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Stockbroker Excel Error And Clients Liquidation Losses
December 8, 2016
A stockbroker made a computational mistake on an Excel spreadsheet and erroneously told her clients that their accounts were worth $120,000 less than was true. Thereafter, the clients liquidated their holdings and purportedly sustained a loss. Right up front, let me confirm that there is no question whatsoever that the stockbroker goofed and conveyed the inaccurate account valuations to her clients. All of which suggests that this is something that should have settled quickly. Surprisingly, this one went to trial.
We got the uncontested Point A of a clear-cut mistake in computation. Then we got the Point C of the liquidation of the accounts and some likely losses. What we don't got and what's going to prove to be a fascinating issue is Point B, which determines whether the stockbroker's mistake caused the clients' account-liquidation damages.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2015, public customer Claimants case asserted this claim (as set forth in the preliminary portion of the FINRA Arbitration Decision:
Claimants alleged that in 2008, Blount failed to execute investment changes to move their positions from equity investments to defensive stocks and bonds. In addition, Claimants stated that Blount made a substantial computational error in their investment schedule in February 2009, which understated the amount of Claimants assets by more than 19%. Claimants further alleged that had they known of this misstatement, they would have not liquidated all of their accounts
In furtherance of their claims, Claimants asserted breach of fiduciary duty; failure to execute; negligence; and negligent misrepresentation .At the close of the hearing, Claimants requested damages from $333,260.12 to $405,896.73 plus fees and costs. In the Matter of the FINRA Arbitration Between Larry A. Koch, Julie M. Koch, and Koch Partners, L.P., Claimants, vs. UBS Financial Services Inc. and Susan Lee Blount, Respondents (FINRA Arbitration 15-00401, December 6, 2016).
Expungement Requests
Respondent UBS and Respondent Blount generally denied the claims, asserted affirmative defenses, and requested the expungement of the arbitration from Respondent Blount's and an unnamed party's Central Registration Depository records ("CRD").
Claimants objected to Blount's request for expungement but did not oppose the unnamed party's request for expungement
Award
The FINRA Arbitration Panel denied Claimants' claims.
The Panel recommended the expungement of Respondent Blount's CRD based upon the following rationale:
On or about February 20, 2009, Blount made a computational error on a schedule of values of Claimants' accounts. This schedule was prepared as an Excel spreadsheet. On February 24, 2009, Blount presented this schedule to Claimants at a meeting to discuss Claimants' investments. The computational error arose from a somewhat anomalous characteristic of Excel Software: a failure to add within the total value, accounts next to which an asterix had been placed. The computational error understated the total value of the accounts by approximately $120,000. Had Claimants not had the benefit of contemporaneous documentation, which was reviewed by Blount with them at the February 24, 2009, meeting, they may have been lead to believe that they had losses in excess of $120,000. However, other documentation was provided to them at the February 24, 2009, meeting showing the correct total of their accounts within the UBS system. Nonetheless, assuming that Claimants were misled by the Excel spreadsheet, Claimants, in fact, discovered the error by February 27, 2009. Between February 24, 2009, and February 27, 2009, Claimants took no action whatsoever in reliance on the erroneous account value document. Specifically, no trades whatsoever were executed. After they discovered the error, Claimants took no action, at any time, in reliance on it. On or about March 6, 2009, Claimants, for reasons unrelated to the error, liquidated some, but not all, of their accounts. On or about May 19, 2009, Claimants went back into the market, reinvesting the liquidated account proceeds.On or about February 16, 2015, Claimants initiated this action. This was approximately two weeks before the action would have been time-barred by operation of FINRA Rule 12206. By their Statement of Claim and throughout the hearing, Claimants claimed damages on account of the incorrect schedule of values. They contended that they would not have liquidated the accounts but for the erroneous schedule of values. Importantly, Claimants grossly overstated their damages in the Statement of Claim and through extensive testimony at the hearing. Claimants claimed a loss in value of their accounts from the date of their partial liquidation on or about March 6, 2009, until the date of initiation of their action on or about February 16, 2015 (almost 6 years), contending that they would not have partially liquidated their accounts had they been provided a correct schedule of values. Claimants' measure of damages and the testimony and documents purportedly supporting it, were considered by the Panel to be grossly unreasonable and unbelievable. This finding affected all aspects of the Claimants' credibility and claim.
