Margin Call Disputes Primer

Margin call disputes often arise during times of market turmoil such as now.  Knowing what to do and whom to speak to when a margin call is issued is vitally important to an investor’s financial well-being.  Here is a little primer on what to do.

A margin call often occurs when the value of an investor’s margin account falls below the broker dealer’s required amount. A margin call is the broker dealer’s demand that an investor deposit additional money or securities so that the value of the account is brought up to the minimum value, which is known as the maintenance margin.  Some margin calls are small and an investor simply has to move securities in from another account or write a check to the broker.  However, in other situations, the acts by the broker dealer prior to the margin call being issued may have played a role in the margin call itself.

For example, a conservative investor often should not be holding any securities on margin at a brokerage firm.  If the firm recommended an unsuitable investment strategy that contained a significant amount of margin, and the market turned bad, and the investor sustained losses, said investor may have a potential FINRA arbitration claim against the broker.  In these situations, when a margin call is issued on the account, we highly recommend that the investor call a law firm such as ours who regularly represents investors in disputes with the financial industry.  It is paramount that the investor receives legal advice as soon as possible.  Most broker dealers have very broad powers in how to handle margin calls pursuant to onerous margin agreements.  The brokers sometimes even blow out investors’ portfolios without providing any notice (though they are supposed to exercise good faith in any decision they implement).  Time is usually of the essence.  It is important to have counsel engage with the broker dealer as soon as possible to potentially work out any issues.

In fact, one of our firm’s best results for a client derived from a client’s margin call.  In the Montfort v. CL King case, our client and their counsel called us when they received a multi-million dollar margin call.  We investigated and learned that the brokerage firm engaged in improper behavior.  The client did not meet the margin call.  We filed an arbitration at FINRA against the broker dealer.  After a long and hard fought arbitration hearing, we won $10 million in damages, plus we knocked out the $5.9 million margin debit.  Here is the award.

Now, obviously what happened in the Montfort case doesn’t mean that a similar result will occur in the next case.  However, the decision of the client to reach out to our law firm early, during the time period that the margin call was outstanding, provided our firm the opportunity to develop a legal strategy in a timely manner and helped create the paradigm for the positive result.

If you are experiencing a margin call situation, we highly recommend you contact our firm or any other firm that practices in this space as soon as possible.