Claim Scenario: The client alleges that the registered representative failed to execute simple option trades on his equity position. The client was trying to hedge himself from downside losses by implementing the use of an option strategy using calls and puts. The client alleges that the registered representative refused to execute this option strategy even though funds were available to fund these options. The client further alleges that the registered representative was vague in his reasoning for not executing these orders and due to this failed execution, the client’s stock was not hedged and suffered losses of $800,000.
The registered representative asserts that when the client
opened the account, the options principal told him that he was approved only
for Level 1 options trading (covered calls and protective puts). These trading
restrictions were confirmed in an e-mail to the client after this telephone
conversation. The client attempted to sell more call contracts than he had the
shares to cover. The trading desk refused to process the order. The options
principal reminded the client of the trading restrictions on his account and
suggested he move his account elsewhere. The account application states that
the broker/dealer “reserves the right to refuse your orders.”
Outcome: The
client’s claims were denied by the FINRA panel and expungement was recommended.
Estimated Claim Cost: $48,000 in defense costs
Loss Prevention Tip:
Explain in detail and document your conversations with clients regarding terms,
conditions and costs of a product at the time of a sale (e.g., that marketing
materials and illustrations are based on anticipated, not guaranteed rates of
return; notify the client if a surrender charge is involved and the amount).
All information provided in this blog is for informational
purposes only. The sources used are presumed accurate. CalSurance Associates,
Brown & Brown Program Insurance Services, Inc. and Brown & Brown, Inc.
will not be liable for any errors, omissions, losses, injuries or damages
arising from its display or use and will not assume responsibility for any
misguided information. No guarantees are implied.
