Inherited brokerage account with naked calls

[Pekelo]

Not me, but this is an interesting case, so I am sharing it. Finally has been resolved, the calls went from positive to negative and margin calls AFTER the death of the owner and after the brokerage was notified of the death of the account holder. The deceased was playing a long-short strategy on AMD and Nvidia.

https://www.reddit.com/r/path%3D%252Fr%252Flegaladvice%252Fcomments%252F6hye56%252F

This is the Update post:

https://www.reddit.com/r/path%3D%252Fr%252Flegaladvice%252Fcomments%252F8sys1y%252F

 

[Pekelo]

Looks like the broker instead of opening a new account for the son and liquidating advanced instruments like options (the son wasn't cleared for those) they rolled over the position.

"The transaction shows that my dad had negative 71 of these options: NVDA Jul 21 2017 140 Call
The broker liquidated the account on June 8th."

"He (the lawyer) had dug up a version of the transfer on death contract the brokerage has and discovered that, according to the contract, the broker is responsible for closing all leveraged and margin-ed positions immediately upon notification of death."

TL;DR: OP got a 500+K settlement instead of a -75K debt before the case went to court. The brokerage acted incorrectly and in bad faith.

Edit: Lawyer was paid by contingency, so ended up with a 33% cut after the first 50K pro bono, so 150K. Not bad...

 

[zdreg]

Edit: Lawyer was paid by contingency, so ended up with a 33% cut after the first 50K pro bono, so 150K. Not bad...

and worth every penny.
( is an explanation necessary?)

 

[OptionsOptionsOptions]

• The original account was 50K.
• Why was the 500K settlement so much higher?
• Must be a typo.
  
  

 

[Pekelo]

• The original account was 50K.
• Why was the 500K settlement so much higher?

At the time of death the account was 125K. For damages, because the brokerage acted both incorrectly (against regulations) and in bad faith. You can not just throw derivatives on an unsuspected and unqualified person. That is why there are different levels of investing/trading at the brokerage, the broker wants to know if you know what you are doing.

I think they also rolled the position, without permission. As a minimum they should have closed out the naked call after they have been notified of the death. The bad faith part was that they even wanted the margin call to be inherited, when they could have just swallowed the loss.

 

[traderslair]

must suck to be a broker these days...

 

[JSOP]

At the time of death the account was 125K. For damages, because the brokerage acted both incorrectly (against regulations) and in bad faith. You can not just throw derivatives on an unsuspected and unqualified person. That is why there are different levels of investing/trading at the brokerage, the broker wants to know if you know what you are doing.

I think they also rolled the position, without permission. As a minimum they should have closed out the naked call after they have been notified of the death. The bad faith part was that they even wanted the margin call to be inherited, when they could have just swallowed the loss.

Wonder what would've have happened if there was no TOD. What if somebody died so suddenly that that person did not have time to draw up a TOD and all of sudden their next-of-kin inherited the account full of derivatives that they have no idea about. What would happen then? Without TOD, would the brokerage still be required to close out all positions?

 

[newwurldmn]

At the time of death the account was 125K. For damages, because the brokerage acted both incorrectly (against regulations) and in bad faith. You can not just throw derivatives on an unsuspected and unqualified person. That is why there are different levels of investing/trading at the brokerage, the broker wants to know if you know what you are doing.

I think they also rolled the position, without permission. As a minimum they should have closed out the naked call after they have been notified of the death. The bad faith part was that they even wanted the margin call to be inherited, when they could have just swallowed the loss.

Probably got hit with treble damages.

 

[Pekelo]

Without TOD, would the brokerage still be required to close out all positions?

I would say, only derivatives. You see everyone can open a plain stock account. Not much experience needed. Also a normal stock account fluctuate a bit but usually doesn't take a nosedive like options or futures can.

But I am just guessing here... The broker should look through the holdings and if there is a dangerous stock or too big of an exposure compared to the account size they might recommend the new owner to trim the position down.

 

[JSOP]

I would say, only derivatives. You see everyone can open a plain stock account. Not much experience needed. Also a normal stock account fluctuate a bit but usually doesn't take a nosedive like options or futures can.

But I am just guessing here... The broker should look through the holdings and if there is a dangerous stock or too big of an exposure compared to the account size they might recommend the new owner to trim the position down.

Not if the stock is VIX positions. So without a TOD, the broker doesn't have to do anything? What happens when they close the positions and the positions were losing or even margin-called? Who's gonna cover the losses? The estate? Because in this case, even if the broker did its due diligence, the positions were still losing; that call already got exercised. Even if the broker didn't roll it it was already losing money. So if the broker didn't roll it and instead closed out the losing position, then the losses would be covered by the account or the estate I guess?