Schwab Sues Customer In Stock Options Dispute

October 10, 2016

You've been called to Blog jury duty. Judge Bill Singer, our blog's publisher, presents for your consideration a lawsuit by brokerage firm Charles Schwab & Co., Inc. against one of its public customers. The case was argued before a panel of arbitrators in the Financial Industry Regulatory Authority forum. The industry member firm demanded six figures in damages and then some. The public customer represented himself. What Judge Singer asks you to consider is not whether the proceeding was fair because, Spoiler Alert, the public customer won; what you are asked to deliberate about is whether the published FINRA Arbitration Decision provides sufficient content and context. 

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2015,  Claimant Charles Schwab & Co., Inc. breach of contract, which the FINRA Arbitration Decision asserts arose in connection with "the exercise and sale of Respondent's Cheesecake Factory Employee Stock Options from his brokerage account maintained by Claimant." Claimant Charles Schwab sought payment of the $107,704.11 unsecured debit in Respondent Cervantes's account plus interest and costs (including Claimant's $2,125 filing fee and $1,700 member surcharge). In the Matter of the FINRA Arbitration Between Charles Schwab & Co., Inc., Claimant, vs. Armando Cervantes, Respondent (FINRA Arbitration 15-01862, October 4, 2016).

Respondent Cervantes, who represented himself pro se, generally denied the allegations. As asserted in the FINRA Arbitration Decision:

In the Statement of Answer, Respondent requested that the Panel reaffirm the stock options and that no penalties or expenses associated with this arbitration are his responsibility.


The FINRA Panel of Arbitrators denied Claimant Charles Schwab's claims.

Bill Singer's Comment

Is this a joke or is this really FINRA's idea of quality control when it comes to the issuance of its FINRA Arbitration Decision

Let's start off with the stark reality of what we know about this lawsuit. One of FINRA's largest member firms, Charles Schwab & Co., apparently sued a customer (or former customer) for over $108,000. Although broker-dealers sue customers and former employees everyday on Wall Street, the more common scenario is for customers and former customers to sue the firms. The only reason for noting that distinction is to underscore that the FINRA arbitration under discussion is not one initiated by an unhappy customer but by an unhappy broker-dealer.  Moreover, this is not a dispute over chump change but concerns Schwab's attempt to obtain six-figures worth of alleged damages, interest, fees, and costs. 

When stepping back and taking a hard look at the dynamics at play, we are struck by the fact that Respondent Cervantes represented himself and was confronted with not only the demand for about $108,000 in damages linked to some options transaction but also the fees and costs incurred by Schwab in pursuing those damages. In most forms of litigation involving similar themes, Schwab's demands for the kitchen-sink of damages and reimbursement are fairly normal; however, let's not lose sight of the fact that FINRA arbitration of customer disputes is mandatory and that FINRA arbitration does not come with the panoply of constitutional and procedural protections of court proceedings. 

So . . . what the hell was this arbitration about? The only thing we know is presented in this section of the FINRA Arbitration Decision:


Claimant asserted the following cause of action: breach of contract. The cause of action relates to the exercise and sale of Respondent's Cheesecake Factory Employee Stock Options from his brokerage account maintained by Claimant.

Unless specifically admitted in the Statement of Answer, Respondent denied the
allegations made in the Statement of Claim.

READ the full-text Schwab v. Cervantes

How about I play the wizened professor and you play my brilliant student?  In order to pass my course, please answer the following questions:
  • What were the terms of the alleged "contract" that Claimant Schwab sued under?
  • What aspects of the alleged "exercise and sale" of the Cheesecake Factory employee stock options from Respondent Cervantes's Schwab brokerage account caused the alleged breach?
  • How was the alleged $$107,704.11 in damages calculated?
  • Was there any dispute as to whether Claimant Schwab was authorized by Respondent Cervantes to exercise and/or sell the stock options?
The above questions matter because Wall Street has foisted a mandatory arbitration system on the backs of public customers and industry persons. Those folks under the yoke of FINRA arbitration might prefer to have their disputes handled elsewhere. Those folks might prefer to have their day in court  . . . literally. Alas, it's pretty much a take-it-or-leave-it proposition that manifests itself as a mandatory FINRA arbitration. Good luck trying to open a brokerage account with any FINRA member firm if you decide to strike out the mandatory arbitration clause in the new account agreement.

Why do I make such a stink about this particular FINRA Arbitration Decision when, in fact, the industry member firm lost, and lost decisively?  I do so because I wonder how many public customers faced with similar allegations at Schwab and other brokerage firms are stampeded into settling when they might be better off taking the fight to the mat -- even if that means representing themselves.  I also raise my complaints about FINRA's quality control in its Decisions in order to embolden other arbitrators to do a better job communicating the underlying facts and rationale for their awards. Regular readers of the Blog know my familiar refrain: We need more content and context.

Imagine that you are another Schwab public customer and the brokerage firm is complaining to you about the exercise and/or sale of employee options in your brokerage account. Assume that you just may not be able to hire a fancy-schmanzy, high-priced attorney like Bill Singer to defend you and you opt to represent yourself against Schwab's lawyers. Don't you think it might be helpful and instructive to find out if there is a pattern of employee stock options misconduct by Schwab that is common among other cases?  A great starting point in that research would be to read FINRA's online arbitration decisions and see if there is some guidance from prior cases. If nothing else, such online information would help you figure out whether you might be better advised to settle and to provide you with a likely range of dollars to offer. 

Yes . . . I know . . . there are many who disagree with me about Wall Street's system of mandatory arbitration.  

Some of the disagreement is based upon the notion that arbitration is supposed to be an "alternative" to more lengthy, more legalistic, and more costly court proceedings. That's a fair point if the alternative proves to offer those enhancements. 

Some of the disagreement is voiced by folks who I dismiss as apologists for mandatory arbitration. Those defenders of the system likely dismiss me as a mere gadfly or chronic complainer.  Been there, done that. It's ongoing trench warfare.

Given the critical role that Wall Street plays when it comes to the life-savings of millions of investors, FINRA Arbitration Decisions must be mindful of the mandatory nature of the arbitration process and strive to offer meaningful content and context to those trapped within the forced system of dispute resolution. Yes, Charles Schwab lost its case against Cervantes but that's not enough to point at as justification for issuing a Decision that comes off as an indecipherable facade by which the desired secrecy of mandatory arbitration is furthered. 

At the end of the day, you be the judge.  Submitted for your deliberation is the published FINRA Arbitration Decision in Schwab v. Cervantes