Stockbrokers Sue Customer Over Unpaid Margin Debit

July 16, 2015

Few issues cause more friction between public customers and brokerage firms than margin disputes. By now, we have grown accustomed to customers yelling and screaming in outrage over an allegedly unjustified sell-out. Today's BrokeAndBroker.com Blog has the shoe on the other foot with the customer being sued over an unpaid margin debit. Now don't get me wrong, it's not especially unusual for a firm to sue a customer over margin; but in the arbitration presented here, the brokerage firm is not in the role of the Claimant.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2014, three associated persons alleged that public customer Wijk had failed to repay a debit balance that purportedly arose after he had traded an unspecified stock on margin and, thereafter, failed to repay the ensuing debit balance. Claimants sought $25,338.70 in compensatory damages plus interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Steven Scott Baldassarra, Joseph Benjamin Baldassarra, and Carl Joseph Smith, Claimants, vs. Pieter Van Wijk, Respondent (FINRA Arbitration 14-03768, July 10, 2015).

Online FINRA BrokerCheck records as of July 16, 2015, disclose that the three Respondents are currently registered with Newbridge Securities. The FINRA Arbitration Decision indicates that the FINRA membership surcharge of $750 was paid by Newbridge Securities Corporation. Claimants were apparently represented by "Carl Joseph Smith, President, CJS Financial Corp., Coral Springs, Florida" but there is no indication that he is a lawyer.

Repondent Wijk did not file an appearance and was apparently not represented by a lawyer.

Award 

The sole FINRA arbitrator found RespondentWijk liable and ordered him to pay to Claimants $25,388.70 in compensatory damages; and a further $600 reimbursement for FINRA filing fees.

Bill Singer's Comment

No . . . you're right . . . not a particularly complicated or interesting case. It's a basic they-said-he-didn't-answer case; however, there were a few aspects of this matter that did catch my eye.

For starters, I have frequently mused in the BrokeAndBroker.com Blog as to why we don't see more FINRA arbitrations brought by member firms and registered representatives against public customers, particularly for defamation or non-payment. In this case, we have three individuals suing a non-paying public customer. Oddly, there is no FINRA member firm on the Claimant-side of the caption.  I am, as such, curious as to the legal theory underpinning the Statement of Claim (which is not available online at FINRA's Arbitration website). Assuming that the public customer had an unpaid margin balance, that would typically be owed to the member firm. How did these individuals wind up suing for a debit typically carried on a firm's books? A possible answer is that they were docked for the debit or took an assignment of same, and then sued on their own behalf. One odd issue here is why member firm Newbridge Securities paid the FINRA member firm surcharge for the arbitration but didn't join as a Claimant -- or, to take the pondering a bit further, why Newbridge Securities wasn't the only Claimant.

Another aspect about this case that is worth noting is that the public customer lost and now owes the full amount for which he was sued. Of course, winning the award and collecting are two very different challenges.

Margin liquidations are a common source of customer complaints.  Many customer beliefs about how margin calls are supposed to be made do not accurately reflect legal and regulatory requirements.  Let me briefly try to clarify some misconceptions.

Generally,when the equity in a margin account is deficient according to the maintenance levels in effect, your brokerage firm can sell securities in your account without your prior consent, agreement or authorization. Frankly, if you re-read your Margin Agreement, you will likely see buried among the thousands of words that you agreed to that circumstance as a condition precedent to opening that account. If the equity in your account falls below the legally proscribed margin maintenance requirements or the brokerage firm's "house" maintenance requirements, the firm can, without prior notice to you, sell the securities in your account to cover the margin deficiency. While many brokerage firms will send courtesy notices to clients prior to undertaking such margin liquidations, those notices are not legally required. If, however, you have negotiated a specific margin agreement that imposes different terms, that would be a different situation -- good luck trying to extract such concessions from most brokerage firms.

Similarly, many customers believe that they are entitled to an extension of time on a margin call if they simply ask for one. While an extension of time to meet initial margin requirements may be available to customers under certain conditions, a customer is not legally entitled to an extension nor is a brokerage firm obligated to grant one.  What if the forced sale doesn't raise enough cash?  You may be responsible for any resulting deficiency.

As the Securities and Exchange Commission warns in its online Investor Bulletin "Understanding Margin Accounts" (SEC Pub. No. 156 (8/13) ) :

Understand Margin Calls
You Can Lose Your Money Fast and With No Notice.

If your account falls below the firm's maintenance requirement, your firm generally will make a margin call to ask you to deposit more cash or securities into your account. If you are unable to meet the margin call, your firm will sell your securities to increase the equity in your account up to or above the firm's maintenance requirement.

However, your broker may not be required to make a margin call or otherwise tell you that your account has fallen below the firm's maintenance requirement. Your broker may be able to sell your securities at any time without consulting you first. under most margin agreements, even if your firm offers to give you time to increase the equity in your account, it can sell your securities without waiting for you to meet the margin call.

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