December 22, 2018
Before you read today's analysis of a recent FINRA regulatory settlement, place a large pillow on the floor directly under your chin because it may cushion the impact when your jaw hits the hardwood not once or twice but possibly three or more times. By way of a brief observation from someone who's been on Wall Street for four decades: When we are confronted by the stupid stuff that folks do, often our first inclination is to assume that the stupid stuff was a mistake; however, notwithstanding our inclination to assume that there may well have been a sensible reason for doing the stupid stuff, it turns out that folks just do stupid stuff. Or, as that great Wall Street regulator Forest Gump so aptly observed "Stupid is as stupid does."
Wall Street lawyer Aegis Frumento has empathy for the many clients he has represented over the years, in DOJ, SEC and FINRA investigations and prosecutions, whose essential explanation was that despite their misgivings, they were only doing what they understood their bosses or their firm or the market expected of them. There were brokers who thought "truthful hyperbole" was, well, honest, because everyone did it. There were traders who just followed firm-sanctioned trading desk procedures as they went about skimming a basis point here and a basis point there for the greater profit of the firm. There were salesmen who persuasively sold financial products they didn't themselves believe in, because that's what they were trained to do and what their firm told them to do. As Frumento argues, they were, all of them, little Michael Cohens blindly loyal to a boss, a firm, a peer group, an accepted practice, or -- the most self-aware of them all -- a fast buck.
When it comes to margin accounts on Wall Street, many customers believe that they have the right to prior notification from their brokerage firm before any positions are liquidated to cover margin calls. In fact, many customers sincerely believe that they will be entitled to a modest delay in order to pick and choose which securities will or will not be sold off to cover the debt. Consequently, it often comes as a shock -- a severe one -- when customers discover that their brokerage firm sold their securities without first contacting them. In fast moving markets with dramatic drops or rises, many brokerage firms won't wait for things to get worse and will seek to mitigate damages by going into a non-compliant account and selling whatever they think makes the most sense at the appointed hour. Few interactions between customers and brokerage firms prompt more lawsuits than those involving sell-outs to satisfy margin calls. Few disputes end more overwhelmingly in the brokerage firms' favor than those involving margin sell-outs -- except in today's featured FINRA arbitration.
After reading a recent FINRA Arbitration Decision about a public customer case, we don't come away with much of a sense as to where things ended. Oh, sure, the arbitrators dismissed all of the customer's claims but we seem to think that the case may have settled. Or not. Unquestionably, we are lost. We're not even sure that we can find our way back to where we lost the scent. Alone and afraid, we keep searching for answers but can't seem to find them. Respondents came to the hearing and stayed but they said that the case had settled. Claimant never appeared at the hearing and insisted that there was no settlement. Where do things stand now? Will we ever catch up? Will we ever understand what the hell happened here? Probably not.
Given the high cost of retaining a lawyer, we frequently see parties forced to represent themselves in courts and arbitration hearings. In some cases, it's not merely a matter of funds but of disagreement with the advice of counsel -- often whether to accept or propose a settlement. From the perspective of an adversary, few things are calculated to cause more happiness than to learn that some amateur is going to cross swords with your lawyer during a trial or hearing. On the other hand, veteran lawyers know that judges and arbitrators often allow pro se litigants to get away with murder in an effort to ensure that the unrepresented get their day in court. Unfortunately, too many pro se parties seem to prepare for their day by watching endless hours of "Law & Order" reruns. In a recent pro se FINRA arbitration, the public customer represents himself after two lawyers had withdrawn. Things went about as well as you would expect from this preamble.