Customer Pays Fidelity Full Damages on ACAT Transfer Error

Panel awards Fidelity Brokerage Full Damages on Mistaken ACAT Transfer

FIDELITY BROKERAGE SERVICES, INC. v. LaVALLIE, NASD ID # 99-03918 (New York, 8/22/03).

A customer who wrongly retained an over delivery of securities is held liable for the consequences, in spite of the broker-dealer’s error. Fidelity made a mistake when its customer, Michael John LaVallie, issued instructions to transfer his accounts to Merrill Lynch. It made the mistake, in part, because the customer rescinded the transfer order mid-stream, which allowed a trading freeze to be lifted.

According to Fidelity’s Statement of Claim, Mr. LaVallie quickly sold the long positions in his account and initiated short sales. Then, the mistake occurred. Fidelity transferred the account to Merrill with the long positions that were pending sale, plus the cash attributable to the short credit balance.

According to the Claim, Respondent refused permission to return the over deliveries, leaving Fidelity with the obligation to buy-in the sales and close the open positions. These were technology stocks and this was the summer of 1999, so prices were rising, meaning the buy-ins led to losses and the long positions in Mr. LaVallie’s Merrill accounts continued to profit. Accordingly, Fidelity sought compensation in arbitration for, among other things, its buy-in losses, the margin interest charged on the resulting deficits, and the profits flowing from Mr. LaVallie’s alleged conversion.

Four years hence, the Panel granted Fidelity $586,289, an amount that equates to an aggregate of the entire deficit and the margin interest on the deficit, plus 9% interest on that total from mid-May 2003. Counterclaims filed by Respondent for alleged damages flowing from the erroneous transfer were denied.

In addition to the arbitration victory, Fidelity also sought and won interim judicial relief, in order to preserve the assets sitting in the Merrill accounts pending the outcome of the arbitration. That was in 1999, when an injunctive order issued in New York state court, as part of which Respondent was directed to supply Merrill with a letter of authorization allowing Fidelity to receive account status reports. When the letter of authorization was not forthcoming, Fidelity, joined by Merrill this time, sought a contempt citation.

As we reported in SLA 2001-15, the Court held Mr. LaVallie in contempt and ruled that both he and his attorney, Max Katz, falsely stated in affidavits appended to a cross-motion that an instruction letter was sent in November. Attorney’s fees and costs totaling almost $50,000 were assessed and, under NY Judiciary Law §773, the Court ordered attorney Katz to personally pay $5,000 to the NY Lawyer’s Fund for Client Protection for his frivolous conduct in submitting the cross-motion. The Appellate Division affirmed the Order, with costs, in May 2002 (see SLA 2002-23). (SAC Ed: Fidelity was represented in the judicial and arbitration proceedings by Michael G. Shannon, Brown Raysman, New York, NY. In addition to the Statement of Claim, the SAC Reference file also contains copies of the Answer, the closing statements by both sides and charts and documents used in the case.) (SAC Ref. No. 03-38-06)

( – the question of who is liable for a broker-dealer mistake in a transfer of accounts comes up with surprising frequency, given the low number of transfers that occur in the industry. Basic contract law provides that a party who makes a mistake can recover from the party who benefited from the mistake. This case is interesting since it appears that the arbitrators awarded more than a recovery of the mistake, awarding full damages for all events flowing from the mistake. The customer’s conduct may have contributed that finding, as it appears that he did not act reasonably when learning of the mistake.)

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.