Unhappy Customers Pull Out All the GameStops In FINRA Arbitration Win Against Charles Schwab

April 12, 2022

It's not just Charles Schwab or Robinhood. It's not just GameStop. It's not all the fault of Reddit or social media. To the contrary, Wall Street expanded to a point where its operational capacity doesn't keep pace. In the rush to cut commissions, expand online trading, and cater to those eager to "play" the stock market, brokerage firms are frequently overwhelmed by surges in volume or computer outages. Sure, there are times when it's just the nature of technology. More recently, a finger might even be pointed at COVID. But where are the industry's regulators? Where are the consequences for a lack of planning or a lack of funding or a lack of management? In a recent lawsuit against Schwab, customers raise many of these issues -- and not for the first time . . . and likely not for the last time.

Case in Point

In a FINRA Arbitration Statement of Claim filed in May 2021, public customer Claimants asserted negligence; breach of contract and covenant of good faith and fair dealing; and breach of fiduciary duty. Claimants sought compensatory and punitive damages, interest, fees, and costs.

In the Matter of the Arbitration Between Chad Durrance and Leslie Durrance, Claimants, v. Charles Schwab & Co., Inc., Respondent (FINRA Arbitration Award 21-01181)

https://www.finra.org/sites/default/files/aao_documents/21-01181.pdf

As asserted in the FINRA Arbitration Award:

[T]he causes of action relate to Claimants alleging that Respondent: failed to maintain an adequate infrastructure and trading platform; prevented Claimants from entering orders to sell Claimants' entire GameStop Corporation ("GME") position; failed to timely place Claimants' trades; did not provide proper support and resources; did not have an adequate risk management system or controls in place; and did not satisfy industry standards.

Respondent Schwab generally denied the allegations and asserted affirmative defenses.

Award

The FINRA Panel of Arbitrators found Respondent Schwab liable and ordered the firm to pay to Claimants $214,640.00 in compensatory damages.

Bill Singer's Comment

The Durrances claimed in part that Schwab had "failed to maintain an adequate infrastructure and trading platform." Yet again, we have an alleged lack of operational capacity. We're hearing that term with more frequency. Unfortunately, we ain't hearing all that much from Wall Street's regulators about how they're going to address the industry inability to scale up to demand. It was only about a year ago that I wrote about a fairly similar dispute involving Schwab: "Schwab Sued Over Allegedly Malfunctioning Order System" (BrokeAndBroker.com Blog / March 23, 2021)

https://www.brokeandbroker.com/5760/schwab-order-system/

As I noted in part in my March 2021 blog:

This case highlights issues that are not unique to Schwab but have become common occurrences among brokerage firms that offer so-called discount, online trading. In this age of zero-commission-day-trading, operational capacity is an issue that has stepped to the forefront. Each day, when customers log on to their accounts, they are immediately confronted with warnings about unprecedented trading volume, brokerage employees working remote, and all sorts of indications about why the brokerage firm may not be able to timely execute an order or timely confirm same or timely update your buying power or timely disclose your current positions. Sure, go ahead and trade blindfolded!

Frankly, that's just not acceptable. Worse, Wall Street's regulatory community is all too aware of the operational capacity stresses among the industry's key retail players; however, rather than act decisively, the industry's regulators prefer to fall back to their same old, tired reactions. They issue notices reminding broker-dealers to remain compliant. They post purported consumer warnings about the risks of trading. They produce podcasts and videos. What doesn't come from Wall Street's regulatory community are solutions.

What would some meaningful solutions look like? For starters:
restrict a firm from opening more retail accounts until it invests sufficient cash and human assets into its trading platform and operational capacity;

require X number of customer service reps per Y number of customers;

monitor the delays between a customer phoning a firm's customer service and the time it takes for that call to be handled -- and NOT ending with the time the call is "picked up" but immediately put on further hold;

monitor the level of traffic coming into a firm's online helpline and chat features to detect growing issues;

monitor online communities and websites that report about brokerage firm outages;

require firms to post weekly statistics about the time to answer an average customer request for help or to file a dispute about a trade-related issue;

promulgate fixed guidelines as to when a delayed response to a customer trading complaint/query is not timely and constitutes conduct inconsistent with just and equitable principles of trade; and

require firms to fully and timely repay all customer losses related to platform or operational capacity issues.