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Transfer of AMC Shares From Webull Financial to Fidelity Becomes Unfunny Comedy of Errors
January 13, 2023
In today's featured FINRA Arbitration we got a mess involving a transfer of a customer account from Webull Financial to Fidelity. We got a misspelled customer's name. We got covered calls that wound up as naked options sales. We got a busted position and a margin call. Maybe the customer sustained losses. Maybe not. And then we have a pro se customer asked to prove that a purported contract didn't exist. What we don't have are answers. That's just not acceptable when it comes to a public, published FINRA Arbitration Award.
Case in Point
In a FINRA Arbitration Statement of Claim filed in August 2022, public customer Claimant Young, appearing pro se, asserted:
unauthorized trading; breach of contract; execution error; and margin calls. The causes of action relate to Claimant's AMC Entertainment ("AMC") shares.
In the Matter of the Arbitration Between Justin N. Young, Claimant, v. Webull Financial LLC, Respondent (FINRA Arbitration Award 22-1856)
https://www.finra.org/sites/default/files/aao_documents/22-01856.pdf
Claimant Young sought $17,150 in compensatory damages. Respondent Webull Financial generally denied the allegations and asserted affirmative defenses.
FINRA Award
The Sole Public FINRA Arbitrator denied Claimant's claims.
Bill Singer's Comment
The Misspelling of a Name
Ah yes, that old meme stock AMC -- small wonder we're looking at a lawsuit involving that stock. As to what could possibly have gone wrong when trading AMC shares, this is the Arbitrator's rendition:
From the papers which have been filed and upon which this case is to be decided, it appears that Claimant requested that the assets in his self-directed brokerage account with Respondent (i.e., 3,500 AMC shares and some other assets) be transferred to Fidelity Investments. A mistake was made in the spelling of Claimant's name, either by Claimant or by Fidelity Investments, as a result of which the requested transfer of the AMC shares was delayed. Claimant apparently believed he still had the AMC shares in his account with Respondent whereupon Claimant, without contacting either Respondent or Fidelity Investments, attempted to sell 3,500 AMC share options from his account with Respondent. All during this time, Fidelity Investments was in the process of finalizing the transfer of the AMC shares to it. As a result, there were no AMC shares then in Claimant's account with Respondent to cover these options, creating naked short 3,500 AMC calls with no collateral to cover these naked short calls. Because this transaction exposed Respondent to significant financial risk, Respondent, as it had a right to do, reclaimed Claimant's 3,500 AMC shares from Fidelity Investments and required Claimant to sell 800 AMC shares to meet the margin call of approximately $17,150.00.Subsequent to this series of events, Claimant transferred the remainder of his AMC shares to another broker, presumably Fidelity Investments, and his account with Respondent was closed.Although Claimant expresses regret at no longer having the 800 AMC shares sold to cover the naked short calls, Claimant does not articulate any financial loss for which he claims damages. Moreover, while Respondent, in its Statement of Answer, cites its compliance with all contractual documents between Claimant and Respondent and its compliance with all FINRA regulations, Claimant does not cite, in his Statement of Claim, any contract breaches, regulatory violations, or other bases for relief in Claimant's favor.Therefore, based on the papers submitted by the parties and the foregoing analysis, the undersigned Arbitrator hereby orders that the Claimant's Statement of Claim should be and hereby is denied in its entirety. . . .
A Mistake Was Made
Public customer Young decided to transfer the assets of his Webull account to Fidelity. Simple enough except, it's always the simple crap that explodes into a mess. In this case, Young's misspelled name lit the fuse. In somewhat oddly neutral language, the FINRA Arbitration Award says "a mistake was made." Indeed, one was. And as a result of this mistake, the customer thought his AMC shares had not transferred from Webull to Fidelity but were, in fact, still at Webull. Okay, sure, we could go with that but for this pregnant statement in the FINRA Award:
[A]ll during this time, Fidelity Investments was in the process of finalizing the transfer of the AMC shares to it. As a result, there were no AMC shares then in Claimant's account with Respondent to cover these options, creating naked short 3,500 AMC calls with no collateral to cover these naked short calls. . . .
The Process of Finalizing
Sorry but that language just doesn't cut it with me. Just what does it mean that Fidelity was "in the process of finalizing the transfer of the AMC shares?" In the process of finalizing? To my sensibilities, either the shares were transferred or they weren't. There is no "almost" when it comes to finalizing a transfer -- like being pregnant. More accurately, Webull and Fidelity were handling Young's request to transfer his AMC shares from the former firm to the latter. That contemplated transfer never quite got done as it was intended. Perhaps there was a lack of coordination between Webull and Fidelity and/or a lack of communication by Webull and/or Fidelity to customer Young. Regardless of where we point the finger of blame, there was a point in time when Young believed that the AMC shares were in his Webull account -- as in that they had not been transferred out to Fidelity, as in Fidelity had not FINALIZED the transfer. Fidelity may have been in the process of finalizing but, y'know, even the FINRA Arbitration Award seems to infer (or imply) that this process was fluid and not completed when Young believed that the AMC shares were still at Webull. Which explains why he placee an order with Webull to sell "3,500 AMC share options from his account. . ."