As to the unnamed party seeking expungement, the Panel recommended the requested relief based upon the following rationale [NOTE: Although the unnamed third party is actually named in the FINRA Arbitration Decision, the BrokeAndBroker.com Blog has redacted his name below]:
REDACTED was present and ready to testify, but Claimants represented that his testimony was not necessary. Claimants stipulated that they had no opposition whatsoever to the request by UBS on behalf of REDACTED for expungement. REDACTED had been introduced to Claimants on or about May 1, 2009, approximately 65 days after the alleged conduct that Claimants asserted to be wrongful. REDACTED was not involved in any respect in the alleged conduct that Claimants asserted to be wrongful. Claimant Larry Koch testified that in May of 2009, he "told Jay [REDACTED] he was a great guy," but that UBS would not honor the claim against Blount. For that reason, Claimant Larry Koch removed the accounts from REDACTED and UBS. No allegations whatsoever were made or implied that REDACTED was at all involved in the asserted wrongful conduct or otherwise conducted himself in an inappropriate manner
Bill Singer's Comment
I will be the very first to acknowledge that, at times, I can be really, really pissy when it comes to complaining (which, also at times, it appears that I do endlessly) about the lack of clarity in any number of published materials from Wall Street regulators and arbitration forums (or, for those of you who prefer, "fora"). Taking all of that into account, I applaud this FINRA Arbitration Panel for going the extra distance to offer us some meaningful content and context, and to publish their rationale. The problem for me, however, is that after reading and re-reading much of what's in the FINRA Arbitration Decision, I still don't think I'm getting it.
Here's what I understand:
On or about February 20, 2009, Respondent Blount made a mistake in computing on an Excel spreadsheet the valuation of Claimants' accounts. In all fairness to Blount: Been there, done that.
To compound her computational mistake, Blount presented the Excel spreadsheet to Claimants at a February 24, 2009, meeting. At that meeting, the mistake too the form of understating by $120,000 the valuation of Claimants' accounts.
It's at this point in the underlying fact pattern that the Decision loses me.
Picking up the thread, we are informed that:
[H]ad Claimants not had the benefit of contemporaneous documentation, which was reviewed by Blount with them at the February 24, 2009, meeting, they may have been lead to believe that they had losses in excess of $120,000. However, other documentation was provided to them at the February 24, 2009, meeting showing the correct total of their accounts within the UBS system . . .
What??? Unless I misunderstand, the Decision asserted that at the same meeting where the erroneous Excel spreadsheet with the $120,000 understated value was presented to the Claimants, those same Claimants had the "benefit of contemporaneous documentation," which allowed them to dispel the $120,000 understatement. Seems to me that notwithstanding the mistake by Blount that the Claimants knew that the Excel spreadsheet contained a $120,000 error.
In the face of the above conclusion, the Decision then states:
Nonetheless, assuming that Claimants were misled by the Excel spreadsheet, Claimants, in fact, discovered the error by February 27, 2009.
Huh??? I thought that the Decision had earlier argued that at the February 24th meeting that the Claimants were shown the erroneous Excel spreadsheet but also reviewed other materials that conclusively demonstrated the error. Why are we then being asked to "assume" the Claimants were misled by the spreadsheet?
Further complicating our comprehension of the underlying facts, the Decision asserts that it was only sometime in March 2009, when:
Now, please, don't misunderstand, I do get the Panel's point about why they recommended dual expungements. The premise was that the Excel spreadsheet did not appear to have prompted the liquidations. What comes off a bit fuzzy is what, if anything, Blount's mistake had to do with the cited losses. As I comprehend the Panel's explanation, Blount made a mistake that was, in part, caused by the often quirky operation of an Excel spreadsheeet, an issue with which I am all too familiar. I also get the point that the erroneous account balances on the spreadsheet were shown to the Claimants and, contemporaneously with that presentation . . . and this is where I lose my level of comfort. At this point, did the Claimants also know, without a doubt, that the spreadsheet was wrong and that their accounts had $120,000 more than indicated? Assuming that was the case, did the Panel conclude that the Claimants were exercising an abundant amount of bad faith in suing for the losses they had sustained when they liquidated their accounts? As clearly stated in the Decision:[C]laimants, for reasons unrelated to the error, liquidated some, but not all, of their accounts. On or about May 19, 2009, Claimants went back into the market, reinvesting the liquidated account proceeds.
[B]y their Statement of Claim and throughout the hearing, Claimants claimed damages on account of the incorrect schedule of values. They contended that they would not have liquidated the accounts but for the erroneous schedule of values. Importantly, Claimants grossly overstated their damages in the Statement of Claim and through extensive testimony at the hearing . . .
Thus, we arrive at the end of my puzzlement. For those of you wondering why I have embarked upon this nit-picking journey, let me pose the following:
Assuming that three FINRA arbitrators heard a case in which it was clear that:
- a Respondent had made a mistaken calculation pertaining to account valuation,
- said mistake did not prompt any conduct that reasonably incurred losses in a Claimant's account,
- Claimants had "grossly overstated their damages," and
- Claimants' damages occurred "for reasons unrelated to the error"
[C]laimants' measure of damages and the testimony and documents purportedly supporting it, were considered by the Panel to be grossly unreasonable and unbelievable. This finding affected all aspects of the Claimants' credibility and claim . . .