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What are an investor’s rights when a brokerage firm seeks to liquidate a portfolio with margin in a rapidly declining market?

The answer is: it’s complicated.

Take last month when following the April 2 “Liberation Day” the Dow Jones Industrial Average fell by almost 2,000 in a few days. If your account had substantial margin borrowing, you likely received a “Margin Call” from your brokerage firm.  Under the Firm’s “Customer Agreement” , the Firm has the right to immediately liquidate stocks or bonds in your account to protect the Firm against incurring a loss.

An investor may be forced immediately to sell “low basis” stock and incur an unwanted capital gain. Bonds and other liquid assets could also be immediately sold at a loss.

As with the “Liberation Day” crash , The Dow Jones made back all of its losses in a few weeks, but the poor margin investor who was liquidated during a “Margin Blowout” was saddled with losses and could not enjoy the market’s recovery.

Does an investor have any legal recourse to recoup the losses from her broker in a FINRA Arbitration case ? The answer is “maybe”

A brokerage firm has a fiduciary duty to put the customer’s interest ahead of its own.

If the customer had other assets to pledge ( say, another account with substantial liquid assets ) and she advised the firm that she would agree to provide additional collateral for the margin loan, a FINRA Arbitration panel could conclude that the firm violated its fiduciary duty and award the customer’s losses. This is particularly so when the harm to the customer is substantial and avoidable, such as when a big tax hit would be incurred.

If there had been a “course of conduct” where a firm had previously allowed a customer to bring in “new money” and avoid a margin call, the firm may be found to have acted unreasonably in issuing an abrupt margin call.

Then there is the situation where the margin call “notice”  (an email or call) was issued precipitously and didn’t give the customer sufficient time to stave off a margin call.

If you find yourself in a “Margin Blowout” situation, it’s best to contact a FINRA Arbitration attorney or investment fraud attorney to discuss  your legal rights.

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