NEW YORK—55 investors have been awarded $5.5 million by an arbitration
panel, to be paid by NDX Trading Inc. and TradeRight Securities Inc. (now
inactive). The investors claimed that the broker-dealer based in Minneapolis
used their mutual fund investments as collateral payment for margin trading
without their express consent.
The investors filed for millions in claims of fraud and negligence against
the firms. Included in the ruling by the Financial Industry Regulatory
Authority (FINRA) arbitration panel were punitive damages for the elder
investors, the majority of whom are living in California.
The investors started out as clients of Advisory Financial Services, a
California-based broker dealer that was later jointly acquired by Enterprise
Trust Company and TradeRight, according to Pat Baldwin, one of the attorneys
who represented the investors.
The Securities and Exchange Commission charged Enterprise with fraud in
2008, alleging that the company induced hundreds of Advisory Financial
Services customers to transfer custody of roughly $49 million in mutual
funds to Enterprise.
Unbeknownst to the customers, Enterprise allegedly placed their investments
into margin accounts where they served as collateral for leveraged margin
trading--including options trading and short selling--intended to benefit
other customers and some of its executives, the SEC said. More than $8
million in the customers' mutual funds were later sold without their
knowledge in order to cover Enterprise's margin debt, the SEC alleged.
Mr. Baldwin said his clients brought their case against NDX Trading because
it assumed the TradeRight accounts. Finra records show that TradeRight
hasn't been registered with the regulator since 2009.
The investors involved in the case are mostly retired school teachers in
their 70s and 80s, added Christopher Mader, another attorney for the group.
The arbitration panel found TradeRight and NDX Trading liable for about
$1.8 million in compensatory damages plus five years of interest and $2
million in punitive damages. The panel also awarded the investors more
than $500,000 in attorneys' fees and other costs.
NDX Trading didn't immediately return a request for comment.
As is customary, the panel didn't provide details on the reasoning
for its decision, which was dated May 10 but made public on Wednesday.