A top discount brokerage, Interactive Brokers LLC, must pay $1.2 million to two Texas siblings who alleged the firm failed to stop "reckless trading" by their trust fund overseer, arbitrators ruled on Tuesday.
The ruling is raising questions among lawyers about the extent to which trading firms should be held responsible when customers make risky bets.
Brian Parker and Jessica Parker Valentine, the siblings, filed their claim in 2013 after $800,000 in a trust established for them in their father's will four years earlier plummeted to about $75,000, said Joseph Marrs, their Houston-based lawyer.
The siblings alleged that the trustee at the time, Robert Dillard of Austin, day-traded the account using risky margin and options strategies, wiping out most of the funds.
Interactive Brokers "approved and assisted" Dillard's reckless trades, the siblings alleged in the complaint heard by the arbitration unit of the Financial Industry Regulatory Authority, Wall Street's industry-funded watchdog. Arbitrators agreed, though they awarded less than the $1.7 million the siblings had originally claimed. The arbitrators did not explain their reasoning, as is typical.
"We disagree strongly with the award and we are examining the possibility of appealing it," David Battan, Interactive Brokers' general counsel, said in a statement. The firm is not responsible for Dillard's trading decisions, since it is an online broker that gives no advice or trading recommendations, Battan said.
The siblings reached a civil settlement with Dillard in March for undisclosed terms, according to documents in a related court action. Dillard's lawyer could not be reached for comment.
Interactive Brokers took a "hardline" position during the arbitration that it is an online trading service and can expose customers to any kind of market risk, despite being told by Dillard that the trust was for the welfare of children, Marrs said.
A written dissent by one of the three arbitrators in the case could form the basis for Interactive Brokers' possible effort to overturn the ruling, said Jonathan Uretsky, a New York lawyer who represents brokerages but who was not involved in the case.
In the dissent, arbitration panel chair Malcolm Whittaker wrote that the firm is eligible for protection under Texas securities laws for its dealings with trustees.
Dissenting arbitrators rarely explain why they disagree with the other arbitrators, Uretsky said.
Arbitration rulings are typically binding, but courts can overturn them under limited circumstances, such as when arbitrators disregard the law. Such outcomes are rare, Uretsky said.
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