A FINRA arbitration panel in New York ordered brokerage firm TD Ameritrade to pay $75,000 to a married couple whose account was wiped out. The FINRA arbitrators also denied TD Ameritrade’s attempt to collect an outstanding margin debt of $180,000 that TD Ameritrade claimed the couple owed. The wife testified at the FINRA arbitration hearing in early February 2020. The husband, who lives mainland China, was not permitted to travel to the United States to attend the hearing due to the COVID-19 pandemic that was ravaging parts of China.
TD Ameritrade Broker Recommended an Unlicensed Investment Advisor
Dimond Kaplan & Rothstein, P.A. filed the FINRA arbitration claim against TD Ameritrade after the couple lost their money after their TD broker recommended an unlicensed, third-party investment advisor to the couple. DKR sought damages from TD Ameritrade based on the broker’s negligent recommendation of the unlicensed investment advisor and TD Ameritrade’s negligent supervision of its broker.
Before he recommended the unlicensed advisor, the TD Ameritrade broker did not inquire about the advisor’s licensing or registration to work as an investment advisor. He also never bothered to ask about the advisor’s investment strategy or about his historic investment performance. (The broker allegedly had cut a deal with advisor to split any compensation that the couple would pay to the advisor out of any profits that the advisor may prospectively generate for the couple.)
Unlicensed Investment Advisor Lost Couple’s Entire Account
After DKR’s clients followed their TD Ameritrade broker’s recommendation, the advisor made tens of millions of dollars of purchases and sales in the couple’s small account in a matter of days. Among the securities the advisor bought were risky exchange-traded funds (ETFs) that gambled on the volatility of the S&P 500 Index. The advisor built up a massive position in the risky securities and exposed the couple’s account to catastrophic losses.
The couple did not understand the risky nature of the volatility securities that the advisor traded. Rather, they relied on the fact that their broker and TD Ameritrade had recommended the advisor, trusting that TD Ameritrade had done its homework and had recommended a trustworthy, competent advisor.
In early February 2018, stock market volatility caused enormous losses and the couple lost every dollar in their account. They also were left with an outstanding margin debt of approximately $180,000. That is, in addition to losing all of the money in their account, the couple owed TD Ameritrade $180,000.
TD Ameritrade Denied Any Responsibility
DKR filed the FINRA arbitration claim in April 2018 and TD Ameritrade filed a counter-claim, seeking to recover the $180,000 margin debt and attorneys’ fees from the couple.
Early in the case, TD Ameritrade hung its hat on the claim that its broker did not recommend the unlicensed investment advisor. But after learning that text messages revealed that the broker, in fact, had recommended the unlicensed advisor, TD Ameritrade promptly fired the broker and abandoned that defense. (The text messages also revealed that the broker had recommended multiple unapproved advisors and at least one unapproved investment.)
During the FINRA hearing, TD acknowledged that its broker’s recommendation of the unlicensed advisor violated TD Ameritrade’s rules. But TD then claimed that it could not have known, and was not required to know, of its broker’s text messages with the couple. TD maintained that defense notwithstanding that for more than 10 years FINRA has reminded brokerage firms to supervise brokers’ use of electronic devices to communicate with customers.
FINRA Arbitrators Ruled in the Couple’s Favor
Fortunately for DKR’s clients, the FINRA arbitrators accepted the couple’s theory of liability and awarded damages to the couple. The arbitrators also rejected TD Ameritrade’s efforts to recover the outstanding margin debt of approximately $180,000, presumably finding that the margin debt would not have arisen if the TD Ameritrade broker had not violated rules and recommended the unlicensed investment advisor.
If you have lost $100,000 or more in your brokerage account, contact Dimond Kaplan & Rothstein, P.A. for a free consultation. DKR’s investor rights lawyers have vast experience representing investors throughout the United States and Latin America and have recovered more than $100 million for victims of stockbroker negligence and investment fraud. Representing clients nationwide, DKR maintains offices in Los Angeles, New York, Detroit, West Palm Beach, Naples and Miami, and we represent clients nationwide. Translations services are available.