Chronology of Court Case Against TD Ameritrade
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Laurent J. LaBrie v. TDAmeritrade
Laurent LaBrie takes TD Ameritrade ("TDAmeritrade" or "TDA") to the Maryland District Court for misappropriation of $15,174 from a personal individually managed account
Civil Case #: 0804-0021814-2010
1. Laurent J. La Brie, an INDIVIDUAL and non-professional investor, maintaining a PERSONAL self-directed brokerage account with TD Ameritrade (TDA) (Account #XXX-XXXXXX) from January 24, 2006, when Ameritrade Holding Corporation acquired TD Waterhouse (where La Brie had an account) until February 2009. The account was opened with Waterhouse Securities which was acquired by TD (Toronto Dominion) in 1996.
2. TD Ameritrade, broker-dealer with principal office at 4211 South 102nd Street, Omaha, NE 68127. Resident Agent: CSC-Lawyers Incorporating Service Company, 7 St. Paul Street, Suite 1660, Baltimore, MD 21202.
3. La Brie signed a brokerage agreement with TD Waterhouse, and signed a Brokerage Agreement with TDA. TDA held all of the securities as custodian.
4. The Margin Handbook provided by TDA states that they will 'automatically exercise equity option contracts that are at least $0.01 in-the-money' and that customers must notify TDA if the customer desires otherwise. (See Exhibit A, Page 15 Paragraph 1, highlighted)
'It is our firm's policy to automatically exercise all long equity option contracts that are at least $0.01 in-the-money, and all long index option contracts that are at least $0.01 in-the-money. To exercise options outside of these parameters, or to decline the automatic exercise of options within these parameters, options owners must notify a Client Services representative of their instructions. This notification must occur by 4:30 p.m. ET on the last trading day for the option contracts.'
5. On October 27, 2008, La Brie purchased 8 Put contracts of 100 shares of UDR, Inc., (NYSE stock symbol UDR) with a strike price of $25.00 and an expiration date of January 16, 2009 (original option symbol UDRME, changed to UQWME in December 2008). The price of that contract was $9.50 per share. (See Exhibit B.)
6. UDR, Inc. (UDR), formerly known as United Dominion Realty Trust, Inc., is a self administered real estate investment trust (REIT) that owns, acquires, renovates, develops and manages apartment communities nationwide. As of March 3, 2008, the Company owned 40,226 apartment homes and had 6,184 homes under development and another 738 homes under contract for development in its pre-sale program. It is headquartered at 1745 Shea Center Drive, Suite 200, Highland Ranch, CO 80129 .
7. A Put option is an enforceable monetary contract that gives the buyer the right to sell a stock by a certain date (called the expiration date) at a certain price (called the strike price) to the seller of the Put, who must buy the stock regardless of the price of the stock on the date the put is exercised. Puts are bought and sold on national exchanges regulated by the Securities and Exchange Commission (SEC).
8. The seller of the Put contract attempts to make income in two ways: First, the seller hopes that the stock will rise in value above the exercise price, so that the buyer of the Put would have no incentive to sell the stock to the seller of the Put contract at the lower exercise price. That way, the seller of the Put makes money on stock appreciation and also gets the payment the buyer of the Put option had to pay for the right to make the seller of the Put buy the stock.
9. As an example in this transaction, if the exercise price is $25.00 per share, La Brie had the right to make the seller buy 800 shares (8 puts and 100 shares per put) for $25.00 per share from him, as long as La Brie gave his broker proper notice prior to the expiration date. If the stock price drops to $15.00, La Brie could go into the market, buy 800 shares, instantly realizing a profit of $10.00 per share, and the seller of the put must buy that $15.00 stock for $25.00 per share. Or, as La Brie directed TDA to do in this case, La Brie could borrow the stock from TDA and sell the borrowed stock to the buyer of the put, locking in the profit on the option contract vis a vis the seller of the put, but leaving La Brie in the position, by La Brie's choice, of remaining exposed to price movements on the underlying UDA stock. La Brie chose to postpone buying the UDA stock, thus remaining "short" on the stock. An explanation of 'shorting stock' is below.
10. La Brie's agreement with TDA provided specifically that if, at the expiration date, the price of the stock was more than $0.01 below the exercise price of $25.00, TDA would sell the stock to the seller of the Put, and by its agreement with La Brie, create a 'short' position between TDA and La Brie that La Brie would cover by purchasing the stock and returning it to TDA at a later time.
11. More formally, the seller of the Put contract attempts to make income on the sale price of the contract, believing that the stock will rise in price above the strike price by the expiration date, making the option valueless. The seller can then keep the 'Put option' sale price without having to deliver the stock to the seller of the put option. The buyer of the put option contract, on the other hand, believes that the stock is overpriced and will fall in price by the expiration date. The buyer of the option ( in this case Laurent J. La Brie) seeks to make money by technically exercising the option and selling the stock at the strike price which he hopes will be higher than the market is offering. Hence the importance to Laurent J. La Brie that the exercise of the option, which occurred and that TDA seeks to reverse months after the fact, not be reversed and be allowed to stand.
