FOOLED by new client's posh appearance
Broker to pay $350,000 in stock market loss after client, who drove Jaguar and lived in condo, vanishes
By Tay Shi'an
November 23, 2008 / Source : The Electric New Paper
THEY are sometimes referred to as brokers. For one remisier, however, the word has taken an awfully literal meaning.
Reason: She may soon go broke having to make up for a rogue client's losses.
The client, a Malaysian woman in her 60s, had seemed financially reliable. She lived in private property. Her family gets around in a Jaguar. And she had put a US$50,000 ($76,600) deposit to begin trading.
The remisier, who has been in the industry for more than five years, said: 'I thought this client was able to trade and able to pay.'
But then the client lost US$227,000 after taking huge risks on the US stock market, betting on shares such as AIG and Fannie Mae.And she vanished.
Now, the remisier, who is in her 30s, will have to settle the debt with her brokerage firm if the client cannot be found.
That's because, under the remisier's agreement with her firm, if any of her clients do not honour their debts, it is the remisier who will have to pay the firm.
This is the standard practice in the industry, firms and remisiers told The New Paper when asked.
Ms Lim (not her real name) has since filed a police report and magistrate's complaint against the client.
She asked not to be named, as her colleagues do not know about her loss.
She said the walk-in client opened the trading account in April. In her application, the client stated that she had an annual income of between $100,000 and $200,000, and a net worth of $250,000 to $500,000, excluding properties and retirement assets.
She also stated that she was the director of a Malaysian company, and lived in private property in Singapore.
As she wanted to play the US stock market, she was asked to place a US$50,000 cash deposit with the brokerage firm. This amount varies on the discretion of the remisier.
Ms Lim said she did not do a check to verify the personal information provided by the client, and did not know if the firm did its checks.
The remisier said the Internet trading account was used by the client and the client's son, who appeared to be in his 40s.
For five months, the account was very active and volatile because of the wild swings in the US stock market.
The client and her son would frequently do contra-trading, meaning they would buy shares without coming up with any capital, hoping to sell them for a higher price within the three-day settlement period.
Suspended account
They would then pocket any profits, or fork out the difference in losses to the brokerage firm.
Ms Lim said she suspended the account about five times, when the losses reached the deposit sum of US$50,000. But she reinstated them each time, after mother and son made good the losses.
Ms Lim said she met the son and his girlfriend once, when they drove up in a Jaguar to hand a cheque to her. She claimed the son rebuked her for suspending the account and was 'abusive'.
By September, the account had a profit of US$180,000.
But things went horribly wrong within the same month when the client and her son traded heavily on shares such as AIG, Fannie Mae, Lehman Brothers and Washington Mutual.
The share prices plummeted. Within a week, the account chalked up US$227,000 in contra losses.
Ms Lim said: 'They did Internet trading, so it was very hard to control. By the time I woke up, (the trades) were done.'
Ms Lim immediately suspended the account and contacted mother and son to settle the debt.
But in an SMS reply dated 29 Sep, the son wrote, 'want me honour my lost and yet u suspend my line..its nt profesional..talk to yr boss' (sic).
After several days of unreturned phone calls, Ms Lim made house visits alone on two occasions to the family's condo home in the west. Both times, she saw only two children in the house.
She got another SMS message from the son on 1 Oct, telling her not to 'disturb' his mother, but the next day, the son sent her a message promising to settle the debt a week after.
When she did not hear from him by then, Ms Lim made another house visit, this time with a debt collector - only to find the condo unit empty.
That was when she found out they were tenants who had lived there for only a few months.
Ms Lim lodged a police report on 12 Oct.
Her last contact with the family was an SMS message from the client on 13 Oct: 'U dun keep chasing. Give some time. Wil sort out.' The telephone numbers were disconnected soon after.
Ms Lim reported the client's account as delinquent to the Singapore Exchange on 21 Oct.
That was when she found out that another major brokerage firm had also blacklisted the same client on 10 Oct for failure to pay. It is understood that the sum owed to the other firm is about $5,000.
Ms Lim said that even if she hired a debt collector now, she would not be able to tell them where to look for the client.
She consulted a private investigator, but was reluctant to pay several thousand dollars to track down mother and son.
'It'll be throwing good money after bad money,' she said.
When speaking to The New Paper, Ms Lim appeared stoic about her loss, which she wryly compared to the cost of a Housing Board flat.
Ms Lim said she has told her family about the loss: 'My parents are very worried, but still very supportive.
'I just wish I let go of the account and passed it to someone else. Now, I've got to bear the debt.'
Ms Lim is still trying ways and means to track down the missing client, but she is also preparing for the worst.
She declined to reveal how she would repay the debt to her brokerage firm. 'I'll just have to come up with the money somehow,' she said.
I thought this was an interesting story. It is an real example that the brokers have to pay the losses if their clients fled. This is the reason why brokers have to be careful about increasing the trading limit of their clients. If they increase it too much, they take on a higher risk of their clients fleeing away after losses. If they keep the trading limit low, they may not earn so much in their commission.
Posts
How can the client trade online and exceed the trading limits, yet still hold the broker liable?
ReplyDeleteWhere are the firms internal controls?
Hi,
ReplyDeleteWas it mentioned in this article that the client exceeded the trading limits ?
Kay
Simply envision what might happen to world when nearly everyone who possesses the shares tries to do that, you would essentially have a distraught surge of notices everywhere throughout the world. stock alerts
ReplyDelete