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FINRA Arbitrators Put It There In Disputed AMZN Options Trade
July 28, 2021
You ever read something and you think that you understand what happened but when you go back and re-read the same document, you realize that you assumed a lot of stuff that wasn't in there and, geez, the more I read this thing, the less confidence that I have with what I'm being told happened because I don't think that what they meant is what they said, but if that's the case, then I don't think that they said what they meant, but if they did, I'm not quite sure that it makes sense but for the fact that I still think that I intuit what went on here even if I can't actually explain it. And thus we begin the tale of a recent public customer's FINRA Arbitration.
Case in Point
In a FINRA Arbitration Statement of Claim filed in February 2021, public customer Claimant Eldereiny asserted breach of contract; abuse of fiduciary duty; constructive fraud; financial exploitation or financial elder abuse; fraudulent or intentional misrepresentation; negligence and omissions. Claimant Eldereiny sought an Order for Respondent TD Ameritrade, Inc. to return 6,000 shares of Amazon.com, Inc. stock ("AMZN"); $1,443,716.19 in 2016 "seized profit" plus interest; $159,000 in 2019 "deprived profit"; $50 million in treble damages; $50 million in punitive damages; fees, interest, and costs. In the Matter of the Arbitration between Misbah A. Eldereiny, Clamant, v. TD Ameritrade, Inc., Respondent (FINRA Arbitration Award, 21-00370)
https://www.finra.org/sites/default/files/aao_documents/21-00370.pdf
Respondent TD Ameritrade generally denied the allegations and asserted various affirmative defenses.
The 2011 Purchase (or not) of 6,000 Shares of AMZN
At issue in this arbitration was Claimant Eldereiny's alleged 2011 purchase of 6,000 shares of AMZN. As best can be discerned from the FINRA Award, Claimant seems to argue that sometime in 2016, "Respondent fraudulently stole the shares and covered up the theft and fraud with false documents." at Page 2 of the FINRA Award.
In contrast, Respondent TD Ameritrade asserted that Claimant did not own 6,000 AMZN shares after 2011 and that his "assertions of fraud and theft thereafter, allegedly arising from the earlier transactions and in 2016, are demonstrably inarticulate, false and impossible, and not supported by the account documents;" at Page 2 of the FINRA Award. Beyond attacking the substance (or lack thereof) of Claimant's claims, Respondent further argues that the events at issue transpired over six years before the February 2021 filing of Claimant's Statement of Claim and, accordingly, are ineligible for FINRA Arbitration pursuant to FINRA Code of Arbitration Procedure for Customer Disputes Rule 12206: Time Limits.
Motion to Dismiss
On May 28, 2021, Respondent filed a Motion to Dismiss citing the six-year eligibility limit set forth in FINRA Rule 12206.
The FINRA Arbitration Panel dismissed without prejudice Claimant's claims in accordance with FINRA Rule 12206.
Say What?
The FINRA arbitrators offered, in part, this underlying fact pattern:
Claimant's investment activities consisted mainly in option contracts in a self-directed account at Respondent. He neither sought nor received investment advice or assistance of any kind from Respondent and claimed he was an experienced options trader. On Friday, January 14, 2011, with no significant position in the stock, Claimant bought two "Puts" of AMZN, which gave him the right to sell 6,000 shares on Friday, January 14, 2011, the same day, which the account initiated for him to avoid market loss (when, he says, he "forgot" about them). The sale is clearly shown on his TD Ameritrade account statement for the month of January 2011. The account was thereupon rendered deficient by 6,000 AMZN shares. (Claimant does not acknowledge this sale of shares.) Just as clearly, Claimant (or the account automatically on his behalf) bought 6,000 shares of AMZN stock on Tuesday, January 18, 2011 (after a holiday weekend), to reconcile the trade.The Puts that Claimant bought were "naked" or uncovered, because he did not own the underlying shares. The two Puts cost him $6,900 and $6,000, respectively, that's all. So when he exercised the Puts and sold 6,000 shares for $1.14 million, he had to purchase an equivalent amount to use for the sale (at the lower market price of $1.135 million), which Respondent argued is what happened, with Claimant pocketing the price difference. There was never an independent purchase of AMZN shares; Claimant did not have the money and they were not found in his portfolio after January 2011.
