Tastyworks Eats $2 Million Worth Of Not-So-Tasty ZOOM Options

August 31, 2022

In today's blog, we got a tasty bit of litigation involving a popular brokerage firm that got stiffed by one of its customers. How the jaw-droppin' $2 million debit arose is set out in the arbitration award's fact pattern. As to why that huge debit was not covered by margin maintenance or risk management is not explained. A lot of painful lessons all around -- and some unanswered questions.

2021 FINRA Arbitration Statement of Claim

In a FINRA Arbitration Statement of Claim filed in March 2021, FINRA member firm Tastyworks, Inc. asserted breach of contact against customer Respondent Thrower. Claimant sought $1,999,743.48 in damages plus interest, expenses, and fees. In the Matter of the Arbitration Between Tastyworks, Inc., Claimant, v. Jonathan Thrower, Respondent (FINRA Arbitration Award 21-00715).

Gettin' ZOOMed

As to why Tastyworks hit its customer Thrower with a nearly $2 million breach claim, the FINRA Arbitration Award asserts in part that:

The cause of action related to Claimant's allegation that Respondent purchased multiple option positions in Zoom Video Communications Inc., and defaulted on his obligations under account agreements entered into between Claimant and Respondent by failing to pay the debit balance owed on his accounts and failing to meet margin and maintenance requirements.

Apparently, Tastyworks sued Thrower because he seems to have bought "multiple" option position in Zoom (stock symbol "ZM"). With the onset of Covid in 2020, Zoom's videotelephony and online chat services became the go-to resource for many during the pandemic. Around October 2020, ZM was trading over $550 a share but starting sometime around July 2021, the shares have declined from about $370s range to under $100. https://www.google.com/finance/quote/ZM:NASDAQ?sa=X&ved=2ahUKEwj2vqDCm9v5AhUQkokEHQH1CXUQ3ecFegQIKBAY&window=5Y  

SIDE BAR: If you're not familiar with Tastyworks, consider this content on Tastyworks' "About Us" webpage

We believe in do-it-yourself investing. We think controlling your own money can be more rewarding than relying on money managers or robo-advisors who put your portfolio on autopilot.

That's why tastyworks gives you every edge possible with the technology, rates, and support that help you succeed more easily on your own. We're as serious about your money as you are, and we work for you who are brave enough to take your finances into your own hands.

. . .

We helped pioneer options trading technology for the retail trader

There was no brokerage or software to help us trade how we knew we could. So we built a firm with the services we needed and a platform with the features we wanted to do it our way. We even traveled the world to share our success and to show people of all types that they could trade like us and win at it. After being made an attractive offer to sell the brokerage firm, there was much contemplation about the decision. Ultimately, it was an offer we couldn't refuse. After all, we're traders..

For more about the firm's background, watch:

Let's Go to the Video(conferencing)

In a bit of irony, on January 7, 2022, Tastyworks filed a Motion Requesting a Remote Videoconference Final Hearing. And then the FINRA arbitrators waited for a response from Thrower but nothing was forthcoming.. On January 19, 2020, the FINRA Arbitration Panel granted Tastyworks' motion for videoconferencing. 

Hello? Hello?? Anyone there???

As the FINRA arbitration case moved into May 2022, Respondent Thrower had not complied with his obligation to respond to Claimant's Discovery demands -- and by May 20, 2022, the Panel granted a Motion to Compel Respondent's compliance. And, again, the FINRA arbitrators waited. But no Discovery response was forthcoming from Thrower, and the FINRA Arbitration Panel granted Tastyworks' Motion for Sanction and precluded Thrower from presenting evidence. 

2022 FINRA Arbitration Award

In somewhat anticlimactic fashion, the FINRA Arbitration Panel found Respondent Thrower liable and ordered him to pay to Claimant Tastyworks $1,999,743.48 in compensatory damages plus $48,525.02 in attorneys' fee, and $2,000 in filing fees. 

Bill Singer's Comment

Okay, congrats to Tastyworks -- but good luck collecting some/most/all of the FINRA Arbitration Award. Ultimately, I'm dying to know why/how Tastyworks got caught holding a big but very empty bag?

How the hell did Tastyworks wind up on the short-end of a $2 million stick after a customer entered into a massive, whopping amount of options exposure on a high-flying stock like Zoom? 

Did someone at Tastyworks think that Thrower had the financial wherewithal to cover his Zoom positions in the event that things went into the crapper? 

What happened with the firm's margin maintenance requirements?

Don't get me wrong and don't misunderstand my questions: Wall Street is loaded up with all sorts of margin and margin maintenance rules and requirements. Let's just assume that those were all satisfied when Thrower initiated his Zoom positions at Tastyworks and as he maintained same. After some 40 years in the biz, I'm still fascinated as to how an individual customer blows up in such dramatic fashion. Sadly, the FINRA Arbitration Award doesn't delve into all the intricate compliance and regulatory issues.

Tastyworks Eats $2 Million Worth Of Not-So-Tasty ZOOM Options (BrokeAndBroker.com Blog)

Unsettling Settlement Puts FINRA's Board of Governors in Troubling Light (BrokeAndBroker.com Blog)

San Bernardino County Man Sentenced to 14 Years in Federal Prison for Multimillion-Dollar Investment Fraud and Cheating on His Taxes (DOJ Release)

SEC Charges Florida Man for His Role in $196 Million Ponzi Scheme (DOJ Release)

Arizona and California Men Sentenced for $20 Million Investment Fraud (DOJ Release)

'Modern-day Bonnie and Clyde' admit to fraud charges related to pilfered mail, stolen funds / Defendant faces up to 30 years in prison (DOJ Release)

Georgia Man Sentenced to Over 7 1/2 Years in Prison for Synthetic Identities Scheme That Defrauded Banks Out of Nearly $2 Million (DOJ Release)

California Man Arrested for $7 Million Securities Fraud (DOJ Release)

SEC Charges Advisory Firm and Executives with Devising an Elaborate Scheme to Defraud Clients out of More Than $75 Million (SEC Release)

SEC Files Subpoena Enforcement Action Against Issuer for Failure to Produce Documents (SEC Release)

SEC Charges Hedge Fund Portfolio Manager with Fraud (SEC Release)

FINRA Arbitrators Award About 2/10ths of a Percent of Claimants' Damages Demand Against Raymond James and Rep
In the Matter of the Arbitration Between Christina and Erik Elwell, Claimant, v. Raymond James Financial Services, Inc., Wells Fargo Advisors Financial Network, Wells Fargo Clearing Services, LLC, and Daniel Lawrence Pimental, Respondents (FINRA Arbitration Award)

FINRA Fines and Suspends Former Mutual of Omaha Investor Services Rep for Sending Customer Info Via Email
In the Matter of Kyle Luebeck, Respondent (FINRA AWC)

FINRA Fines and Suspends Former Huntington Rep for Tax Preparer OBA
In the Matter of Ossama Mohamed Helal, Respondent (FINRA AWC)

FINRA Fines and Suspends Former Thrivent Rep for Sales Coaching/Training OBA
In the Matter of Simon Dude Granner, Respondent (FINRA AWC)

FINRA Fines and Suspends Former Joseph Stone Rep for Willfully Failing to Disclose the Judgment, Two Liens, and Bankruptcy Petition
In the Matter of Christopher Stephen Perrillo, Respondent (FINRA AWC)