If a public customer wants to place an idiotic order or insists on engaging in trading that seems destined to commit "economic suicide," what, if any, obligation does the servicing stockbroker and the brokerage firm have? Similarly, what happens when you substitute your sense of what's best for the customer's and he or she loses money when the order you refused to accept would have been, in retrospect, a winning trade? See this recent case for discussion of some of these issues.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2011 public customer Claimants Jiovino and Route 36 East LLC alleged causes of action against Citigroup Global Markets, Inc. ("CGMI") including breaches of fiduciary duty and contract, fraud, and negligence in connection with losses sustained in unspecified securities. Claimants sought $2,000,000 in compensatory damages plus punitive damages, interest, attorneys' fees and costs. In the Matter of the FINRA Arbitration Between Natasha Jiovino and Route 36 East LLC, Claimants, vs. Citigroup Global Markets, Inc., Respondent (FINRA Arbitration 11-03024, December 8, 2014).
Respondent CGMI generally denied the allegations and asserted various affirmative defenses.
In September 2014, Claimants notified FINRA Dispute Resolution that the matter had settled and Respondent petitioned for the expungement of the arbitration from the Central Registration Depository record ("CRD") of an unnamed registered party. Claimants responded to the expungement petition without consenting or objecting, and they did not appear at the expungement hearing.
The FINRA Arbitration Panel recommended the expungement of the arbitration from the unnamed party's CRD. In setting forth their rationale, the FINRA arbitrators explained that:
a. There is insufficient evidence to substantiate any of the claims or allegations.
b. Unauthorized Trading - the record shows that Route 36 East had monthly notice of all account transactions, and that the transactions were unsolicited and in accord with the authorization of Route 36 East LLC. This is clearly illustrated by a May 14, 2003 letter in which Mr. Jiovino stated: "I accept full responsibility for my trading practices and my financial requirements. Route 36 has approximately $1,500,000 in cash on hand and has a net worth of approximately $8,000,000."
c. Failure to Supervise - the record shows that Mr. Garruzzo and others at the brokerage house repeatedly warned Mr. Jiovino that his trading strategy was high risk and advised him to decrease the risk in his account by diversification and curtailing speculation.
d. Unsuitability - the record shows that there is no basis for the claim of unsuitability, as the aforementioned letter in paragraph b. above shows. Also, the Account Opening and Discretionary/Account Information Documents reflect authorization of "aggressive strategy". An Enhanced Due Diligence questionnaire states that Route 36 East LLC had gross revenue in 2002 of $8,000,000.00, and that Mr. Jiovino had been trading options since 1985.
Bill Singer's Comment
It is an ongoing and apparently ingrained institutional shortcoming that FINRA Arbitration Decisions often lack sufficient fact patterns so as to provide context and content adequate to provide readers with an ability to fully understand the dispute and the ultimate award. This case is clearly of that ilk.
Outside of the Decision, online FINRA BrokeCheck records as of December 15, 2014, disclose that CGMI characterized this arbitration as involving "Options" and containing allegations that:
CLAIMANTS ALLEGE, INTER ALIA, THAT FROM MAY OF 2005 THROUGH 2010 THE FINANCIAL ADVISOR MADE UNSUITABLE AND UNAUTHORIZED INVESTMENTS IN THE CLAIMANTS' ACCOUNTS.
The BrokerCheck records further note that the dispute was settled for $150,000, with CGMI explaining that:
THE MATTER WAS SETTLED FOR BUSINESS REASONS IN ORDER TO AVOID THE COST AND UNCERTAINTY OF LITIGATION. THE FINANCIAL ADVISOR DID NOT CONTRIBUTE TO THE SETTLEMENT
Since the FINRA Aribtration Panel granted an unnamed party an expungement of a customer complaint involving $2 Million in sought damages and since the settlement involved six figures, why didnt the Decision explain in a logical order that the customers' allegations involve allegedly "unsuitable" and "unauthorized" options trading from 2005 through 2010? A FINRA Arbitration Decision involving a settled case does not need to go into as full an exposition of the allegations as one that went to verdict; however, there are certain basic facts that should, by default, be presented and in a manner that makes sense. A meaningful explanation of the underlying claims (and the dollar amount of a settlement when expungement is requested) are facts that should rarely be omitted from most arbitration decisions. Further, a Decision should generally start with the underlying facts and then conclude with an explanation of the findings.
As to this Panel's rationale, I compliment the arbitrators on offering us some insight. For starters, under the rubric of "Unauthorized Trading," it was an important explanation that the customer had "monthly notice of all account transactions" and that the arbitrators deemed those transactions to have been "unsolicited."
Similarly, it was important for the Panel to explain that the customer had been "repeatedly warned" that his trading strategy was highly risky and should be off-set by diversification and the curtailing of speculation. Those circumstances were further underscored by the explanation that the account was authorized for an "aggressive strategy."
An interesting issue that emanates from the arbitrators' rationale, however, is whether a line can be crossed and industry respondents deemed "negligent" when they determine that an account is engaging in such troublesome trading that the account should be restricted, suspended, or closed. Obviously such dramatic decisions come with their own set of ramifications: Imagine the consequences of prohibiting further trading if that blocks a customer from entering subsequently profitable trades or prevented the implementation of an option or other hedge to limit exposure. Damned if you do, damned if you don't.
A beneficial aspect of this arbitration Decision is the thought-piece. Should CGMI have informed the customers that their accounts would be limited to liquidating-only transactions and would be closed within X number of days or weeks?
I am NOT suggesting that answer but am merely posing a very pregnant question. The larger issue is often addressed in so-called "Economic Suicide" cases when Claimants allege that brokerage firms sat idly by while the customers engaged in clearly inappropriate trading that resulted in severe losses. That attack is far from academic and esoteric. Consider this customer arbitration brought against CGMI in a 2011 FINRA Arbitration Decision: