The Discount Broker and the Senior Investor

Securities Arbitration and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

Beware of the Discount Broker and the Senior Investor:

We recently completed an arbitration hearing on behalf of a 96 year old woman, who is responsible for taking care of her third husband that has Alzheimer's and is in a nursing home.

The woman was a self-made millionaire who had traded stocks and options, on her own, for a number of years. During this period of time she dealt with both full service and discount brokerage firms. The last firm that she dealt with was a very large, highly marketed and so called "caring" discount brokerage firm.

When she opened her option account with this firm, she was required to provide the usual information sought by all firms to open such an account. So she told the firm her age (91 at the time), her prior investment experience, her net worth, income and liquid net worth as well as provided other relevant information.

What ultimately caused the problem in her case was that she requested level 4 option approval, which included the writing of naked puts.

Because of the fact that the account that she was opening was a living trust account, she was also required to sign a trust certification that the trust was authorized to use margin to trade options. Because of the fact that she did not send in the trust certification with the application, the compliance department called her and told her that if she sent the trust certification in right away, the firm would give her five free trades. What was not discussed with her is why a 91 year old woman would request approval for level 4 option trading approval.

Once the documentation was received by the firm, the head of the compliance department, who had obtained his account executive license and registered options principal license two years earlier, approved the account for the requested activity.

Subsequent to the account being established, the firm had one more direct contact with the client when a local manager contacted the 91 year old and was told by her that she was a conservative investor. This comment directly contradicted what was indicated on the account application. The manager noted the comment in the permanent records of the firm. Nothing else was done.

Because the 91 year old did not know how to use a computer to make trades every trade that was made was done by telephone with a registered representative of the firm, who never told her anything about the overall status of her account. Apparently, there was no protocol in effect to provide net equity information to the caller or to discuss any other aspect of the account unless specifically asked by the caller. If there were, it would have been abundantly clear that the 91 year old had no idea as to the risk which she was exposed to.

At the final hearing the firm disavowed any responsibility for what happened to the then 96 year old woman who had lost over $1,700,000 in less than two years. In fifteen days, in October of 2008, she lost almost $900,000.

The reason that the firm used to deny any liability was because it was a discount brokerage firm and, if the questions on the application were filled out correctly, with the minimum requirements established by the firm, the compliance department would approval the application, regardless of the woman's age.

As we all know, aging contributes to issues such as impaired reasoning and memory. Money lost in the market cannot be replaced. Medical issues might arise that need to be paid for. Consequently we would assert that there has to be some level of responsibility that firms need to assume when dealing with issues of aging and risk.

While each case is factually different, it is important for the reader, especially if you are the child or younger relative of a senior citizen, to keep in mind the moral of this story.

The decision from the arbitration panel is still pending. We will update this post when the award is rendered.

When she sent in the application to open the account, she requested that she be approved for level 4 option activity, which included naked writing in both puts and calls. This is where the problem started. If you would like to read what happened and how the firm responded read more.