Margin calls have become a major issues for investors as a result of the market turbulence caused by the coronavirus (COVID-19) pandemic. Many investors use margin loans through their brokerage firm that are collateralized by the securities in their investment accounts. FINRA has reported that, as of February 2020, the total balance of outstanding margin loans was in excess of $545 billion. When the value of investment accounts decline, as many did after the onset of the pandemic, margin contracts generally give brokerage firms the right to demand additional collateral from their customer, typically in the form of additional deposits into their brokerage account. If the investor does not meet the margin call, firms may have the right to liquidate some or all of the positions held in the account to repay the balance of the margin loan.
Account liquidations can have devastating effects when an account is liquidated after steep market declines, thereby locking in losses and destorying the ablitity to benefit from subsequent market recoveries. Our firm is currently investigation reports that certain brokerage firm have been liquidating investment accounts without providing the investor the opportunity to meet the margin call and, thereby, avoid the devastating effects of liquidation. If your account has been liquidated without adequate notice, your brokerage firm may be liable for damages caused by its conduct. Contact our firm for a free consultation to learn about what rights you may have.
Even where a brokerage firm gave all required notice prior to liquidating a margin account, the firm may still be liable for damages if the use of margin was not suitable for the investor. Brokers have a duty to only recommend investment strategies that are suitable for their customer in light of the customer’s investment objectives and financial condition. For many retirees with conservative investment objectives, the use of margin is not a suitable part of their investment strategy, because it greatly enhances risk. Unfortunately, some unscrupulous brokers will still recommend the use of margin in circumstances when they should not. For example, sometimes brokers that are churning an account will recommend the use of margin so that they have more assets to invest in order to generate higher commissions.
If you believe that your brokerage firm has inappropriately liquidated your account or recommended an unsuitable investment strategy regarding the use of margin, contact our firm for a free consultation. Our attorneys are working remotely during this pandemic and can be best contacted via email in order to coordinate a call or videoconference.