Schwab Accused Of Altering Client Forms In Options Trading Dispute

July 24, 2014

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2013, public customer Claimant Meadows asserted causes of action including breaches of fiduciary duty and contract, negligence, and fraud in connection with his three Individual Retirement Accounts ("IRAs") maintained at Respondent Charles Schwab & Co., Inc. Claimant Meadows sought $241,000 in compensatory damages, interest, fees, and costs. In the Matter of the FINRA Arbitration Between John Anthony Meadows, Individually and on behalf of His IRAs, Claimant, vs. Charles Schwab & Co., Inc., Respondent (FINRA Arbitration 13-01672, July 18, 2014).

As set forth in the Arbitration Decision:

Claimant alleged that changes to Claimant's account verification forms were not based on any contact with Claimant nor did Claimant request any such changes, but it appears to be Respondent's effort to make changes to Claimant's customer account profile in light of the sizeable losses. Claimant alleged that his education, prior investing experience with annuities and mutual funds, health and medical conditions, full disability and unemployment status combined with the fact that his three (3) Schwab accounts represented the vast majority of his net worth suggest that Claimant should never have been authorized to conduct any options trading of any kind and never should have been authorized to conduct any options trading.

Respondent Schwab generally denied the allegations and asserted affirmative defenses.


The FINRA Arbitration Panel found Respondent Schwab liable and ordered it to pay to Claimant Meadows individually and on behalf of his IRAs, $30,000 in compensatory damages.

Bill Singer's Comment

Given the allegations, this was an interesting case based upon a provocative premise: Claimant Meadows alleged that his account forms had been tampered with because of an inappropriate consideration about "sizeable losses" by Respondent Schwab. As set forth in the Decision, the customer asserted that forms were altered without his request or pursuant to any contact with him. Those are troubling allegations.

Further, Claimant apparently argued that he should not have been approved to conduct options trading. In support of that contention, he cites to such factors as his education and seems to claim that his prior investing experience was limited to annuities and mutual funds. He further raised "health and medical conditions" that may or may not have apparently contributed to "full disability and unemployment status." Those are all unsettling allegations and, on top of that, they are made against a major brokerage firm, a household name, if you will. 

As I read the public customer's allegations, I anticipated that the outcome would be a dismissal. Why?  Well, that's a tough one to answer precisely; let's just say it's part instinct and part a default expectation that such a major brokerage firm as Schwab would not do any thing as idiotic as back-dating or altering customer forms. Then again . . . you just never know with Wall Street, right?

When I got to the part of the Decision where the arbitrators found Respondent Schwab guilty, that surprised me -- and I immediately went back to the beginning of the document to re-read the statement of facts and rationale for a better explanation. Sadly, that second pass through the Decision left me with little understanding of what the Panel found wrong and worthy of an award. Which is NOT to suggest that there was no misconduct but it is to suggest that I don't understand which of the Claimant's allegations were sustained and why only $30,000 in damages was awarded out of $241,000 sought.

What, for example, were Respondent Schwab's defenses and explanations in response to truly significant allegations that it tampered with the customer's account statements in a clumsy effort to justify options-trading losses? Given the nature of such allegations, you'd think that the FINRA Arbitration Panel would have at least shared with us some of the alleged fabrications. You'd also think that we would be informed of some of the findings those arbitrators made about some/any/all of the alleged form revisions and suitability concerns.

Claimant Meadows sued for at least $241,000 but was awarded just about 12% of that amount, a somewhat paltry $30,000. That doesn't suggest a "stunning" victory for the public customer and could be interpreted as a modest victory for Respondent Schwab. We have absolutely no idea why the Panel awarded such a small percentage of the damages sought. Even more annoying, we don't know whether the Panel found any account form fabrication by Respondent.

Did the Panel agree with Claimant that he lacked the educational and investing background to understand options trading? Did the Panel conclude that Respondent Schwab should not have approved him for options trading?All of which begs the question: What type of options trading (if any) did occur? Are we talking about a conservative Covered Call strategy or a highly speculative naked buy/sell?

Does FINRA do any quality control whatsoever with these Arbitration Decisions? Not only doesn't it appear that someone reviews drafts to ensure that a modicum of pertinent information and rationale is conveyed, but sometimes the grammar is painful. Consider this excerpt [Ed: Yellow highlighting supplied, not in original]:

[C]laimant should never have been authorized to conduct any options trading of any kind and never should have been authorized to conduct any options trading.

Before the "and," we are told that Claimant's allegation was that he "should never have been authorized to conduct any options trading of any kind . . ." Okay, that's a pretty powerful allegation and it speaks for itself.

After the "and," however, we are additionally informed that Claimant alleged that he "never should have been authorized to conduct any options trading."

Okay, so you tell me, just what the hell is the difference between a claim that a public customer:
  • should never have been authorized to conduct any options trading of any kind; and
  • never should have been authorized to conduct any options trading.
Did the Decision intend to draw a distinction between "should never" and "never should' (on the one hand), and "any options trading of any kind" and "any options trading"? What, if anything was the importance of such differences?

Finally, since the FINRA Arbitration Panel found Respondent Schwab liable, how the hell did it decide to award the relatively paltry $30,000? And puhleeeease don't interpret my complaint as an effort to choose sides as between Meadows or Schwab -- I am not doing that. That's not my point. My point is why are we left to guess as to why only some 12% of the sought damages were awarded in a case involving such unsettling allegations? The public customer's allegations seem to merit a more substantial award; however, for those same reasons, the brokerage firm is entitled to some written statement of exoneration, if, in fact, the Panel did not find that the firm had engaged in some of the serious alleged conduct.