Busting a trade- Is this ilegal?

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Jul 26, 2008 8:53 am

Dear Bill;



I work in a bank. A little (5'2") older (72 yrs old) recent widow (husband passed in Dec '07) wanted to get a higher rate than the current CDs. She has only done CDs. Rates are low. We discussed and invested in a 75% bond, 10% Index, 5% International, 5% MidCap, 5% Small cap allocation of funds. A shares. She said she did not need the money. She has other assets. Had NO plans of touching the funds for 10 years. The bond fund (75%) is yielding 4.5% which we would reinvest.



4 weeks after, the investment dropped along with the market on top of the commissions she paid. She was very upset. We sat down and discussed why we invested in this allocation per long term growth not needing it for 10 plus years etc. Reiterated the reasons like I am doing with all of my scared clients. But, she was different, in addition to being a recent widow her son was diagnosed with a life threatening illness. She was unable to listen - too upset.



Forgetting I was no longer an independent rep (prior to the bank) I said I would bust the trade and make her whole. Thinking I would end up paying any loss out of my commission. If there was a gain I figured the bank would keep it.



I was told by the bank this was a terminal offense. Is this an offense? Was this in the Series 7? Is this unique to my bank. A reputable rep from an independent firm says trades do get busted on occasion. This was a one time event.



What are your thoughts?



Greatly appreciated.



Confused.



Jul 26, 2008 9:12 am

My thoughts? You asked....I can tell why you couldn't hack it as an independent. Who told you it was smart to convert an old lady from a CD owner to an equity investor? I imagine you could get terminated for negotiating a settlement, with a customer, away from the firm. You need to call whoever supervises you and follow his directions. Nothing more, nothing less.

P.S. The clients height is irrelevant.

Jul 26, 2008 9:27 am
Frank Marino:

My thoughts? You asked....I can tell why you couldn't hack it as an independent. Who told you it was smart to convert an old lady from a CD owner to an equity investor?

 
 
I'll bet you wouldn't have any problem converting an old lady from a CD owner to an equity indexed annuity owner, would ya, Frank?
Jul 26, 2008 9:56 am
Borker Boy:
Frank Marino:

My thoughts? You asked....I can tell why you couldn't hack it as an independent. Who told you it was smart to convert an old lady from a CD owner to an equity investor?

 
 
I'll bet you wouldn't have any problem converting an old lady from a CD owner to an equity indexed annuity owner, would ya, Frank?



Piece of cake. That's what EIA's were made for.

Jul 26, 2008 10:51 am

PJ, It sounds like rebating.  If I recall correctly, from the series 7 it is a no-no.  My firm wouldn't let me eat the TOA fee from an ACAT that a client was unhappy about.  Compliance called that rebating. 

 
You may have been better off pleading you case for the investment.  Good luck.
Jul 26, 2008 1:10 pm
Borker Boy:
Frank Marino:

My thoughts? You asked....I can tell why you couldn't hack it as an independent. Who told you it was smart to convert an old lady from a CD owner to an equity investor?

 
 
I'll bet you wouldn't have any problem converting an old lady from a CD owner to an equity indexed annuity owner, would ya, Frank?
 
Borker, isn't this the exact situation an EIA or fixed annuity was created for?
Jul 26, 2008 2:28 pm

Since we're on the topic, I had a guy come in the other day and show me his EIA statement and a personal check for $16,000 from the guy who'd sold it to him.

 
When the guy wanted his $100,000 back due to the "investment" not performing as he'd been led to believe it would, and then after being told he'd lose 16% to surrender fees, he threatened to sue, since he'd never been told about surrender fees.
 
So, in order to keep himself out of court, the broker wrote him a personal check to make him whole.
 
I called my compliance department, and our guy said it sounded like an out-of-court settlement, but not an illegal act. I disagreed but didn't take it any farther.
 
What do you folks think?
Jul 26, 2008 2:33 pm
Borker Boy:

Since we're on the topic, I had a guy come in the other day and show me his EIA statement and a personal check for $16,000 from the guy who'd sold it to him.

 
When the guy wanted his $100,000 back due to the "investment" not performing as he'd been led to believe it would, and then after being told he'd lose 16% to surrender fees, he threatened to sue, since he'd never been told about surrender fees.
 
So, in order to keep himself out of court, the broker wrote him a personal check to make him whole.
 
I called my compliance department, and our guy said it sounded like an out-of-court settlement, but not an illegal act. I disagreed but didn't take it any farther.
 
What do you folks think?



I think you're lying.

Jul 26, 2008 3:32 pm
Borker Boy:

Since we're on the topic, I had a guy come in the other day and show me his EIA statement and a personal check for $16,000 from the guy who'd sold it to him.

