A Marginal FINRA Arbitration With A $44.99 Twist At The End

Claimant Saul Crafton asserted that Respondent TD Ameritrade Clearing, Inc. had wrongfully liquidated Bank of America common stock shares in his account without authorization.  Specifically, Crafton complained that Respondent raised margin requirements and sold securities out of his margin account without notice to him or opportunity to deposit adequate additional funds or securities.  As a consequence of TD's actions, Claimant alleges that he lost profits because the liquidated shares later increased in value.  Claimant sought $16,695.00 in damages or reversal of sale of his Bank of America shares. In the Matter of the Arbitration Between Saul Crafton, Claimant, and TD Ameritrade Clearing, Inc. , Respondent (FINRA Arbitration 09-06201, April 19, 2010)

Broad Right of Protection

Respondent TD countered that it had a contractual right to undertake various margin transactions without any notice to Claimant, regardless of whether TD had previously given margin notice.  Moreover, Respondent asserted that it retained broad rights to effect certain margin transactions for its own protection, as is typical in the industry. The Arbitrator statesd that the Claimant did not introduce any evidence proving that Respondent's margin actions at issue were not reasonably undertaken to protect TD's interests. 

Bill Singer's Comment: If TD had given prior notice to Claimant, I suspect that Respondent would have characterized the head's up as a "courtesy" rather than a binding, contractual obligation.  Further, TD would likely have argued that such a courtesy did not modify the written, executed customer/margin agreements, which generally need to be amended pursuant to a writing that is executed by both the client and brokerage firm.  As such, the theory here is likely that we don't have to provide notice, the fact that we did was just a courtesy, that courtesy did not create a new legal contract between us requiring ongoing notice, and you have a legal obligation to know the status of your account on a real-time basis and ensure that there is adequate margin maintenance at all times -- otherwise, we reserve the right to sell out your account to protect us against margin losses.  

Failure to Cover

Claimant apparently transmitted a letter on February 27, 2009 (a week after the disputed sell-out) that indicated that Bank of America shares were then trading at about the same price when TD undertook the dispute sell-out.  Claimant's letter further indicated that he did not want to reacquire Bank of America shares because of some perceived tax consequences.  Accordingly, Claimant did not purchase the Bank of America shares and mitigate (or "cover") his then alleged damages as calculated from the date of the disputed sell-out.

The Arbitrator deemed the Claimant's failure to "cover" was fatal to his recovery of damages for lost profits on the securities sold.  Further, the Arbitrator implied that Claimant had not presented sufficient facts upon which to base a claim for the alleged losses arising from the contested sell-out.

In an interesting "however," the Arbitrator ordered Respondent to refund to the Claimant the $44.99 in commissions charged for the sell-out.  The Arbitrator ruled that in charging a commission on the sale (undertaken without notice to Claimant, without opportunity for the Claimant to post margin, and for Respondent's own protection), Respondent charged a fee that was not expressly authorized by the margin agreements in the record.

Bill Singer's Comment: Margin liquidations are a common source of customer complaints.  Many customer beliefs about how margin calls are supposed to be made do not reflect the legal and regulatory requirements.  Let me briefly try to clarify some misconceptions.

Depending on the circumstances in your securities account (equity, margin requirements, etc.), your Broker-Dealer (BD) can generally sell securities in your account without your agreement or prior authorization when the equity in your account is deficient.  If the equity in your account falls below the legally proscribed margin maintenance requirements or the BD's "house" maintenance requirements (the latter may often be more stringent than the legal minimums),your BD can without prior notice to you sell the securities in your account to cover the margin deficiency. While many BD's will send courtesy notices to clients prior to undertaking such margin liquidations, those notices are not legally required.

Similarly, many customers believe that they are entitled to an extension of time on a margin call if they simply ask for one. While an extension of time to meet initial margin requirements may be available to customers under certain conditions, a customer is not legally entitled to an extension.

What if the forced sale doesn't raise enough cash?  You will be responsible for any resulting deficiency.