COVID-19 margin calls

Investors To Sue Over COVID-19 Margin Calls

May 4, 2020

Many individual and institutional investors received bad news this spring— large margin calls. According to the Financial Times, these investors are preparing possible legal actions against U.S. banks active in wealth management. This is unwelcome news to such banks who routinely offer margin loans to their customers, such as JPMorgan Chase, UBS, and Goldman Sachs. According to the Financial Industry Regulatory Association  (“FINRA”) investor purchases of securities on margin averaged over $592 billion during the first 10 months of the last year. Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo all reported increases in their client loan balances last year.  What Claims Do I Have for and Improper Margin or Margin Call? There are several ways investors can recover on claims relating to improper margin or margin calls. If losses were incurred as a result of securities being sold on a margin call, it may be possible to make a claim asserting that the broker or firm should have first asked the customer to pay the loan through another source, deposit in more cash or securities, or allow the customer to choose what investments to sell to pay the margin call. It is also possible to bring a claim for losses if the margin loan given to the customer was an unsuitable investment strategy or too risky for the investor’s objectives. Finally, if a brokerage firm has sued you to collect on an unpaid margin loan, there are a number of defenses to this claim which can be raised. Please call us today or use our online contact form, for a free consultation.  How Does a Margin Call Work? A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. Margin increases an investor’s purchasing power but also exposes investors to the potential for larger losses.   The mechanics of how a margin call works are simple. When stocks fall, brokers can be forced to call up clients and ask for more cash or securities to secure the margin loan. Under some contracts, brokers can sell the investments in the account to pay the margin loan even without first calling the client.  The Securities and Exchange Commission has published an investor alert explaining to investors how margin accounts work.  You Should Understand How Margin Works Margin loans are a tool that allows customers to leverage their accounts to make a greater return. Let’s say you buy a stock for $50 and the price of the stock rises to $75. If you bought the stock in a cash account and paid for it in full, you’ll earn a 50 percent return on your investment (your $25 gain is 50% of your initial investment of $50). But if you bought the stock on margin – paying $25 in cash and borrowing $25 from your broker – you’ll earn a 100 percent return on the money you invested (your $25 gain is 100% of your initial investment of $25). You may also owe your broker interest on the $25 you borrowed. There is a downside to using margin, which is […]

Read more
margin call in your brokerage account

Has the Stock Market Crash Forced a Margin Call in Your Brokerage Account?

Mar 30, 2020

When the stock market quickly moves down, as it has been doing during the coronavirus market crash, you may find yourself in a situation where your stocks are sold to pay back a loan that a brokerage firm made to you. This is called a “margin call.” A margin loan is a loan that the brokerage firm makes to you that is secured by the investments in your account. Some people do not even know that they have a margin in their brokerage account, and only first become aware of this fact when they are forced to pay a margin call or maintenance call. Many new account documents which you are asked to sign when you open a brokerage account allow for the securities firm to make a margin loan to you for the purchase of securities in your account. Therefore, you should review your brokerage account statements carefully to determine if you have a margin debit or a margin loan in your account. The Securities and Exchange Commission has published an investor bulletin explaining to investors how margin accounts work.  The Difference Between Cash and Margin Accounts A “cash account” is a type of brokerage account in which the investor must pay the full amount for securities purchased. An investor using a cash account is not allowed to borrow funds from his or her broker-dealer in order to pay for transactions in the account.   In contrast, a “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. Margin increases investors’ purchasing power but also exposes investors to the potential for larger losses.   You Should Understand How Margin Works Margin loans are a tool that allows customers to leverage their accounts to make a greater return. Let’s say you buy a stock for $50 and the price of the stock rises to $75. If you bought the stock in a cash account and paid for it in full, you’ll earn a 50 percent return on your investment (your $25 gain is 50% of your initial investment of $50). But if you bought the stock on margin – paying $25 in cash and borrowing $25 from your broker – you’ll earn a 100 percent return on the money you invested (your $25 gain is 100% of your initial investment of $25). You may also owe your broker interest on the $25 you borrowed. There is a downside to using margin, which is riskier that a cash account. If the stock price decreases, you can quickly lose your money. For example, let’s say the stock you bought for $50 falls to $25. If you fully paid for the stock, you’ll lose 50 percent of your money (your $25 loss is 50% of your initial investment of $50). But if you bought on margin, you’ll lose 100 percent (your $25 loss is 100% of your initial investment of $25), and you still must come up with the interest you owe on the loan. Many investors cannot afford to takes this type of gamble with their funds. Your […]

Read more