Customer Ratifies Unauthorized trades

Ratifies Unauthorized Transactions by Failure to Object

John Dawson & Associates, NDIll Bankruptcy Court

John Dawson & Assoc., Inc., In Re, Adversary No. 99 A 00536 (N.D. Ill. Bankr., 1/16/03). Bankruptcy/Insolvency Issues * Ratification * Unauthorized Trading * Statutory Definitions (“Conversion”) * SIPA.

SIPC claim is disallowed due to ratification of allegedly unauthorized trades by course of conduct and failure of customer to file timely written complaint in accordance with notice concerning objection to transaction by customer.

After 4-day trial, Trustee of Debtor broker-dealer successfully opposed claims of customer Douglas Cameron for over $1 million in losses in his brokerage account, because he failed to make written objections and does not qualify as “customer” entitled to an advance under Securities Investor Protection Act of 1970 (“SIPA”). SIPA defines a customer as “any person who has a claim against the Debtor arising out of sales or conversion of . . . securities.” Trustee takes the position that Cameron “ratified a course of conduct” resulting in “a de facto grant of trading authorization to Dawson.” Cameron’s customer agreement contains a provision, repeated on the back of trade confirmations, that customer should object to trades within 5 days of reports of execution or reported trade is conclusive.

Customer is sophisticated investor and businessman with 25 years of investing experience, who failed to complain when his broker engaged in a series of large, allegedly unauthorized index option transactions in his account over a period of years. Each time, Cameron called the broker and asked him about the transaction, but accepted the broker’s explanation – and the trades, some of which generated profits.

The Bankruptcy Court holds that the claimed fraud damages would have occurred regardless of the insolvency and thus the “loss is not a direct result of the debtor’s insolvency.” Breach of contract or fraud claims are to be satisfied from the Debtor’s general estate and not SIPC funds.

Although unauthorized trading may support a conversion cause of action, to receive payment under SIPA, Cameron was required to (1) file a written complaint within a reasonable time after receiving confirmation or (2) provide “some other reasonably contemporaneous documentation supporting such allegation.” Under Illinois law, a series of ratifications of similar transactions is sufficient to show the transactions are not unauthorized. The Court rejects Cameron’s excuses of family and business problems, plus his alleged lack of knowledge concerning the writing requirement, holding that this is not sufficient to overcome his lack of affirmative action in the face of unauthorized transactions. (S. Anderson) (SLC Ref. No. 2003-11-07)

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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.