Pro Se Customer Alleges Unsuitability of Self Directed Put Sales

August 13, 2019

Some litigants jump the gun in an effort to improve the so-called "optics" of litigation. In situations where two parties each have claims against the other, there's a sense that it's better to be cast in the role of the Claimant than of the Respondent. The theory is that it's better to frame the lawsuit in the language of the aggrieved rather than as the alleged malefactor. In a recent FINRA arbitration, a public customer representing himself pro se sought to recover hundreds of thousands of dollars in put-sales losses. In response to his claims, the respondent brokerage firm counterclaimed for a couple of hundred thousand in its own claimed damages. 

Case In Point

In a FINRA Arbitration Statement of Claim filed in April 2018, public customer Claimant Hu representing himself pro se asserted suitability and negligence in connection with his alleged sales of put options in the exchange traded fund ProShares Short VIX Short-Term Futures ("SVXY"). Hu sought $437,895.65 in damages plus costs and expenses. In the Matter of the Arbitration Between Jay Z. Hu, Claimant/Counter-Respondent, v. Regal Securities, Inc., Respondent/Counter-Claimant (FINRA Arbitration Decision 18-01515)

Respondent Regal Securities generally denied the allegations and filed a Counterclaim asserting that Hu had breached his August 2017 New Account Agreement when he failed to pay the unsecured debit balance in his account. The FINRA Arbitration Decision states that:

In the Statement of Answer, Respondent confirmed that Claimant opened a self-directed trading account with eOption is [sic] a division of Respondent.

Regal Securities sought $265,338.43 plus interest, attorneys fees, and expenses by way of its Counterclaim.

Discovery Disputes

After a few months of apparent haggling over Discovery, in March 2019, Respondent Regal Securities filed a Motion for the Imposition of Sanctions Against Claimant citing Hu's alleged failure to comply with Discovery orders. As explained in the FINRA Decision:

[B]y Order dated May 8, 2019, the Panel advised that the parties spent approximately 80 minutes describing the discovery process to date, and both parties agreed that the evidentiary hearing scheduled to begin July 23 could proceed as scheduled. In the Order, the Panel directed Claimant to comply with the prior discovery orders and, for Claimant's clarification, itemized the documents to be produced. The Panel also ordered the following: 

2). Regarding documents which have been failed to be produced, the Panel further orders sanctions in accordance with Rule 12212 that it will: 
A) Preclude Claimant from presenting evidence at the hearing in connection with the subject-matter of those documents, and/or 
B) Make an adverse inference against the Claimant at the hearing 

3). The Panel has deferred its assessment of monetary damages in connection with Claimant's failure to comply with the FINRA Code [of Arbitration Procedure] to the conclusion of the hearing. 

After being advised by the Respondent that Claimant had not complied with the above Discovery orders and following Claimant's disagreement with said assertion, the FINRA Arbitration Panel issued a June 4, 2019, Order, which stated in pertinent part that:

1- The Panel finds that the Claimant has continued to fail to comply with discovery orders and guidelines, therefore in addition to previous sanctions assesses a monetary penalty payable by Claimant to Respondent of $23,000. 

2- The Panel denies Respondent's request to dismiss the claims - the hearing scheduled for July 23, 24 and 25th is still on [c]alendar. 

As likely comes as no surprise, On June 27, 2019, Respondent Regal Securities filed a Request for Dismissal of Claimant's Claim citing Claimant Hu's alleged failure to comply with the FINRA Arbitration Panel's June 4th Order. In response the Panel took the request under advisement and eventually denied it.


The FINRA Arbitration Panel denied Claimant Hu's claim. 

The FINRA Arbitration Panel found Claimant Hu liable and ordered him to pay to Respondent Regal Securities:
  • $265,338 in compensatory damages plus interest
  • $43,000 in attorneys' fees; and
  • $23,000 in sanctions per the Panel's June 4, 2019, Order.
Additionally the following fees were assessed by FINRA and/or the Panel:

Claimant Hu: $1,425 Initial Claim Filing fee; $160 Discovery-related motion fee;$200 contested motion for issuance of subpoena fee; and $7,537.50 hearing session fees

Respondent Regal Securities: $2,125 Counterclaim Filing Fee; $1,900 Member Surcharge; $3,750 Member Process Fee; $40 Discovery-related motion fee; $50 contested motion for issuance of subpoena fee; and $787.50 hearing session fees.

Bill Singer's Comment

The fact that Hu's trading was characterized as "self-directed" likely increased the difficulty of demonstrating unsuitability because of the reduced likelihood that he was trading on the recommendations of Respondent Regal Securities in contradistinction to his own ideas. Given Hu's pro se status (and assuming that he is not a lawyer), his chance of winning such a claim was marginal at best.

You got to wonder what would have happened here had Claimant Hu not filed his lawsuit seeking $437,895.65 in damages, purportedly for losses that arose from put sales. Regal Securities had a $265,338.43 claim for the unsecured debit in Hu's account, but that was presented as a Counter-claim. Given the amount at issue, I'm guessing that Regal would have gone after Hu in any event. On the other hand, had Hu not fired the first salvo, who knows. If nothing else, Hu's conduct during Discovery earned him an additional $23,000 sanction. Further, if Hu had been able to settle the case, he may not have incurred some $43,000 in his adversary's attorneys' fees -- and also saved the tacked-on fees. 

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Pro Se Customer Alleges Unsuitability of Self Directed Put Sales
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