Estate goes negative from options / margin story, lawsuits ensue

A cautionary financial and legal story from over on Reddit.


(also see the first two links for the story background)

basically, the dad had a portfolio margin brokerage account and was playing some long short options strategy when he dies, subsequently the bets go bad, margin calls ensue (compounded by the increased requirements when you fail to meet the PM margin call, since it downgrades the account to Reg T margin with even higher requirements, so more liquidations), and eventually the account is -$50k. The heir somewhere in this process has notified the broker and takes over the account, so of course the broker tries to collect against them personally.

Long story short, they lawyer up and go after the broker for securities violations and eventually reach a settlement “over $500k” in their favor. two factors seemed to matter a lot:

  1. the broker is supposed to make a new account for the heir/estate(?), which would not have options privileges unless you assumed them, passed various suitability tests, etc. so this gave good grounds for supporting entitlement to the value of the account at the time they were notified (maybe +$125k at that point) since the options should have been closed at that time, and

  2. The broker wanted to take it to FINRA arbitration (of course), but the dad opened the account 30+ years ago when that wasn’t in the account agreement, and he had kept those records, so they weren’t able force arbitration.

In light of these, the broker settled shortly before going to court to avoid bad PR and likely fault. The crew of lawyers (estate law, securities law, forensic accountant) took their 1/3 cut and everyone was happy.


On a personal note, this story has reenforced my already strong desire to keep living and not let my heirs inherit a giant pile of long / short stocks on margin.

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That’s what I call a happy ending!

Well, having to live in the real world instead of relying upon their rigged rules. That musta been a golf club to the nutz.

How exactly was the broker supposed to know the accountholder was dead?

Xerty, you’re young, but you should probably have a contingency plan for an orderly liquidation of your short-term positions if calamity hits.

I don’t see any problem with giving your heirs stocks.

The real problem here was using leverage that allowed the account to go negative and options that are extremely risky and can go to zero very quickly.

That is a lot different than passing on an account that holds a low cost S&P index fund without leverage and has enabled dividend reinvestment.

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The heir tells them and takes over the account. They wouldn’t be responsible before that.

BBB:

  1. Invest in a lot of risky options
  2. Dies
  3. ???
  4. Profit

You’re talking about something on a different continent than x. Likely the derivative trading was for a different purpose than the person’s long term investments.

Who do you think keeps the market efficient?

Me, but not too efficient mind you :).

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