Brokerage Customer Sues Because X Minus X Equals Zero

October 26, 2015

Seriously? Really?? We got a customer suing a brokerage firm because he claims that they should have warned him that if he kept writing checks that he would reduce his checking account's balance?  No . . . I'm not kidding you. Read this recent FINRA arbitration

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2013, public customer Claimant Phillips representing himself pro se alleged the following causes of action against Respondent Chase Investment Services:

  • breach of fiduciary duty,
  • misrepresentations,
  • omission of facts,
  • failure to supervise,
  • negligence, and
  • failure to execute.

Claimant sought $200,000 in compensatory damages plus interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Nico Phillips, Claimant, vs. Chase Investment Services Corp., Respondent (FINRA Arbitration 13-03133,October 19, 2015).

Respondent Chase Investment Services requested that Claimant's claim be dismissed, and the firm also sought the  expungement of this matter from the CRD record of unnamed party.

Repetitive Withdrawals

As explained in online FINRA BrokerCheck records as of October 26, 2015, J.P. Morgan Securities LLC disclosed that Claimant Phillips had filed a complaint seeking $200,000 that alleged:


Unrecognizable Violations

The FINRA Arbitration Panel denied Claimant's claim in its entirety. 

In addition to dismissing Claimant's case, the Panel recommended the expungement of the matter from the unnamed party's Central Registration Depository records ("CRD"). In recommending expungement, the Panel preliminarily explains that:[Ed: advisor's name REDACTED at sole discretion of Blog]:

The Claimant did not allege, nor can the Panel recognize, any investment related sales practice violations. The Claimant testified that he gave unsolicited instructions to his advisor, REDACTED, directing REDACTED to liquidate positions in his account and to transfer proceeds from said liquidations into his checking account. REDACTED followed the instructions of the Claimant. Claimant further testified that he alone subsequently depleted the funds that were transferred into his checking account over a short period of time. Neither Respondent, nor non-party advisor REDACTED, had a duty to manage or monitor the activity in the Claimant's personal checking account. Claimant cannot impose liability onto the Respondent or the non-party advisor by asserting that they owed him a duty to manage or monitor the balance of funds in his brokerage or personal checking accounts when no such obligations were undertaken. Claimant acknowledged that he alone made choices to liquidate the positions in his brokerage account to transfer said funds from his brokerage account to his personal checking account and, to allocate the funds from his checking account to finance his personal and business needs.

Bill Singer's Comment

Now here's one you don't see everyday: A public customer alleges that his stockbroker should have warned him that the customer's withdrawals would reduce the balance of funds in the account . . . and that, more precisely, "repetitive" withdrawals could reduce said balance to zero

Imagine suing your banker because no one informed you that by writing a number of checks against your balance that you could wind up depleting the funds in your account or generate an overdrawn debit balance. Taking things a step farther, consider a lawsuit in which a credit card company is named as a defendant because it failed to warn its customer that she would incur mounting charges when paying for goods and services with her card.

Okay, sure, I'm coming off a tad cynical here -- that's a fair inference. Okay, maybe you could imagine a set of circumstances where the allegations in Phillips or similar cases wouldn't strike me as absurd. On the other hand, howsabout we stick with the facts in Phillips as three independent FINRA arbitrators presented them to us in their Decision? Those findings included the characterization of UNSOLICITED for the: 

  • securities sales, 
  • subsequent transfers of the proceeds of those sales into the customer's checking account; and
  • withdrawals of the funds by the customer from his checking account.
Frankly, I wonder why a Counterclaim citing a frivolous and baseless lawsuit was not filed against the customer -- and I'm wondering whether you could concoct a more convincing case upon which a FINRA Arbitration Panel would be justified in making a financial award. Granted I may be missing something but I'm going by what's in the FINRA Arbitration Decision; and if there is an important omission of fact in that document, that's not on me.

This case reminds me of one of the very clients I handled as a lawyer. Some 25 years ago, I get a telephone call from a woman seeking my legal services. She is very upset and scared. Her bank has not only threatened to sue her to force payment of a debit balance in her checking account but they're also making noises about filing criminal charges. That latter part is a bit odd since the client is telling me that it's all a misunderstanding . . . that when she wrote the check that caused the overdraft that she thought another check she had deposited had cleared. 

I call the bank to find out what's going on. Turns out that my client sort of left out a minor detail in her narrative to me. After the bank informed her that her account was overdrawn, she then wrote another check against that same overdrawn account for the amount of the overdraft plus penalty charges and then deposited that into her account. Missing from that solution was any deposits of funds into her account to cover the second check.

Sure, I'll be happy to represent you and my Retainer is $1,000. What?  Oh, uhhhhhh, sorry but I would really prefer that in cash. No . . . no . . . I'm not going to accept a personal check from you. Why?  You know, I'd like to be a gentleman here but under the circumstances, I would prefer cash. What? Oh, yeah, I'm sure that you have two forms of photo ID with you but that's not the point.