 
When the guy wanted his $100,000 back due to the "investment" not performing as he'd been led to believe it would, and then after being told he'd lose 16% to surrender fees, he threatened to sue, since he'd never been told about surrender fees.
 
So, in order to keep himself out of court, the broker wrote him a personal check to make him whole.
 
I called my compliance department, and our guy said it sounded like an out-of-court settlement, but not an illegal act. I disagreed but didn't take it any farther.
 
What do you folks think?
 
Even if this event is true, you're taking one Dateline-esque EIA example and stereotyping all EIA sales like this.
 
It's like saying that you have a 72 year old widow that has only invested in CD's and you put her into an A share mutual fund portfolio with bond and equity exposure.  Then the markets go down and she gets pissed.  So even though it may have been inappropriate for her, does it make all A share mutual fund portfolios wrong?  Oh wait, that kind of sounds like the original poster's example....
Jul 26, 2008 4:38 pm
Frank Marino:
Borker Boy:

Since we're on the topic, I had a guy come in the other day and show me his EIA statement and a personal check for $16,000 from the guy who'd sold it to him.

 
When the guy wanted his $100,000 back due to the "investment" not performing as he'd been led to believe it would, and then after being told he'd lose 16% to surrender fees, he threatened to sue, since he'd never been told about surrender fees.
 
So, in order to keep himself out of court, the broker wrote him a personal check to make him whole.
 
I called my compliance department, and our guy said it sounded like an out-of-court settlement, but not an illegal act. I disagreed but didn't take it any farther.
 
What do you folks think?



I think you're lying.

 
I really wish I was.
 
(Is that you again, Bobby?)
Jul 26, 2008 6:35 pm
Borker Boy:
Frank Marino:
Borker Boy:

Since we're on the topic, I had a guy come in the other day and show me his EIA statement and a personal check for $16,000 from the guy who'd sold it to him.

 
When the guy wanted his $100,000 back due to the "investment" not performing as he'd been led to believe it would, and then after being told he'd lose 16% to surrender fees, he threatened to sue, since he'd never been told about surrender fees.
 
So, in order to keep himself out of court, the broker wrote him a personal check to make him whole.
 
I called my compliance department, and our guy said it sounded like an out-of-court settlement, but not an illegal act. I disagreed but didn't take it any farther.
 
What do you folks think?



I think you're lying.

 
I really wish I was.
 
(Is that you again, Bobby?)



Your wish has come true. You're lying. ARe you stupid enough to think that we're gonna believe that some guy would go to the trouble to show you that he was duped? Noone is going to come to you and admit that they did something that stupid (even though it didn't really happen anyway).

You asked what we thought. I said I thought you are lying. Why would you argue with someone who did what you asked him to do?

Jul 26, 2008 11:17 pm
Jul 27, 2008 11:33 am

Now I have had a chance to calm down and relook at my situation.



Ref: Is busting a trade illegal?



Actually, I DID not bust the trade, my boss did. I asked him to do it and he did it. Therefore, I would think I am covered for any wrong doing. The client did not put anything in writing. There are No written complaints. She verbally said she was not ready to jump into investments.



To me this was an act of compassion, understanding, and an opportunity for further training and educating the client to do what is right for them. (Her husband had just passed and one of her sons learned he had a terminal illness).



Also, strategically this is an opportunity to gain the business from her 4 successful sons ie. a doctor, attorney etc. Showing compassion and understanding to their mother showed them that there is some heart in this industry.



And what is right for her is exactly what I recommended (75% bonds and 25% equities. It was right for her age, timeline, and her expressed desire for growth. No one loss any money - just commissions.



Now, how can a company like Sears, build a business in its Hey Day by taking back merchandise from the client? They were known for taking back merchandise that the customer did not even buy at the store.



Why would allowing this client (unique situation) who was recently widowed to get out of her trade any different? No one suffered. No dollars lost on either side except the commission.



The intent was to listen to her, educate her, and then to provide her and all her grown children with the right solutions. This was an opportunity to lose a battle but to win a war. Other investments such as Annuities and Insurance provide a free look period. So it is not unusual for someone to change their mind about something even if it is good for them.



I do not get what might be wrong, evil about this situtation as implyed by my current employer... after the fact.

Jul 27, 2008 11:52 am
pjrrider:

Now I have had a chance to calm down and relook at my situation.



Ref: Is busting a trade illegal?



Actually, I DID not bust the trade, my boss did. I asked him to do it and he did it. Therefore, I would think I am covered for any wrong doing. The client did not put anything in writing. There are No written complaints. She verbally said she was not ready to jump into investments.



