by Bill Singer
Cancelled FAZ Purchase Leads to MSSB Arbitration and Expungement
October 17, 2011
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2010, Claimant Colombino sought $106,344.00 in compensatory damages plus interest, $300,000 in punitive damages, costs, and attorneys' fees.
Claimant Colombino asserted that he sustained damages as a result of Respondents' allegedly improper cancellation of his purchase of 60,000 shares of the Direxion Financial Bear 3X Share ("FAZ"), which is an Exchange Traded Fund ("ETF") that seeks to achieve a 300% inverse of the price performance of the Russell 1000 Financial Services Index. In the Matter of the FINRA Arbitration Between Michael Colombino, Claimant, vs. Ashraf Elghandour, Morgan Stanley & Co., Incorporated, and Morgan Stanley Smith Barney, Respondents (FINRA Arbitration 10-04424, October 7, 2011)
Respondents Morgan Stanley Smith Barney ("MSSB") and Elghandour generally denied the allegations, asserted various affirmative defenses, and requested an expungement of this arbitration from Respondent Elghandour's Central Registration Depository record ("CRD").
On October 28, 2010, Claimant dismissed Respondent Morgan Stanley & Co.
Settlement
By letter dated September 19, 2011, Respondents informed FINRA that the parties settled this matter and that Respondents wished to proceed with the hearing for the purpose of their request for expungement of Respondent Elghandour's CRD. Claimant Colombino had notice of the hearing, did not oppose the expungement request, and did not attend the expungement hearing.
Decision
The FINRA Arbitration Panel reviewed the parties' settlement documents, considered the amounts paid to Claimant, and considered all other relevant terms and conditions of the settlement. Thereafter, the Panel recommended the expungement of the arbitration from Respondent Elghandour's CRD based upon a finding that the allegations against him were clearly erroneous.
A Larger Oops, A Smaller Oops
On August 9, 2010, Claimant Colombino apparently entered an unsolicited order to purchase FAZ for one of his accounts - the one that was designated the "Larger" account.
John Raima, Credit Manager of MSSB's National Credit Risk Group, testified that without notice to Respondent Elghandour (who was the broker of record for Claimant's account), a 90-day "free riding" restriction should have been placed on Claimant's Larger account according to Regulation T. Unfortunately, as Raima testified and documentation corroborated, the free-riding restriction was erroneously placed on another of Claimant's accounts - the one denominated as the "Smaller" account.
How the hell should I know?
The FINRA Arbitration Panel determined that Respondent Elghandour did not know (and apparently had no reasonable way of knowing) that Claimant was prohibited from making the unsolicited purchase of FAZ in the Larger account. E-mails from Respondent MSSB's risk department verify that its personnel discovered their error after the FAZ transaction was effected. At that point, Respondent Elghandour was notified and Claimant Colombino's trade was cancelled on August 10, 2010.
One right leads to several wrongs
Consequently, the Arbitration Panel noted the FAZ trade was not improperly cancelled because a bona fide free-riding restriction was mandated by the Securities and Exchange Commission's and Respondent MSSB's rules. As such, the FAZ trade should not have been accepted. Moreover, in the normal course of business, Respondent Elghandour should have been timely alerted to the restriction on his client's account and the decision to cancel the FAZ trade.
Ultimately, this was a matter in which a mistake was compounded and a blameless registered person wound up in the hot seat and the object of his customer's arbitration complaint. In reality, the Panel concluded that the placing of the restriction of the wrong account was not Respondent Elghandour's doing or fault - nor was MSSB's risk department's belated notification to Elghandour his fault.
Finally, in recommending the expungement of Respondent Elghandour's CRD, the FINRA Arbitration Panel also noted that Claimant Colombino did not contest the requested expungement, remained a client of Respondent MSSB, continued to actively trade his accounts, and Respondent Elghandour continues as the broker of record for those accounts.