Opening Pandora's Box of Puts

August 4, 2017

A customer alleges that he lost money when the broker-dealer invested his funds without his authorization. As far as lawsuits go, that's a pretty strong case. The thing about strong cases is that they can inexplicably go off the tracks. The customer Claimant swears on a stack of bibles that he never authorized the trades and the stockbroker swears that he did. Which of the swearing witnesses a panel of arbitrators chooses to believe makes all the difference. Another oddball aspect of trying a case is that even if you prove that there was a foul, you may not be able to prove that there was harm -- or the arbitrators may view your harm as so minor that they tell you to walk it off and keep the game going. 

On Wall Street, public customers are forced to pursue their grievances through a system of mandatory arbitration at the Financial Industry Regulatory Authority. One of the glaring shortcomings of FINRA mandatory arbitration is that the decisions issued by arbitrators aren't always helpful, useful, or comprehensible. It's as if there's a secret understanding to say nothing of consequence or, okay, let's keep it to the bare minimum. All of which reminds Blog publisher Bill Singer, Esq. of a soccer match between the great philosophers of Ancient Greece and those of Germany. Sure,  everyone is giving everything a lot of thought but nothing much happens. In the end, a goal is scored but we don't quite understand why.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2016, customer Claimant Steve Boehm IRA asserted the following causes of action: violations of Section 10(b) and 10b-5 of the Securities Exchange Act of 1934; fraud; negligent misrepresentation; breach of fiduciary duty and breach of the covenants of good faith and fair dealing; negligent supervision, breach of conduct, and violation of Section 20 of the Securities Exchange Act of 1934; and respondeat superior. The causes of action related to Claimant's allegations that Respondent placed Claimant's funds in put options in Pandora stock without Claimant's authorization. At the close of the hearing, Claimant requested a range of damages from $45,921.38 to $63,407.45, plus recovery of costs relating to expert witnesses. In the Matter of the FINRA Arbitration Between Steve Boehm IRA, Claimant, vs. K.C. Ward Financial, Inc., Respondent (FINRA Arbitration 16-01522, July 24, 2017).

Respondent K.C. Ward Financial generally denied the allegations and asserted various affirmative defenses.


The sole FINRA Arbitrator found Respondent K.C. Ward Financial liable  and ordered it to pay to Claimant Steve Boehm IRA $11,460.00 in compensatory damages plus 5% interest until paid in full and $150.00 as reimbursement for the non-refundable filing fee.

Bill Singer's Comment

Never been a fan of asking for a range of damages. I understand why that could happen. I appreciate that this may well have been a case in which a range was necessary. On the other hand, it would likely have made some sense if the FINRA Arbitration Decision set forth the different considerations that warranted a low-end award of $45,921.38 and a high-end award of $63.407.45.  Even an explanation along the lines that the Burger costs you $4.49 but the Burger Deluxe with cheese, fries, tomato, and lettuce costs you $6.34 would have been helpful. 

Then there's the puzzle as to how the sole FINRA arbitrator apparently found that the customer was victimized by unauthorized trades in Pandora puts but awarded only $11,460. How do we wind up with an award of about 1/4 of the Claimant's low-end proposed damages and 1/6 of the high-end?  I mean, you know, if the arbitrator is going to reject awarding at least the bottom of Claimant's proposed damages in a case where that customer is found to have prevailed on liability, at least offer some explanation as to how you calculated the losses and why you rejected Claimant's low-end. 

Was there no Eureka! moment that the arbitrator could have shared with us?

All of which reminds me of that famous soccer match that took place years ago in Munich. An epic battle between Greece and Germany. Not that much action but a lot of pondering and thinking. When the match is over, we know there's a winner but we're not quite sure what just happened. Germany's Existentialist strikers felt no moral obligation to take a single shot and, worse, their Nihilist midfielders refused to play because they felt the game was pointless. In the end, a triumph of Stoicism!