JP Morgan Securities should NOT be trusted blindly with the sale and purchase of customers’ securities. The Securities and Exchange Commission (SEC) and FINRA oversee the operations of the brokerage firms. However, does SEC and FINRA protect individual customers?
PDF files of the original and tampered documents are attached below.
Misconception About Protections Provided by SEC and FINRA
If investment banking customers believe that Securities and Exchange commission (SEC) and other financial industry regulators (e.g., FINRA) will protect the customers’ interests and rights against brokerage firms’ misconduct and fraud, they are deeply mistaken. There is an arbitration clause in the brokerage agreement that forces parties to go through an arbitration even when there are serious fraud allegations.
To start the arbitration process, the customers must file a complaint before FINRA and pay the mandated fees to start the proceedings. Evidently, paying fees to file a FINRA arbitration complaint against a broker who is involved in misconduct or fraud is the first obstruction customers must face. Many customers will NOT file a complaint and accept the broker’s misconduct as bad luck. The fees paid to FINRA for arbitration adds to the damages that the customers already suffered due to the broker’s misconduct. This encourages the brokers to keep on defrauding their customers without fearing consequences.
Unfair Proceedings Favoring Brokerage Firms Over Investment Customers
The brokerage firms hire big law firms to bully the customers. Customers who cannot afford an attorney can avoid paying hefty fees and represent themselves (appear Pro se) before the arbitrators. However, it is noteworthy that pro se customers will face a daunting uphill battle and will not get any assistance from any entity. Most customers have no legal education, which puts them at a huge disadvantage. In the customer’s experience, the arbitration process is unfair and biased mainly because the arbitrators are not FINRA employees rather independent contractors who are chosen by parties and paid per session.
Independently Contracted Arbitrators Have a Conflict of Interest
FINRA and SEC should consider the cons of employing independent contractors as arbitrators. The arbitrators have a clear conflict of interest and an apparent bias towards the big brokerage firm. If the arbitrators penalize the brokerage firms for their misconduct and fraud, it would hurt their chances of being chosen again by the brokers. The awards are publicly available and parties are able to review them before choosing their potential arbitrators. FINRA and SEC should consider having their employees adjudicate the allegations of fraud against brokers. Arbitrators are paid per session; hence, more sessions mean more fees for arbitrators. There is no financial benefit to the independent contractors (a.k.a. arbitrators) to decide the brokerage fraud cases fairly and expeditiously.
The Arbitration Proceedings Point to a Rot in the Compliance structure of the Security Industry
Any amount of incriminating proof is irrelevant to some independently contracted arbitrators who favor brokerage firm in the hope that they may be chosen by the brokerage firms in their next arbitration case.
In the customer’s case, the chair of the arbitration panel was specially rude with the customer and his attitude discouraged the customer from pursuing the case against JP Morgan Securities for alleged fraud. The customers showed courage despite the circumstances and saw the arbitrations proceedings till the very end.
JP Morgan Securities Withheld Discovery Documents
In this case, the customer filed TWO MOTIONS to compel JP Morgan Securities to provide the requested discovery documents. Shockingly, in both discovery motions, the arbitrators asked the aggrieved party (customer) to pay half of the session fees even though it was JP Morgan Securities who was withholding evidence against FINRA and SEC regulations.
To add insult to injury, fees paid to FINRA to bring the complaint, fees paid to attorney, accountant, security industry expert were not awarded as damages. The arbitrators declared that the fees were not “legally cognizable damages” despite finding JP Morgan securities at fault. In this case, the arbitrators accepted the culpability of JP Morgan securities but watered down JP Morgan Securities’ numerous SEC and FINRA violations. Some of the alleged violations were the same for which SEC had fined JP Morgan securities and ordered cease and desist from such conduct in future.
JP Morgan Securities Fined Many Times for Similar Violations
In one instance “…JPMS was ordered to cease and desist from future violations of those provisions, was censured, and was ordered to pay the $125 million penalty.”
