A panel of Financial Industry Regulatory Authority arbitrators ruled against Charles Schwab & Co. and its subsidiaries TD Ameritrade Clearing and TD Ameritrade in a dispute with a group of investors, AdvisorHub reported.
The arbitrators ordered the firms to pay $4.4 million in compensatory damages plus more than $92,000 in costs to the claimants, the majority of whom were retired teachers in their mid 60s to 70s. They alleged that Schwab failed to put in proper safeguards to prevent them from concentrating their investments in potentially risky “inappropriate holdings” such as structured products, non-traditional and leveraged exchange-traded funds and proprietary ETFs. The group was investing funds that they had been paid from a state retirement pension.
The 27 claimants alleged breach of fiduciary duty, negligent supervision, violations of securities laws and other claims, and requested at least $3 million in damages, as well as compensation for lost income.
The panel of two public and one non-public arbitrators denied requests for punitive damages, treble damages and attorneys’ fees.
The lawyer for the investors, Michael Bixby, contended that his clients did not fully understand the complex structured products their money was being invested in, and that Schwab should have done more to prevent them from purchasing the products.
Schwab failed “to implement a guardrail in place in order to ensure that these people should be permitted to trade in these types of complex products,” Bixby said, adding that the products were “worst-of” auto callable notes tied to highly volatile, speculative small-cap stocks, many of which lost “essentially 100% of their principal value.”
Bixby said he is pleased with the award and that it covers his clients’ full losses of principal.
Schwab denied the allegations, with a firm spokesperson saying, “We empathize with these investors, but the decision was legally wrong.”
“All investment choices were made by the claimants and their independent financial advisor and not Schwab, whose sole role was as a custodian of the accounts,” the spokesperson added. A source close to Schwab told AdvisorHub that the firm is assessing steps it can take to appeal the arbitration decision.
Handling financial services disputes requires counsel with a significant understanding of the industry, the laws, rules and regulations that impact our clients and the forums in which disputes are adjudicated. At Hyman Cotter, our attorneys’ unparalleled litigation experience comes from leveraging their industry-specific knowledge developed from working at firms such as Morgan Stanley, UBS Financial Services and serving as outside counsel for some of the world’s largest law firms, and through prior affiliations with the SEC. For more information about our arbitration and litigation services, please contact us at (833) 665-0784 or through our online contact form.
