the Great Recession, the stockbroker seems to have urged his customer to avoid panic and go with the plan - in retrospect, perhaps great advice, but when you're in the midst of a market collapse of historic proportion, it's tough not to panic. On November 21, 2008, the customer liquidated all of his equities.
Regardless of whether one opts to characterize the customer's November 21, 2008, liquidation of all his equities as panic or prudence, the fact is that such was not consistent with a long-term investment program and the stockbroker cannot be fairly blamed for the ensuing market crash nor credited with its recovery.Personally, I'm not a fan of any so-called long-term investment program. I've never quite understood how anyone can predict anything five years from now, much less ten years. More to the point, securities portfolios were absolutely hammered by the last recession to the point that decades of profits were wiped out. On the other hand, imagine how much wealthier you would now be if on November 21, 2008, you loaded up on quality stocks or exchange traded funds and held on through the March 2009 market bottom.
In the end, you can never, ever eliminate risk from the markets and your investments, no matter what you're told, are never guaranteed. Just when you think it's safe to go back into the water, someone screams and there's one less swimmer and one happy Great White Shark.