Securities Expert Witness


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Quoted in the Wall Street Journal September 24, 2018

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Douglas Schulz, CRCP


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The authors have taken the rules and regulations of the brokerage industry and put them in laymen’s terms. -- Professor William C. Tyson, The Wharton School & The Law School of the University of Pennsylvania


The Book, Brokerage Fraud is a must read for all compliance professionals and brokerage firm's compliance and legal departments.

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This book is a timely wake up call to the brokerage industry to clean up its ways. -- George D. Mullen, Vice President UBS PaineWebber


Tracy Stoneman and Douglas Schulz certainly know what Wall Street brokerage firms wish you didn't. -- Evan Cooper, Editor-in-Chief, On Wall Street, Co-Author


This book can save you thousands of dollars and loads of headaches! -- Jordan E. Goodman, author of Everyone's Money Book


Had "Brokerage Fraud" been available to my wife and I eight years ago, it may very well have saved us the fortune we lost to a mercenary industry that promotes itself as caring and responsible, when in fact it cares mostly for itself.


"Brokerage Fraud" is frank and friendly, organized, comprehensive, easy to digest -- and quite unique, too, because the distinguished authors tell all about an autonomous, all-powerful institution that routinely sheers the uninitiated."


". . . I am an attorney and an investor. Yet, I must say that each chapter of 'Brokerage Fraud' brought new information and insight that is invaluable . ."


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PERILS OF THE NET TRADER

Can you imagine going to the doctor and being told that you have a cancerous growth in your arm and you if you don't have it removed, you will die? Based upon the doctor's representation, you have your arm removed - only to find out after the operation that what the doctor told you was wrong. You were merely suffering from tennis elbow. When you confront the doctor, he says, "Hey, we make mistakes all the time. We can't be held responsible. I guess you are screwed. I hope this doesn't mean I can't still be your doctor."

Sound like a nightmare? Welcome to the world of Internet trading. Allow me to give you the specifics of a case in which I am currently involved. The investor, who we shall call Mr. Smith, entered an online order through his account at Ameritrade to sell short 400 shares of a stock after the market closed. Shortly thereafter, he received a written notice on his screen saying that his order had "expired." In reliance on this representation, Mr. Smith re-entered the exact, same order. The next day, much to his shock, he discovered that both orders were executed, thereby doubling his trade. To complicate matters, a debit balance was created in Mr. Smith's account and he received a margin call. Mr. Smith could not afford to pay off the debit balance. So Ameritrade not only sold the duplicate order, it wiped out his entire account.

Mr. Smith wrote a letter to Ameritrade in which he very succinctly laid out the facts of what happened. Since Ameritrade erroneously reported that his first order had expired, when it obviously had not because it went through the next day, Mr. Smith quite fairly asked that he be put back in the position he was in before the duplicate order.

The response from Ameritrade's "regulatory specialist" was somewhere between comical and ridiculous. First, Ameritrade admitted in its response letter, "The Internet site may have temporarily reflected an 'expired' notification for [the] order." Okay, so we have an admission that what Mr. Smith says happened, in fact, happened. Notice the distancing that Ameritrade employed in referring to "the Internet site." It was Ameritrade's order status screen that reported the false information. The remaining three pages of Ameritrade's response was much like the doctor's response above…we make mistakes all the time and you can't hold us responsible. What made Ameritrade's response comical is that with the intermingled brush off of the client, it continually bragged about being "the most customer-friendly discount brokerage service." In a crowning blow just after the words, "You are responsible for both orders," the firm closed with the following:

I am sure you will agree that Ameritrade, through its use of technology, has helped you gain a powerful command over your investments and lowered your cost of investing. But I also want you to be assured that we are here to provide the highest level of services on a personal basis.

Whoever wrote this letter must have been the same technologically oriented person who sent Mr. Smith the mistaken notice that the order had expired. Just as the expired representation was false, this letter couldn't be further from the truth. Mr. Smith is clearly powerless. His cost of investing was not lowered - he was damaged to the tune of thousands of dollars through no fault of his own. And Mr. Smith's opinion of Ameritrade's service level is…well…not fit to be published.

Back to our doctor story, you can rest assured that as a lawyer, I would be filing a medical malpractice case and the jury would be awarding large sums of money for the missing arm. As a securities attorney, I can say that Ameritrade's unique defense that it simply can't be held responsible for its own negligence is not going to fly. Yet, this defense is one that is being used throughout the Internet industry. The results of this debate are still being tabulated, as cases against Internet trading firms are still in their infancy. These cases, like cases against regular brokerage firms, are also in arbitration, as opposed to court. Many arbitrators decide cases based on their noses. What I mean is that they view their role as "doing the right thing", as opposed to strictly following the law. So, if something just doesn't smell right, they will often find in favor of the investor. When it comes to many of the defenses of Internet trading firms, something not only smells - it stinks.

The securities industry is the most highly regulated industry in America. But the Internet firms are trying to wiggle out from under the scrutiny of regulators through this invented theory that if the client enters the trades through a computer, then all responsibility rests with the client. I could draw a thousand analogies where this business practice can't be allowed or accepted. It would create total mayhem in the securities business. Internet trading is growing at alarming rates. If firms are allowed to provide their clients with misleading, false, negligent information, and get away with it, the investing public is in for quite a roller coaster ride. Stay tuned to Perils of the Net Trader, Part III.
Tracy Pride Stoneman is a Colorado Springs attorney specializing in investment related complaints.

 

Preparation of this article was assisted by Douglas J. Schulz, a registered investment advisor and former stockbroker residing in Westcliffe, Colorado.



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