Articles Tagged with Interactive Brokers

Chicago-based Stoltmann Law Offices, P.C. represents clients nationwide in securities and investment arbitrations and litigation. One area we are very familiar with, is to look for all liable parties when investment advisors commit securities fraud. In many instances, there are multiple potentially liable parties beyond the primary bad actors, including banks that facilitate the illegal movement of funds and brokerage/clearing firms that facilitate illegal trading schemes.  Cherry-picking is one of those trading schemes that brokerage or clearing firms are geared to supervise for and prevent. In the event you are a victim of a cherry-picking scheme orchestrated by your trusted investment advisor, you may have a viable claim against the brokerage firm or custodial firm that executed the trades on behalf of the investment advisor.

According to published reports, Barrington Asset Management and Gregory D. Paris executed an allocation scheme which resulted in profits to the firm and losses to firm advisor clients.  In a civil complaint filed June 28, 2021, the Securities and Exchange Commission alleged that Barrington Asset Management and Gregory D. Paris, who was the firm’s chief compliance officer, executed this “cherry-picking scheme” in violation of several federal securities laws including Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act (“Exchange Act”) and Rules 10b-5(a), 10b-5(b) and 10b-5(c) thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act (“Advisers Act”). According to the SEC complaint, Barrington Asset Management executed this scheme through a pooled trading fund called the Barrington Opportunity Fund.

As investment advisors, Barrington Asset Management cannot execute securities transactions. They must use a FINRA registered broker/dealer to do so. In this circumstance, this brokerage firm plays the role of “custodial” firm, where the firm physically holds cash on behalf of the RIA’s clients and also executes or brokers securities trades. These are generally back-office functions and these companies, like Schwab, Fidelity, TD Ameritrade, and Interactive Brokers, typically disclaim away any responsibility to supervise for the suitability of the transactions at issue. What they cannot disclaim away, however, are their obligations under the Bank Secrecy Act and Patriot Act to supervise for illegal activities. One of the most common schemes executed by RIAs like Barrington Asset Management is the “cherry-picking” scheme, and these firms typically do have compliance and supervisory systems in place to check for and prevent such illegal activity. When they fail to detect this sort of scam, they could be secondarily liable for aiding and abetting breach of fiduciary duty, or for negligent supervision.  Here, the facts also reflect that Barrington Asset Management trading in leveraged ETFs, which are extremely high risk and volatile investments.  According to the SEC complaint, the manner in which trades were allocated statistically represented a 1 in a billion outcome for the Advisor – Paris. The SEC identifies these firms as “clearing broker A”and “clearing broker B”.

Stoltmann Law Offices is investigating Interactive Brokers for allegedly executing forced margin calls in customer accounts. A number of cases have been filed against the brokerage firm for not providing investors fair pricing for the securities during the liquidations, violating the “National Best Bid/Best Offer” rule that is required in processing auto liquidations. Subsequently, the customer’s accounts were subject to additional margin calls, which causes more selling and additional investment losses. A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. They occur when an investor’s account value depresses to a value calculated by a particular formula. A broker must take into account a customer’s age, net worth, investment objectives and investment sophistication before recommending a security. If he does not, he or his company, such as Interactive Brokers, may be held liable for investment losses. A broker recommending a customer purchase an investment or security on margin may not always be suitable for the investor. They can be risky investments. In Interactive Brokers’ case, one Claimant asserted claims of breach of contract, promissory estoppel, violation of state securities statutes, claims under common law and vicarious liability. The Claimant alleged that the broker’s flawed, inefficient and fraudulent margin auto-liquidation system caused auto-liquidation of the customer’s portfolios at prices far inferior to the National Best Bid/Best Offer.

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