In another costly legal loss this month, Charles Schwab & Co. Inc., the financial advice industry’s leading custodian, last week was ordered to pay clients – including schoolteachers - who bought esoteric products $4.5 million in damages and costs by a three-person arbitration panel operating under the aegis of FINRA Dispute Resolution Services.
The more than 20 clients sued Schwab and TD Ameritrade in 2024 and initially sought $3 million in damages, according to the award. The FINRA arbitrators awarded the customers $4.4 million in damages and $92,000 in costs.
The products in question were a mix of sophisticated, complex and potentially volatile offerings, according to the award, which was issued last Thursday.
Those included alleged “inappropriate holdings” such as structured products, non-traditional and leveraged exchange-traded funds and proprietary ETFs, according to the award. The clients alleged negligence and other causes in their lawsuit against Schwab.
“The majority of these people worked for a school district, teachers coaches and others in a public school system,” said the plaintiff’s attorney in the matter, Michael Bixby. “They were normal working folks, and the majority were teachers.”
“The case involved failure to implement heightened compliance and guardrails surrounding purchases of complex structured products by mom and pop investors,” Bixby added.
Clients' holdings typically were between 50% to 80% concentrated in a portfolio of autocallable structured products tied to volatile baskets of stocks, he said.
Structured products are high-risk financial instruments that firms liken to bonds in marketing materials but are often linked to small baskets of stocks tied to derivatives. Fees and commissions on structured products are particularly opaque as they are typically not listed on clients’ account statements.
Although it lost the arbitration, Schwab was not at fault, a company spokesperson said Monday in an email.
“We empathize with these investors, but the decision was legally wrong,” a Schwab spokesperson wrote Monday morning in an email to InvestmentNews. “All investment choices were made by the claimants and their independent financial advisor and not Schwab, whose sole role was as a custodian of the accounts.”
Schwab has lost other expensive lawsuits to clients of late. Earlier this month, a divided panel of FINRA arbitrators awarded a Schwab client close to $1.34 million in compensatory damages over a dispute centered on wire transfers from an elderly client’s account to a cryptocurrency, Okcoin.
Stifel Nicolaus & Co. Inc. for years has been facing scrutiny due to sales of structured products and structured notes by a former star broker, Chuck Roberts.
In total, Stifel Nicolaus has paid or is on the hook for close to a staggering $200 million in damages and settlements to former clients of Roberts. Roberts was barred last July from the securities industry by FINRA.
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