12. Series 7 training, licensing which all brokers must obtain, explains options as similar to a down payment on a home. If a buyer continues to follow the legal and contractual process of purchasing the house, the down payment is considered part of the purchase price, as the United States tax laws considers payments for stock options. TDA used La Brie's down payment on UDR as their own and purchased a position using the Plaintiff's money. Not only did they make the profit on the closing of the position at no risk to themselves, they stole La Brie's down payment money. It is this theft that the Plaintiff requests be rectified.
13. Based on our agreement and our previous conversations, instead of automatically exercising the options, TDA manually exercised the options on January 16, 2009. This Complaint will discuss why the manual exercise occurred momentarily, but in all events, the options were timely exercised by TDA.
14. On January 16, 2009 the closing price of UDR was $12.42, well below the strike price of $25. The contract for which La Brie had paid $7915.95 for 8 puts was now worth $10,064. On January 20, as La Brie had expected and had directed, TDA exercised the option. Unbeknownst to him, and undisclosed to him by TDA, I actually had the right to buy 108 shares per put, so the real value was higher.
15. In order to provide the shares to exercise put options, a broker lends a client the securities in what is called a short sale, which is what TDA did to La Brie to sell the stock to the put seller. This is also called a a 'short trade' and the trade was assigned Transaction # 04594471136 and CUSIP #902653104. (See Exhibit C.)
16. In a short trade an investor sells a stock by borrowing it from the brokerage house. The investor has the obligation to purchase it back and return it to the brokerage house when said brokerage house decides to sell it. The shorting investor believes that the stock is overvalued and that the price will decline. Short sellers provide more liquidity to the market. Since there is no limit to the price to which that a stock can rise, the risk to a short seller is much greater than the original funds invested and is, in fact, unlimited. Theoretically, the investor could lose his entire net worth if the stock price skyrockets due to factors like the company being acquired by another company. The investor would have to buy the stock back at whatever price the market places on it.
7. As La Brie had hoped and predicted, the price of UDR had continued to fall after January 16, 2010. On March 17, 2009 at 09:39:01 La Brie bought 800 shares of UDR at $7.40 to cover La Brie's position. The transaction was assigned number 04769636054, and listed, as expected, with the same CUSIP Number. (See Exhibit D.)
18. In total then, the Plaintiff put his own money at risk to buy the 8 puts of 100 share each for a total of $7915.95. A conversion from 100 to 108 shares per contract had occurred). La Brie gained the right to sell 864 shares of UDR at $25 per share which 864 shares La Brie could acquire for the sale for $7.40 apiece. La Brie had made $18.60 per share. Multipled by 864, The Plaintiff's gross gain was $16,070.40. La Brie had to pay $7,915.95 , including commission, for the option. The Plaintiff's profit would be $8,154.45.
19. On December 5, 2008, La Brie noticed in his account holdings on the TDA website that the trading symbol for that option had changed to UQWME and that a quote was no longer available. Becoming concerned, Plaintiff called TDA to determine the reason. At the beginning of the call, La Brie was told that it would be recorded "for quality control purposes," so La Brie fully expected this to be done. TDA has concealed the transcript of that tape and changed their purpose to 'proprietary', thus disabling the tapes' use for the purpose originally promised.
20. On multiple occasions Plaintiff has requested copies of the recordings of these conversations. These included 1) by telephone on March 27, 2009 where La Brie was informed that La Brie would have to submit a written request to the Compliance Department including the reason for La Brie's requesting the copies, 2) in writing, as requested in the aforementioned telephone conversation, by registered mail on April 8, 2009 to the Compliance Department, 3) by electronic communication on April 15, 2009 to the Office of the President, 4) in written correspondence on May 18, 2009 through the Better Business Bureau to Joseph E. Belek (Client and Regulatory Relations Analyst). In an e-mail from the Office of the President on April 16, 2009 TDA stated that they have these recordings. In their e-mail of April 15, 2009 the same individual stated that these recordings of La Brie's conversations "are considered proprietary to TDA." The Plaintiff certainly did not agree to that use of the recordings when Plaintiff permitted TDA to make the recordings. If a client by implication (no explicit consent was given by La Brie) agrees to be recorded, as TDA hopes in order to satisfy Maryland law, TDA has established the expectation by the client that the recordings will be used as TDA states. To use them otherwise renders these recorded announcements misleading. The withholding of them is spoliation of evidence supporting the facts set out in this Complaint.
21. In the conversation of December 5, 2008, La Brie spoke with the customer representative who consulted Scott Allan Cornett in their options department. The customer representative relayed the message to La Brie that all was still normal with this option and that quotes were not available because there was no trading volume for the options. The Maryland Assistant Attorney General listened to the recording and confirms this. (See Exhibit E.) These statements were misleading.