SIDE BAR: Let's cut out the crap and call it as it was:
- Fidelity and Webull were handling a requested transfer of AMC shares by their customer Claimant Young.
- The shares were in Young's Webull account.
- Claimant Young wanted them transferred to his Fidelity account.
From my perspective, either Webull or Fidelity or both screwed up with the transfer; but I sure as hell don't see how this was a problem caused by customer Young. If it was Young's fault, I wish we had some explanation in the Award.
An Apparent Belief By The Customer
Again, I'm gonna be a stickler when it comes to language in a public, published FINRA Award. The Award says that "Claimant apparently believed he still had the AMC shares in his [Webull] account." As such, the FINRA Arbitrator conceded that Claimant Young believed that the AMC shares had not transferred out from Webull to Fidelity despite the fact that those shares were apparently not at Webull when the firm accepted the covered call order to sell AMC options as against the believed-to-exist long shares. Because the shares were not at Webull, Young's ensuing sale of the covered calls turned out to be the sale of naked calls.
In considering the handling of the AMC transfer, I'm wondering if Webull may have been a tad ticked off about the customer's decision to likely/possibly close out his account and send his future business to Fidelity; and, as such, when Young mistakenly created a naked call position, perhaps Webull wasn't all that motivated to sound the alarm, send up the flares, and ring the bells. From what I understand from the arbitration fact pattern as set out in the Award, it seems obvious that Young's intent was to create a covered call position. If I'm in Operations or Compliance and I see to order to sell the calls, I might think that something is amiss and get in touch with the customer ASAP. On the other hand, that's mere conjecture and maybe Webull did try to contact Young . . . or not. As I keep saying about this arbitration, there's not enough content and context provided in the Award. Ultimately, the Award seems to imply that Webull figured it would just reclaim the AMC shares in transit to Fidelity and then require "Claimant to sell 800 AMC shares to meet the margin call of approximately $17,500."
Inarticulated Loss?
As to the no-harm-no-foul aspect of this mess the the FINRA Arbitrator seems to have adopted, here's how the Award paints that picture:
Although Claimant expresses regret at no longer having the 800 AMC shares sold to cover the naked short calls, Claimant does not articulate any financial loss for which he claims damages. Moreover, while Respondent, in its Statement of Answer, cites its compliance with all contractual documents between Claimant and Respondent and its compliance with all FINRA regulations, Claimant does not cite, in his Statement of Claim, any contract breaches, regulatory violations, or other bases for relief in Claimant's favor.
What does the Arbitrator mean when he says that "Claimant does not articulate any financial loss . . .?"
Was there or wasn't there any net loss sustained by Claimant as the result of having his covered call position busted, the underlying shares repatriated to Webull, and 800 of his AMC shares liquidated to meet a $17,500 margin call?
I mean, c'mon, Claimant is representing himself. I can't imagine that it would have been all that arduous for the FINRA Arbitrator to ask the simple, direct question of a pro se Claimant as to "what, if any, financial loss do you argue that you had sustained?" Maybe the Arbitrator did pepper Young with that question; however, it's not stated in the Award.
Notably absent from the Award is any explanation as to how we are to reconcile Claimant's demand for $17,150 in compensatory damages, with the finding by the Arbitrator that there was a sell-out of 800 AMC shares to satisfy a $17,500 margin call, and how those two facts failed to "articulate any financial loss for which he claims damages." To be clear . . . to be VERY clear . . . there may well be an explanation(s) as to why the dollar amount of the margin call did not translate into compensatory damages. I'm just arguing that FINRA should have requested the Arbitrator provide such an explanation in the Award.
I've been on Wall Street for over four decades and I can think of several scenaria whereby the existence of a margin call and the concomitant sell-out of same may not produce compensatory damages. But I don't want to play guessing games when it comes to one of FINRA's public, published Arbitration Awards. I don't want to worry that some pro se public customer got screwed because someone didn't ask a question or a Respondent was requested to submit proof -- and, for all we know, the question may have been asked and the proof submitted, but even that isn't set out in the Award.
Remarkably, we are never informed as to the price at which Claimant sold the AMC calls, the price at which the 800 AMC shares were sold, and whether Young's overall position sustained a loss or was closed out without any financial detriment. Similarly, I'm still puzzled as to why Webull allowed the uncovered calls to be sold in an account "with no collateral" and with full notice that the customer was transferring the account's assets to Fidelity. In fairness to Webull, I understand the nature of the self preservation that likely prompted the firm's prudent response to reclaiming shares in transit and closing out the naked call position. Still -- why was the client even permitted to execute the call sales given the totality of circumstances?
Ultimately, this is yet another example of horrific quality control by FINRA. Someone should have read this Award before it was published and asked the sole Arbitrator to offer just a tad more explanation so as to render the Award intelligible. As matters stand, I have a feeling that the public customer either still misunderstands what happened despite not having sustained any net loss; or, in the alternative, that the customer still misunderstands what happened and did sustain a net loss. That doesn't work for me. Sorry.