To me this was an act of compassion, understanding, and an opportunity for further training and educating the client to do what is right for them. (Her husband had just passed and one of her sons learned he had a terminal illness).



Also, strategically this is an opportunity to gain the business from her 4 successful sons ie. a doctor, attorney etc. Showing compassion and understanding to their mother showed them that there is some heart in this industry.



And what is right for her is exactly what I recommended (75% bonds and 25% equities. It was right for her age, timeline, and her expressed desire for growth. No one loss any money - just commissions.



Now, how can a company like Sears, build a business in its Hey Day by taking back merchandise from the client? They were known for taking back merchandise that the customer did not even buy at the store.



Why would allowing this client (unique situation) who was recently widowed to get out of her trade any different? No one suffered. No dollars lost on either side except the commission.



The intent was to listen to her, educate her, and then to provide her and all her grown children with the right solutions. This was an opportunity to lose a battle but to win a war. Other investments such as Annuities and Insurance provide a free look period. So it is not unusual for someone to change their mind about something even if it is good for them.



I do not get what might be wrong, evil about this situtation as implyed by my current employer... after the fact.



So... If I invest with you and my portfolio goes down in value, you will refund my money?  Sounds good to me.  Sign me up, I'm goin all in.  I'll take some GM, Bank of America, some Countrywide bonds and any other crazy idea you have.

Jul 27, 2008 12:01 pm

There was money lost.  You stated that the portfolio had gone down.  Now you only lost commissions, but the bank lost the difference in the investment value.  You requested that it be done, so you busted the trade.  From the banks perspective, you failed to make the client understand the volatility involved and the result was a loss to the bank.  From the banks perspective, you should have put her in an appropriate investment in the first place, and this is what would have shown the widow's children how great you are to earn their business.  By asking the bank to bust the trade, you have admitted wrongdoing, like it or not.

Jul 27, 2008 1:32 pm

Actually, I DID not bust the trade, my boss did. I asked him to do it and he did it. Therefore, I would think I am covered for any wrong doing. The client did not put anything in writing. There are No written complaints. She verbally said she was not ready to jump into investments.

 
That probably does make it legal and your company will be taking your commissions for some time now.

To me this was an act of compassion, understanding, and an opportunity for further training and educating the client to do what is right for them. (Her husband had just passed and one of her sons learned he had a terminal illness).

No it wasn't.  It was an act of CYOA on the part of your b/d.  They don't want to be sued and they probably would have been and they would have lost big time. 


WTF were you thinking??? Taking a senior citizen and moving her from CD's which she has probably been investing in for the last 50 years and putting her into equities in a BEAR MARKET.   In addition a senior citizen woman who probably never made any financial decisions on her own and who was mentally and emotionally unstable having just lost her husband and now her son is dying.  ARE YOU INSANE!!!
 
I assume she signed all the required disclosures that your Bank requires.  Not insured by FDIC etc etc etc so at least they could have that to fall back on when you went to arbitration.  But I doubt that it would have saved your ass.  Good thing she took the made whole deal.

Jul 29, 2008 3:58 pm

imo a fixed annuity would of been a more appropriate product for her. bank clients cant deal with Any Losses.

Aug 3, 2008 12:08 am

This isn't the same as "busting a trade", which usually happens because the trade was done in error.  (Example:  You meant to sell a hundred shares, rather than BUY a hundred more shares)  What you offered to do was against the rules, because you guaranteed the client against a loss, and it IS a terminal offense at every firm I'm aware of.

BTW:  I don't have a problem with the investments, per se.  When a client tells you, "I won't need the money", that gives you some license to recommend diversification beyond a laddered CD portfolio.  It's just a guess, but it's likely your manager closed out the positions and rebated the losses to keep the customer from suing, and also, well, to KEEP the customer.   I hope she doesn't tell any of her friends, though.  Word gets out that you're rebating losses in equity accounts, you'll have a long line outside your office.

Aug 3, 2008 12:17 am
Bodysurf:

This isn't the same as "busting a trade", which usually happens because the trade was done in error.  (Example:  You meant to sell a hundred shares, rather than BUY a hundred more shares)  What you offered to do was against the rules, because you guaranteed the client against a loss, and it IS a terminal offense at every firm I'm aware of.

BTW:  I don't have a problem with the investments, per se.  When a client tells you, "I won't need the money", that gives you some license to recommend diversification beyond a laddered CD portfolio.  It's just a guess, but it's likely your manager closed out the positions and rebated the losses to keep the customer from suing, and also, well, to KEEP the customer.   I hope she doesn't tell any of her friends, though.  Word gets out that you're rebating losses in equity accounts, you'll have a long line outside your office.

 
And eventually one will be a regulator from FINRA.
Aug 3, 2008 10:06 am

Yep.