Let me first lay out the situation. My brother-in-law is a stock broker and works for a small brokerage house. Recently, he made a call to a client about a stock which, as it turns out, was a real dog. The client bought the stock on margin (I gather) and it promptly lost $20,000 worth of value at which point the client either never sent his check or put a stop payment on it leaving my brother-in-law (and the brokerage) high and dry.
O.k. so forget whether or not my brother-in-law is a decent broker and focus on the missing money. The brokerage tells my brother-in-law that while the client is clearly in the wrong, it is up to HIM to sue the guy and get the money! And in the meantime, the brokerage expects my brother-in-law to cover the missing $20,000! Apparently, he signed something when he first started as an employee there that indicated this was what would happen under the circumstances which, of course, my brother-in-law overlooked.
My question is, can a brokerage put this clause in their employment contract legally? It seems to me if the brokers are acting as agents of the company, the company should both gains from their good sales and loses from their bad ones. The way this thing is written, it would appear the company only gets the upside of his work while having no downside. Or is the fact he signed this thing really going to screw him?
The obvious answer in any “legal question” type of a case is to hire a lawyer.
In this case, it is even more imperitive that you do. Here’s the reason. Contract law is tricky not just because of what the law says but also what the contract says. No one on this board can ever state with certainty that what happened is or isn’t legal without seeing the contract’s wording, which you don’t have available.
Besides, if anyone here says that what the company did is legal, would you take our word for it? Your brother would be betting $20,000 that we’re right.
And assuming we agreed that it was illegal, what’s the first thing you’d do? Hire a lawyer.
Any way you look at it, it comes down to the same answer.
I suppose you’re right, and he certainly is going to hire a lawyer. What I thought was strange was how quickly the brokerage blew the whole thing off as “Well, of COURSE, you are expected to cover the missing $20,000” like this happens everyday.
I’m just curious for my own interest whether this is common, and whether anyone else on the board is/ knows a stockbroker and what their feedback is on the situation. For all I know, this IS common practice at all brokerage houses and my brother-in-law is just whining about it because it’s the first time it’s happened to him.
Or (more likely) he made a margin buy he really should not have done (i.e. in excess of the total value of this client’s account) and thus took an (illegal) chance and is now paying the price for it. I wouldn’t be surprised if I wasn’t getting the whole story from him either.
Yes, it does happen & yes, he does have to pay that $20,000.
That’s the job. Happened once to guy interviewing me for that position. I came to his office & he said that he couldn’t see me then because he had to cover a $5,000 mistake that he did similar to that one above.
I have a broker, and his first question will always be “Where’s the money?” He doesn’t do anything until I anti up.
The client bought on margin? Not good. Especially not good with a new client. But that’s your brother’s problem.
The moment that stock started dropping your brother should have made the margin call, and if he couldn’t reach the client the stock should have been sold to cover.
If my broker ever advised me to buy on margin I’d drop him like a hot potato. But that’s just me.
My husband is a broker for PaineWebber and he says…
First of all, it is extremely common. Trading errors and trades reniged upon by new clients, which in the industry is known as being “DK’d” on a trade, happen every day. However, it is something that every new broker is briefed about. Their liabilities are made clear to them. If the broker makes a business decision to place a trade for a new client, without having that client send that money in first, if the client decides to “DK” the broker, in other words say he didn’t know the broker when it came time to pay for the trade, then the broker is liable for the difference between the price paid for the stock and the price sold to bust the trade. If that stock happens to have risen in value, then the firm keeps the profit. If it has gone down, the broker pays the difference. This widespread policy is in place to prevent unauthorized trades.
The situation would be different with an existing client who already has assets at the firm. If the broker is positive that an order has been given from the client and the client refuses to send in additional money to pay for the trade, then the firm can liquidate assets from the client’s account in order to pay for the new trade.
To answer the OP, all full-service brokerage houses have this type of clause. At any of these firms, he is liable for the difference between the buy and the sell. Unless the client as assets in the account to be liquidated to cover the trade, your brother-in-law is responsible for covering the loss. It’s the price you pay for running a trade in a brand new account without having any assets on hand. If your brother-in-law decides to leave the firm without paying, the firm can come after him legally.
From what I recall from my brief brokerage days, Grace is right - and $20,000 is not much to get DK’d for. Lots of brokers have to pay much much more than that.
If I recall correctly, though, the firm doesn’t make the broker write a check then and there for the DK - they take it out of future commissions, and if the broker quits, the firm sues him. Plus, they make sure that the broker doesn’t work at any other reputable brokerage house again, at least not until he coughs up the DK. Could be different at different firms.