Customer wins more than $450,000 from TD Ameritrade over volatile investment

Finra arbitrators ordered TD Ameritrade Inc. to pay more than $450,000 to a customer who owned a leveraged investment for months longer than it was designed to be held.

Ian Delahunty bought a leveraged exchange-traded note — Velocity Shares 3x Long Crude Oil ETN (UWTI) —– in August 2015 on the TD Ameritrade online platform through a self-directed account.

He maintained the investment until February 2016 — a total of 199 days, or approximately 197 days more than the volatile product should remain in an account. It is designed to take advantage of market swings over short time periods.

“He had no idea the security was not meant to be held long term,” said Delahunty’s attorney, Michael Hill, managing partner at Menzer & Hill.

Delahunty filed an arbitration claim against TD Ameritrade on Jan. 7, 2021, alleging the firm “knowingly put [him] in harm’s way” by allowing him to hold the product for so long.

Three Financial Industry Regulatory Authority Inc. arbitrators held TD Ameritrade liable and awarded $360,000 in compensatory damages to Delahunty, according to a May 11 award. They also ordered the firm to pay interest on the award as well as $5,000 in costs, which bumped the total up to more than $450,000.

Delahunty had asked for $480,000 in damages as well as $5,000 in costs.

TD Ameritrade said it disagreed with the claim and the result.

“Any notion that the product in this matter was recommended is categorically untrue,” TD Ameritrade spokesperson Mayura Hooper said in a statement. “Award notwithstanding, TD Ameritrade met its obligations to its client. TD Ameritrade did not recommend the investment at issue to the claimant, who was self-directed and received detailed disclosures about the unique risks associated with the leveraged exchange-traded notes that he chose. We did then as we do now: We consistently recommend that every self-directed investor truly understand the risks, disclosures, and features of any securities before investing in those products.”

Schwab purchased TD Ameritrade in 2019, and the transaction was approved by the antitrust division of the Department of Justice in mid-2020.

As is typical in an award, the three public arbitrators didn't explain the reasoning for their decision, which came out as Finra is reviewing its regulation of complex products, such as leveraged investments.

This week, the broker-dealer self-regulator concluded a comment period in which it sought public input on whether it needs to update regulations to address concerns related to investors increasingly accessing complex products through self-directed online accounts rather than through a financial adviser.

Even when Delahunty and others who buy complex products on their own, they still need help from brokerages, Hill said.

“The average retail investor is not reading the fine print,” he said. “They’re trusting the broker-dealers to alert them about any concerns [about the products] before they invest in them.”

Some kind of message from TD Ameritrade saying that the ETN Delahunty bought should be sold within a couple of days would have helped prevent his losses, Hill said.

“That would have been enough,” he said. “But nothing of the sort was done.”

Leveraged ETNs don’t require the same suitability reviews as other complex products, but Finra has released guidance reminding firms to ensure that their recommendations fit the risk tolerance of their customers. The broker-dealer self-regulator may be poised to take further action.

“It’s hit or miss in how [brokerages] apply compliance to these products,” Hill said. “The industry is not doing enough. [Finra] is going to lay the rule for them.”