Although disputing the conclusion that the purchase and sale were equalized, when asked during the telephone conference on the Motion to Dismiss about the source of funds for the alleged separate purchase, Claimant could not answer. But the answer is obvious from the temporary Put sale proceeds which his account matched to his pending purchase, and offset them, consummating the Put transaction and bringing the account back to zero AMZN shares.The summary first page of 58 pages in the TD Ameritrade account statement for January 2011 shows a "total value" for Claimant's stocks and options at the end of the month at only $777,792.81 - far below the $1.14 million for which the AMZN shares had been purchased and sold in order to cover the Puts - because he no longer had the shares. Subsequent pages of the TD Ameritrade statement show the actual purchase and exercise of the Puts (page 23), the sale of the AMZN shares (page 30), and the purchase of the same (page 33) for the wash.Claimant has never explained how he could have consummated the Puts without selling the very same 6,000 AMZN shares he purchased. It may be that he does not understand how a Put works. Respondent's statement for the month of January 2011 shows both the purchase and sale while the third-party Gainskeeper's documents offered by Claimant do not, without explanation.Since Claimant never had a continuing interest in 6,000 shares of AMZN stock, they could not have been "fraudulently" taken from him in 2016 as alleged. If, on the other hand, Respondent's 2011 statement is fraudulent and Claimant did NOT sell the shares (contrary to the clear documents, common sense, and the nature of Puts), that wrongful reporting happened more than 10 years ago.Hence, the Statement of Claim does not furnish a basis for arbitration that could have occurred within the last six years.
Ummm . . . what? I gotta tell ya, I really don't have any idea what the hell the arbitrators are talking about here.
Bill Singer's Comment
Assuming that Claimant's two AMZN puts each covered 3,000 shares (at a cost to him of $6,900 and $6,000 ($12,900 total)), then he had the right to "put" 6,000 shares of AMZN to a Put seller with an open contract, or Claimant could go into the market and sell his two Puts as part of a closing transaction. In the absence of Claimant selling or exercising, his total loss would seem to be capped at his purchase price of $12,900.
The Panel references some avoidance of a market loss -- a loss of what . . . the $12,900 options premium? Assuming that Claimant forgot that he had just paid $12,900 for two AMZN Puts, was January 14, 2011 the Expiration Date? That's an important fact. If it wasn't, then what market loss was in need of being so urgently avoided -- and by the sale of what? Are we selling the two Puts? If Claimant bought the right to Put 6,000 shares of AMZN, on what basis was there an apparent short sale of AMZN shares undertaken in his account? Not saying that TD Ameritrade did anything wrong, but I am saying that the Award sure as hell prompts far too many questions and asks us to make far too many inferences.
So . . . at the end of business on January 14, 2011, the Award asserts that Claimant is short 6,000 shares of AMZN for total proceeds of $1.14 million; however, on January 18, 2011, Claimant bought 6,000 shares of AMN at $1.135 million in an apparent cover of the short. Seems like Claimant made about $5,000 on the covering purchase. Why do I seem so lost by the Panel's narrative? Howasabout you consider this statement:
There was never an independent purchase of AMZN shares; Claimant did not have the money and they were not found in his portfolio after January 2011.
at Page 3 of the FINRA Arbitration Award
In what the arbitrators may think succinctly clears the air, they offer this:
Since Claimant never had a continuing interest in 6,000 shares of AMZN stock, they could not have been "fraudulently" taken from him in 2016 as alleged. If, on the other hand, Respondent's 2011 statement is fraudulent and Claimant did NOT sell the shares (contrary to the clear documents, common sense, and the nature of Puts), that wrongful reporting happened more than 10 years ago.Hence, the Statement of Claim does not furnish a basis for arbitration that could have occurred within the last six years.
at Page 4 of the FINRA Arbitration Award
Why would a customer need to be long any shares of any stock simply because they bought an expiring Put? Among the choices available to such a purchaser:
- deliver subsequently acquired shares as against the open Put contract; or,
- sell a Put as part of a closing transaction; or,
- let the Put expire without an exercise.