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There are lawsuits in which it's pretty clear that we're dealing with an innocent victim. Imagine a pedestrian simply walking down the sidewalk and he gets hit by a car, which was cut off by a cab, which was rear ended by a bus, which was swerving to avoid hitting a bicyclist, who was forced out of the bike lane by a parked ambulance handling a medical emergency. Somebody's got to pay the injured pedestrian. In a recent FINRA customer arbitration, a public customer relied upon the valuation of his bonds as posted on his brokerage firm's website. Those prices may not have been accurate. The brokerage firm argued that the customer had "options" for verifying the accuracy of the bond prices.The brokerage firm argued that it had merely reposted prices provided to it by an exchange. What's an arbitrator to do?
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2018, Claimant Jandt representing himself pro se sought $5,000 in compensatory damages based upon his assertion that Respondents Scottrade and Riney were negligent:
for not updating accurately the value of his Toys-R-Us bonds, which stayed at $65.75 from September 8, 2017 to September 14, 2017, when Claimant logged onto his online "position" account upon which he relied.
In the Matter of the FINRA Arbitration Between Ronnie Jandt, Claimant, vs. Scottrade Inc. and Rodger O. Riney, Respondent (FINRA Arbitration 18-00299, June 27, 2018).
Respondents generally denied the allegations and asserted various affirmative defense. As set forth in the FINRA Arbitration Decision:
Respondent denied liability because the value of the bonds was provided to Scottrade by Intercontinental Exchange, Inc. ("ICE") and Scottrade used the End of Day pricing supplied by ICE to update Claimant's online "position" account. Secondly, Respondent argued that Claimant had other options to verify the accuracy of the prices that Scottrade published to Claimant's account. . .
In response to Respondent Riney's Motion to Dismiss, the sole FINRA Arbitrator dismissed Claimant Jandt's claims against Respondent Riney. As explained in the FINRA Arbitration Decision:
Claimant joined Riney because he was the Chief Executive Officer ("C.E.O.") of Scottrade. Claimant's complaint is that Scottrade did not reflect accurately the pricing of the Toys-R-Us bonds on a daily basis and Riney, as C.E.O. of Scottrade, should be held responsible for that failure. Riney had no interaction with Claimant or his account . . . .
Riney had no association with the prices that were posted for the Toys-R-Us bonds in Claimant's account. Riney meets the qualifications under FINRA Rule 12504 for being dismissed from the case because he was not associated with Claimant's account, securities, or conduct at issue. If there was an error in pricing the Toys-R-Us Bonds, it appears the error was committed by ICE and Riney had nothing to do with the issue.
The Arbitrator found Respondent Scottrade liable and ordered it to pay to
Claimant Jandt $5,000.00 in compensatory damages and a $175 reimbursement for filing fees. Although Respondent Scottrade had argued that Claimant Jandt had other options to verify the accuracy of his Toys-R-Us bonds, the Arbitrator noted that the firm never claimed that notice of such options was provided to Claimant when he logged in to his account. The FINRA Arbitration Decision further explains in part that:
[N]o claim was made by Respondent that the prices published by
Respondent on Claimant's online position account was an accurate reflection of what
Claimant would have received for the sale of his bonds during that time period.
Ultimately, the Arbitrator found that the evidence showed that:
[S]cottrade used the information from ICE for posting the End of Day prices of the Toys-R-Us bonds. Furthermore, ICE verified that the prices posted for the days in question by Scottrade are the same prices that ICE gave to Scottrade.
Bill Singer's Comment
Unfortunately for Scottrade, ICE was not named as a Respondent or relief party in the FINRA arbitration, and that's likely because it may not have fallen under FINRA's jurisdiction. Accordingly, the sole FINRA Arbitrator is admonishing Scottrade that as between you and your customer Jandt, you should bear the financial burden for the questioned bond pricing and whatever losses it caused. As between Scottrade and ICE, the FINRA Arbitration Decision may prompt the broker-dealer to sue the exchange for indemnification/contribution.
An unsatisfying aspect of the Decision is that it doesn't explain how Jandt incurred losses because the Toys-R-Us bonds' price "stayed at $65.75 from September 8, 2017 to September 14, 2017." That's an odd omission of content and context. How did Jandt incur a loss by relying upon one week's worth of valuation? What was the amount of Jandt's loss? Given that the Decision asserts that "ICE verified that the prices posted for the days in question by Scottrade are the same prices that ICE gave to Scottrade," did ICE or Scottrade or Jandt ever demonstrate that said prices were inaccurate? Alas, we are left to guess.