Offsetting Fouls In Customer Renege Arbitration About September 2008 Market Crash

December 20, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2009 and thereafter amended, Claimants Kelly and National Securities Corporation ("NSC") asserted breach of contract, fraud, fraudulent inducement, negligence, and unjust enrichment as a result of Respondent Dorsey's alleged failure to pay for five thousand shares of Morgan Stanley stock that he purportedly had agreed to purchase. The FINRA Decision states that the case involved transactions in Claimants' accounts pertaining to shares of

  • Morgan Stanley;
  • Bank of America Corporation;
  • Visa, Inc.;
  • Harvest Energy; and
  • Intrepid Potash, Inc.

Claimants sought $72,311.76 in compensatory damages, treble or punitive damages,  plus interest from September 2008. Claimants also sought at least $25,000 in costs and attorneys' fees. In the Matter of the FINRA Arbitration Between Thomas E. Kelly, Jr., National Securities Corporation, Claimants, vs. D. Duane Dorsey, Respondent (FINRA Arbitration 09-06699, December 14, 2011).

Respondent generally denied the allegation, asserted various affirmative defenses, and filed a Counterclaim asserting, among other causes, failure to supervise, unauthorized trading, suitability, and fraud.

Respondent Dorsey's Counterclaim provides us with more context to the nature of this dispute. He sought damages of $17,238.92 plus interest for the purchase of 600 shares of BAC for his account the account.  Respondent also sought damages for Claimants' purchases of 5,000 shares of Morgan Stanley on September 22, 2008; and for the sale of 978 shares of Intrepid Potash at a price of $16.98 on October 10, 2008.

SIDE BAR: Ah yes, September 2008 -- quite the interesting month! As you may recall, painfully, the stock markets were going through an historic crash.  On September 28, 2008, the House of Representatives confounded Wall Street by failing to pass a proposed $700 Billion rescue package -- and as word of this debacle hit the wires around 1:30 p.m., the markets cratered.  As such, gee, go figure, who'd a thunk it, there just happened to be a whole lotta finger pointin' between brokerage firms and their clients about whether an order was an order, whether someone meant to buy or sell, whether a sell order had been given and timely executed.  This arbitration seems to be just such a case.


You would sort of figure that when you have two diametrically opposed sets of allegations that one of the parties will win.  After all, the Claimants (the brokerage side of the caption) want to force the former customer to cough up some $72,000 based upon what seems like "buyer's remorse" -- not too shocking an allegation given the historic market nosedive.  On the other side of the caption, the customer Respondent seems just as adamant that he doesn't owe the broker-dealer jack and, on top of that zeroing of the claimed debit, he's asking for damages caused by the cited purchases and sales that he suggests didn't come off as he instructed.

My hunch is that a large chunk of this dispute revolves around the market's incredible gyrations during this time.  Most likely, the customer's account was subjected to a sell-out(s) to cover some margin call(s) -- which the customer either got or claims he didn't get and, just as likely, the brokerage firms says that they sent out or were not required to even do so.

The net result of such margin call activity is that the customer saw what he interpreted as unauthorized activity. Moreover, there may well have been some market-chasing purchase(s) by the customer that were entered when his account had sufficient margin equity, only to see that coverage evaporate in hundreds of points of dips.

What's a FINRA Arbitration Panel to do?

The FINRA Arbitration Panel dismissed the Claimants' case.

The FINRA Arbitration Panel dismissed the Respondent's case.

All parties were found not liable.

Why?  How come this no-decision Decision?  Sorry, dunno -- the Arbitrators ran off the field as the clock expired and refused to explain their ruling.  Given the off-setting penalties called on both parties in this case, I would have loved to understand the Panel's rationale.  Sadly, they didn't offer one.  As I all-too-often find myself noting, FINRA arbitrations should not be guessing games.  Not for the industry. Not for the public.  If you're going to wear the stripes and blow the whistle, at least have the courtesy of explaining the foul.

All of which leaves us with a tied game as the clock expired with the runner apparently carrying the ball over the opponent's goal line for the winning score but the ball came loose and the defensive back picked it up and ran it all the way back to score the winning touchdown for the other team.  The referee watched the instant reply, walked to the center of the field, announced that there was a touchdown by the offense and a fumble returned for a score by the defense but that neither score counted and the game will end in regulation time as a tie but for the fact that there should be an overtime but for the fact that, inexplicably, there isn't.  GRRRRRRRRRRRRR!!!