January 4, 2021
If you believe that you've been defrauded by your stockbroker and/or brokerage firm, you're not alone. Moreover, such a nagging suspicion is not something of recent vintage but a pox that has plagued Wall Street's houses for generations. Where there's money, there's fraud. Plain and simple. On the other hand, not all losses sustained in a brokerage account are properly ascribed to fraud. After all, you put your money down, you take our chances -- some investments make money and some end in losses. Not every hunch plays out. Not every can't-lose investment proves as such. In a recent FINRA arbitration, we see an angry investor demanding compensation from UBS Financial and her stockbroker. The sole FINRA arbitrator didn't see fraud or mismanagement but did see the unexpected impact of COVID.
Case In Point
In a FINRA Arbitration Statement of Claim filed in August 2020, public customer Claimant Roessel alleged breaches of privacy and of contract in connection with what the FINRA Arbitration Award characterizes as "Respondents allegedly commingling Claimant's funds and mismanaging various investments in Claimant's Portfolio Management Program account ("PMP Account"). Claimant Roessel sought $50,000 in compensatory damages, $2,500 in attorneys' fees, and $600 in filing fees. Notwithstanding Claimant's request for attorneys' fees, the Award asserts that she "appeared pro se." In the Matter of the Arbitration Between Angela S. Roessel, Claimant, v. UBS Financial Services Inc. and Joseph Jerome Schirripa, Respondents (FINRA Arbitration Award 20-02829)
Respondents UBS and Schirripa generally denied the allegations and asserted various affirmative defenses.
The Arbitrator's Findings
The sole FINRA Public Arbitrator Elizabeth Anne Moreno denied without prejudice Claimant's claims; and she offered this statement under the heading "FINDINGS":
The Arbitrator finds that the law does not permit Claimant to recover losses through arbitration in
the absence of an actionable misrepresentation. The arbitrator also finds that brokerage firms
are not guarantors of market performance. The securities laws are intended "not to provide
investors with broad insurance against market losses, but to protect them against those
economic losses that misrepresentations actually cause." Dura Pharmaceuticals, Inc. v. Broudo,
544 U.S. 336, 345 (2005). To "disregard the ordinary hazards of the stock market" and award
damages for losses caused by the market "would clearly constitute a windfall for the plaintiff."
Miley v. Oppenheimer & Co., 637 F.2d 318, 328-29 (5th Cir. 1981). Indeed, courts across the
country have held that losses caused by market conditions are not actionable. See Loos v.
Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014); Druskin v. Answerthink, Inc., 299 F. Supp.
2d.1307, 1339 (S.D. Fla. 2004) ("Plaintiffs have failed to allege with specificity that [d]efendants'
fraud, as opposed to general market conditions, caused the stock price to decline."); Platsis v.
E.F. Hutton & Co. Inc., 642 F. Supp. 1277, 1299 (W.D. Mich. 1986) ("[P]laintiff's monetary loss was the direct result of external market conditions and not the results of any misrepresentations
or omissions which may have been made."), aff'd, 829 F.2d 13 (6th Cir. 1987).
When the COVID-19 pandemic struck in early 2020, Claimant's PMP Account experienced
unrealized losses as a result of historically unusual market volatility. However, this unexpected
volatility was due to the health crises caused by COVID-19, a circumstance beyond UBS
Financial's control. UBS Financial cannot guarantee the performance of any investment and
neither Respondents could have predicted how COVID-19 would impact Claimant's
investments. These losses were not because of any wrongdoing.
Claimant's account statements were included in the same envelope as Claimant's daughter's
account statements simply because both reside at the same address. While household rules
provide that clients at the same registration address receive one household statement package
unless otherwise indicated at the time of setting up a client's new account, at no time in opening
her PMP Account with UBS Financial did Claimant request separate household statements.
UBS Financial never commingled Claimant's transferred funds with Claimant's daughter's
assets nor were these transferred funds ever deposited into Claimant's daughter's accounts.
Compliments to FINRA Arbitrator Moreno for penning a thoughtful and compelling rationale for her dismissal of Claimant's claims.
It is refreshing to see an articulate reiteration of the principle that "brokerage firms are not guarantors of market performance." As Moreno so aptly admonishes, securities laws are not designed to provide insurance against any and all risk -- inherent in all investments is some form of risk. For every confident buyer of a share of stock there is often a contra-party seller, who is similarly confident that now is the time to sell. On Wall Street, timing is everything. Further, for defrauded investors to prevail in their lawsuits against brokerage firms, such victims typically need to demonstrate some "actionable misrepresentation." It's not enough to point to losses and argue that such a result is proof positive of fraud by a brokerage firm and/or a stockbroker. In Roessel, FINRA Arbitrator Moreno seems to have found that the Claimant's losses were not the result of the Respondents' fraud but caused by the COVID-19 pandemic: "neither Respondents could have predicted how COVID-19 would impact Claimant's investments. These losses were not because of any wrongdoing."
An interesting aspect of this case was the odd inclusion of Claimant Roessel's UBS account statements "in the same envelope as Claimant's daughter's account statements . . ." Apparently, Claimant and her daughter both had UBS brokerage accounts, and their monthly statements for their different accounts "were included in the same envelope . . . simply because both reside at the same address." Frankly, I don't understand that policy, and I'm not quite sure why that is an acceptable practice.
The so-called "household rules" referenced in the FINRA Arbitration Award that combine statements from different account-holders into one envelope and one mailing strikes me as a horrible policy and one that would seem to run afoul of any number of acceptable compliance policies and regulatory rules. You would think that the default would always be to maintain a given customer's confidentiality by sending all account mail in a dedicated envelope to each (and only each) account-holder at the address of record. Notwithstanding the assertion in the Award that "at no time in opening her PMP Account with UBS Financial did Claimant request separate household statements," it would seem that the better practice would be to require a written request before combining different account-holders' statements into a common envelope.