Your margin positions have been liquidated to meet a margin call despite the fact that you and the brokerage firm had established a pattern of meeting such calls extending to a longer period of time than was set forth in the margin agreement that you signed. Or your broker says she will wait until a certain time for you to wire funds to your account to prevent what’s called a “margin blowout,” but despite your meeting the deadline, the firm blows you out anyway. Do you have a case, even with the one-sided wording of all margin agreements? Perhaps.
Under margin rules, a customer must, within a short time after purchase of a stock on margin, either pay for that security or put up adequate collateral in a margin account to secure a loan from the brokerage firm for that purchase. A brokerage firm’s house maintenance margin rules (after the initial federal margin requirements) require the customer to maintain a certain level of collateral equity in a margin account. Should the customer fail to put up sufficient capital or fail to provide additional capital when necessary, the brokerage firm has the right to sell as much of the customer’s securities as will bring that customer’s account into conformity with margin requirements. Customer losses incurred from margin sell-offs are inherently difficult to arbitrate because it was the brokerage’s firm’s funds that were loaned to the customer, brokerage firm margin agreements are comprehensive in the rights they give firms when margin deficiencies arise and arbitrators tend to be influenced by contract terms over the reality of the customer-broker relationships.
The most common problem involving a margin account occurs when the broker did not explain to the customer, or the customer just did not understand, that the portfolio of stocks put up as collateral could be liquidated to meet margin calls. Even if the margin agreement was signed by the customer, he or she may have had no understanding of what the small print meant. In this scenario, a customer may bring an arbitration against the broker and the brokerage firm due to the unsuitability of margin for that customer.
While, historically, these types of margin liquidation cases have been difficult for customers to win – due to the iron-clad nature of the margin agreement and regulatory structure that has provided brokerage firm wide leeway in liquidating margin accounts as they see fit – there are instances where a customer can recoup losses due to broker (and/or firm’s misconduct.
For instance, if a person associated with the brokerage firm told the customer that, as long as additional funds were received by a certain time, the account would not be sold out. This is known as a “verbal trump” case, in which the employee’s representation could “trump” the written margin contract. Despite the fact that many, if not most, margin agreements specify that the terms of the contract cannot be changed by an associated person’s verbal statement, some arbitrators are receptive to the argument.
Have you suffered losses due to forced liquidations in your margin account? If so, you will need experienced counsel who have faced large brokerage firms and are familiar with the stringent standards imposed by margin agreements. Contact Kaufmann Gildin & Robbins LLP for a complimentary consultation.