22. In fact, UDR put contracts were not thinly traded. The OCC (Options Clearing Corporation, a federal regulatory entity), had in fact informed TDA by a Memo #25184 on December 2, 2008 that UDR was potentially changing a conversion ratio as a result of a special dividend, changing how quotations were given. (See Exhibits F & G.) The change in conversion ratio was subsequently determined to be approximately 108:100, meaning La Brie could sell 108 shares per contract, making those contracts 8% more valuable to La Brie. The statement that the option was thinly traded was misleading. TDA did not advise the Plaintiff of the favorable events regarding Plaintiff's position in this Put contract. No statement or notice of any change in law, regulation or governmental policy was given to La Brie. TDA gave La Brie no notice of the changed symbol or any explanation for it, other than its being listed in place of the former symbol on the website and monthly statements.
23. On January 16, 2009, the OCC issued Memo #25370 advising their members, such as TDA, that nothing had changed with regards to the dividend subsequent to Memo #25184. (See Exhibit H.) Memo #25370 directed TDA to advise TDA's clients that, because there were no further developments, the OCC had disabled the automatic exercising of these contracts. The OCC instructed TDA, among others, that TDA 'SHOULD ADVISE THEIR CUSTOMERS TO TAKE THE FOLLOWING CONSIDERATIONS INTO ACCOUNT IN DECIDING TO EXERCISE, OR NOT TO EXERCISE, THESE OPTIONS." (Emphasis is the OCC's.).
24. The OCC however, did not require TDA to violate any existing agreement with customers; the OCC merely stated that clients should be advised.
25. TDA violated the direction of the OCC by not immediately advising LaBrie of the Memo, which would have enabled LaBrie to exercise the Put contract regardless of the fact the Brokerage Agreement already obligated TDA to exercise the Put and TDA did, in fact, exercise the Put.
26. TDA has advanced a number of excuses as to why this transaction was mishandled. They allege they called the Plaintiff, but no voicemails were received at any of the numbers that TDA had on file and had used in the past to contact the Plaintiff. TDA has used Plaintiff's answering machine at home to communicate with La Brie on other occasions.
27. As stated above, unbeknown to him at the time but later discovered,TDA had manually exercised the options after automatic exercising of these options had been disabled. The fact that this trade was done deliberately and manually by a TDA employee shows that the Plaintiff had made clear that the Plaintiff desired such exercising, which indeed La Brie had on December 5th.
28. TDA made another error when they logged the Plaintiff's sale to his margin account where there were no shares to sell. They noticed this error some time later, reversing the sale and making the position a short. Thus, the Confirmation Notice contains the phrase 'CORRECT PREVIOUS CONFIRM ACCOUNT TYPE...YOU SOLD SHORT' (emphasis theirs). This is also evidenced by the Plaintiff's Statement of January 2009 (Exhibit I) where it reads:
29. On March 28, two months after the option was exercised and even after La Brie had bought the stock to cover La Brie's position, Plaintiff was told by a TDA manager that the two profitable trades of January 20 and March 17 were going to be reversed against La Brie's wishes and obviously against La Brie's best interests. La Brie strenuously objected to this arbitrary and unlawful TDA action. La Brie's gains were going to be misappropriated by TDA for their own benefit or for the benefit of another customer.
30. In short, the facts are:
31. By reversing prior transactions to Plaintiff's detriment, TDA effectively exercised the option for their own financial gain.
32. Until TDA reversed all Plaintiff's properly requested and executed trades, TDA proceeded under their Agreement and under Plaintiff's direction. As is evidenced by documents provided by TDA, TDA exercised the option as La Brie requested. TDA shorted the stock as is required by exercising a Put option that La Brie purchased through TDA. TDA covered the short as La Brie requested. La Brie bought the stock to cover the position. This all resulted in a gain for which La Brie took the sole risk and rightly earned and which now TDA has misappropriated.
33. Clearly, since TDA recognizes that all the trades did, in fact, occur, they have profited from Plaintiff's risk (which in the case of shorting stocks is unlimited) and Plaintiff's investment of $7,915.95 and unjustly retained the reward of $15,173.94 with the inclusion of the 8% dividend owed La Brie. According to NASD rules, TDA cannot hold broker's securities in an individual self-directed account. Thus, the gains of $15,173.94 are rightfully the Plaintiff's and should not have been transferred from Plaintiff's account.
WHEREFORE, pray the Court allow compensatory damages in the amount of $ 15,573.94 ($15,173.94 investment losses and $400 legal charges) and punitive damages for the intentional conduct deliberately directed against La Brie for the benefit of TDA.
Chronology of Court Case Against TD Ameritrade
See stories of TDAmeritrade misappropriating funds from other investors: