CAN A BROKERAGE LIQUIDATE AN ACCOUNT WITHOUT NOTICE?
The market volatility created by COVID-19 fears has been a disaster for novice investors with securities-backed lines of credit (“SBL”) and traditional margin accounts. Many investors learned for the first time the perils of leverage and how quickly seemingly profitable accounts could go south and be forcibly liquidated by broker-dealers without notice (a “Blow-Out”), with the investor suffering substantial losses. Those equity investors, especially those with a few securities concentrated in the oil and gas, hospitality, gaming, air travel, and/or cruise industry sectors, probably suffered the most margin calls and forced liquidations in their SBL and/or margin accounts.
We have heard from many investors that when they complained to their respective brokerage firms, they were told that they signed contracts that allowed the broker-dealers to do exactly what they did to them and that they had no recourse. We have no doubt that contracts were signed with those onerous contract provisions but would question whether you have no recourse against the brokerage firm and your financial advisor. You may not have recourse for the issuance of margin calls and/or forced liquidations of all or some of your securities on short notice or no notice at all, but that is not the end of the inquiry.
The most important inquiry is what happened when the securities-backed line of credit and/or margin accounts were recommended to be opened in the first place. Should either of those leveraged accounts have been recommended at all by a financial advisor? Should the broker-dealer have even allowed you to open one of those types of accounts based upon your investment profile and financial condition? Did the financial advisor misrepresent the nature, mechanics, and/or risks of the securities backed by a line of credit and/or in a margin account? Once the accounts were opened, did the financial advisor make unsuitable securities recommendations to purchase especially volatile securities in that account? Did the financial advisor recommend that you over concentrate your portfolio in stocks in any particular sector in the leveraged account? These are all questions you should be asking yourself and an experienced securities arbitration attorney before you accept the brokerage firm’s denial of any liability for the losses you suffered.
There were many incentives from management to get their financial advisors to drive investors into securities-backed lines of credit and margin accounts. After all, the revenue derived from these interest bearing accounts has become the largest profit center for many brokerage firms. Financial advisors were encouraged to recommend credit-lines to buy houses, boats, and pay taxes when investors wanted to sell securities for those purposes. The sales pitches we heard about repeatedly followed: Why would you want to ruin your portfolio when it’s doing so well? Why sell when you can borrow from the firm, keep your stocks and bonds, and use the profits or interest earned to pay off the loans? These accounts involve leverage, and the use of any leverage in making any investment is a “speculative” investment strategy. Rarely, has any investor told us he/she heard anything from their financial adviser about risk or margin calls before they borrowed any money.
We have represented many investors who have suffered from this kind of abuse. If you are interested in learning more about these type of cases, you may want to read the following articles:
- Investors With “Blown-Out” Securities-Backed Credit Line and Margin Accounts: How Do You Recover Your Investment Losses?
- Securities-Backed Lines of Credit Can Be More Dangerous Than Margin Accounts!
- UBS Financial Services, Inc. Sued For Florida and Ohio Financial Advisor’s Alleged Misconduct Involving a Credit-Line Investment Strategy
- J.P. Morgan Sued for Edward Turley and Steven Foote’s Alleged Margin Account Misconduct
We would be glad to discuss these cases and more importantly, your case during a telephone call or meeting at our office.
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