More information can be found on the following link https://www.sec.gov/news/press-release/2021-262
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement said, “Recordkeeping requirements are core to the Commission’s enforcement and examination programs and when firms fail to comply with them, as JPMorgan did, they directly undermine our ability to protect investors and preserve market integrity…” More information can be found on the following link https://www.sec.gov/news/press-release/2021-262
In this case, the customer provided solid proof, but the arbitrators were not concerned about protecting the customers’ interests. It is extremely unlikely that a pro se customer will ever be awarded any damages, despite a mountain of evidence. The arbitrators’ order read in part…
Although the Panel finds that Respondent (JP Morgan securities, JPMS; CRD# 79), made certain errors and mistakes in the record keeping related to Claimant’s account, the Panel does not find that those errors or mistakes resulted in any legally cognizable damages to Claimant.
The arbitrators did not explain what “legally cognizable damages” meant. They did not award any damages to the customer despite finding JPMS at fault. JPMS conveniently got away without paying any damages. The fees paid by the customer were not awarded either.
Customer Filed a FINRA Complaint Against JP Morgan Securities and Alleged the Following:
- JP Morgan Securities (JPMS) changed/tampered the self-directed cash investment account statements. The customer printed the original account statements showing the suspicious transactions, which are different from the statements JPMS neither accepted responsibility for the account discrepancies nor provided any reasonable explanation for the inconsistent statements.
- JP Morgan Securities (JPMS) transferred incomplete investment account to another brokerage firm upon customer’s request through ACATS, even after formally approving a complete investment account transfer.
- JP Morgan Securities (JPMS) approved/confirmed Automatic Clearing House (ACH) transfer of CASH out of the customer’s investment account. However, JPMS only transferred 1/4th of the total cash withdrawn by the customer from the “available funds to withdraw”. To date, only 1/4th of the total cash withdrawn has been transferred.
- JP Morgan Securities (JPMS) breached JPMS brokerage account agreement and took discretion of the non-discretionary self-investment cash account. JPMS brokerage account agreement states that JPMS has no discretion on a self-directed cash brokerage account. Specifically, it states:
“No discretion. Unless otherwise agreed in writing, JPMS does not have any discretionary authority or obligation to review or to make recommendations for the investment of cash or securities in your account”.
- JP Morgan Securities (JPMS) traded FULL shares of Common Stock securities without any authority in breach of its customer agreement. The unauthorized transactions occurred when the brokerage account was frozen pending transfer to another brokerage firm. The attorney representing JPMS accepted the questionable trades as “open orders”. Later, the attorney totally denied that those traders even occurred. JPMS brokerage account agreement specifically states that the customer agrees that
“Transactions executed through my Account, whether based on information obtained from JPMS or elsewhere, will be solely my own decision and based on my own evaluation of my personal financial situation, needs, risk tolerance and investment objective(s)”.
In this case, trade history showed that full shares of securities were traded without any authority in a non-discretionary account. The corresponding realized losses were also added along with the notations of wash sales (W) or covered security (C) for the IRS records purposes. In this case, when the customer inquired about the unauthorized trades, JPMS simply tampered the account documents and removed the questionable trades from account statement. The customer did not have a margin account so there was no reason to sell her FULL shares.
- JP Morgan Securities (JPMS) blocked access to the customer’s investment account online when confronted about the suspicious fraudulent activities in a self-directed investment account.
- JP Morgan Securities (JPMS) removed customer access to the monthly statements covering the time when the suspicious activity occurred.
- JP Morgan Securities (JPMS) deleted deposit and withdrawal histories when JPMS was questioned about the incomplete transfer of the withdrawn cash.
- JP Morgan Securities (JPMS) did not provide the date and time of when the account documents were download and/or printed against the industry standard until the customer complained to FINRA.
- JP Morgan Securities (JPMS) withheld cost basis for the securities, that were purchased with JPMS, upon transferring the investment account to another brokerage firm.
It has been more than 2 years since JPMS approved the transfer of the customer’s complete brokerage account (March, 2022). JPMS had an obligation to transfer the complete cost basis information using CBRS within a maximum of 15 calendar days as a part of the COMPLETE account transfer process through ACATS. However, it has been over 2 years and the cost basis for many securities are not transferred to date.
Legal Reforms Needed to Protect the Customers‘ Interests
The entire list of the misconduct mentioned above was watered down as ‘mistake and errors in the record keeping’ by the independent contractors serving an FINRA arbitrators. We need legal reforms to protect the customers’ interests rather than the independent contractors’ business interests.
PDF files of the original and tampered documents are attached below.
