Blog by Bill Singer Esq WEEK IN REVIEW

January 16, 2021

( Blog)
The nature of a so-called "demand" loan is that you're not entitled to notice. It's a pay up when we demand repayment. Wall Street's margin loans are creatures of the same stripe. You are extended a loan by your brokerage firm, but if your maintenance margin drops below what is required, the firm can sell whatever needs to be sold in order to protect itself. The firm may give you notice. It may not. Okay, sure, the firm has to exercise reasonableness and good faith, but when a market is crashing and your assets dwindling and full panic mode sets in, you'd be surprised how reasonableness and good faith get stretched. In a recent FINRA arbitration, the onerous nature of margin loans came into play.
The South Park Gnomes had Phase 1: Collect Underpants. The Gnomes had Phase 3: Profit. What the Gnomes never had -- could never quite figure out -- was Phase 2: How do you manage to turn a profit from stolen underpants? In a recent lawsuit brought by a former Wells Fargo employee, the defendants wanted the court to find that there was an enforceable arbitration agreement. They had some Forms U4. They had FINRA's rulebook. They also had a former regulator called NASD and a former employer whose name had changed. Problem was, where the hell was Phase 2?
In theory, arbitration has its merits. In practice, arbitration is rarely the byproduct of free negotiation but too often the result of a default, take-it-or-leave-it contract. Consequently, most modern-day arbitration should likely be called "mandatory" arbitration, and we should fear its use as a tool in furtherance of inequality, be the victim a consumer or an industry employee. A recent racial discrimination case sheds an unflattering and likely unwanted light upon Wall Street's use of employment offers containing pre-fabricated, so-called arbitration "agreements."