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Investor Protection

Was Broker Done-In By Negligence and a Customer's ‘Bait and Switch’ Tactics?

December 2, 2019

by Howard Haykin



In March 2017, a broker was fired by Morgan Stanley for executing transactions in a customer’s IRA account based upon instructions he received from the customer’s wife – which she was not authorized to provide. Over a 4-year period (January 2013 through March 2017), the broker reportedly traded mutual funds in the husband’s IRA account, and he facilitated 32 distributions (totaling $317,000) from the IRA to the couple’s joint bank account.


The broker also received a $5,000 fine and a 90-day suspension from FINRA, the securities regulator – which seemed justified (if not somewhat light) given the fact he was negligent in accepting instructions from an unauthorized individual, regardless of her relation to the account holder.


"Completing the tri-fecta," the customer filed legal action against the broker in October 2017, claiming $1.9 million in losses from unauthorized trading and withdrawals from his IRA account by the wife and the broker over a 7-year period - from 2010 to 2017. That case is pending.



SUSPICION AROUSED, ALONG WITH A PARALLEL.    Though I profess no sympathy for the broker in his yet-to-be-resolved case with the husband, I’m left with some nagging doubts about the customer (husband) and his possible motives for filing claims against the broker. SPECIFICALLY ...


  • How do we get from $317,000 in unauthorized in distributions (FINRA’s findings) to his claim for $1.9 million in losses?


  • How is it possible that, over a 7-year period, he never noticed any large, unusual and/or apparently unauthorized transactions in his IRA account or the couple’s bank account?


  • Is it possible the customer and his wife sought to ‘bait and switch’ the broker - just as another couple had done years earlier when they had incurred significant "unauthorized trading losses?" Here's how that earlier couple's case played out:


A man, accompanied by his wife, met with a broker to open a securities account for himself. The man noted that his wife, who was silent throughout the meeting, was a very knowledgeable investor.
After the account was opened, the wife began phoning-in large and speculative trades, telling the broker that she had her husband’s approval to do so. The broker accepted the orders and executed the trades. [Big lapse in judgment.]
For a while the trades were profitable. However, when the market tanked and the account was decimated by significant losses, the husband claimed that the broker's unauthorized trading caused his losses. The ploy worked, as the husband (couple) recouped his (their) their losses.



[For further details on the featured case, click on FINRA Case #2018057579701.]