Did you Lose Money Due to Unauthorized or Excessive Margin?
Margin is when you use your own securities in your account as collateral to borrow money from your brokerage firm typically to purchase more securities. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, (the difference between the value of the securities and the loan), is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement. This is to protect the broker against a fall in the value of the securities to the point that they can no longer cover the loan. This creates a lending relationship with your brokerage firm. Similar to a bank, when you borrow money, you are charged an interest rate. If the securities in your margin account decline in value sufficiently, your brokerage firm will require you to immediately deposit more collateral to secure the loan due to the decrease in the value of their collateral--the securities in the account. This is called a margin call.
When you receive a margin call, you will either have to deposit additional money into the account, or additional securities. If the investor does not have additional securities or money to deposit the firm will sell enough securities to cover the margin call and meet the required equity maintenance levels. When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investor now either has to increase the margin that they have deposited, or they can close out their position. They can do this by selling the securities, options or futures if they are long and by buying them back if they are short. If they don't do any of this the broker can sell his securities to meet the margin call.
The above mentioned senerio puts the investor at risk to lose more than the amount invested if the value of the security depreciates. In addition the margin interest being charged only adds to the financial damage done to the investors usually resulting in the investor owing money to the brokerage firm even after all of his positions have been liquidated.
The landmark case of Piper, Jaffray & Hopwood, Inc. v. Ladin, 399 F. Supp. 292; 1975 U.S. Dist. LEXIS 16441 (S.D. Iowa August 26, 1975), holds that "The imposition of a duty to investigate the financial capability of an investor entering a margin transaction and to inform that investor of the implications of a margin purchase can also be justified as part of a stockbroker's professional responsibility." If you have been put on margin without your permission, were not fully warned of the risks of investing on margin, or do not feel that it was suitable for someone of your age, experience, risk tolerance or net worth to be placed on margin you may have legal rights against your broker and the brokerage firm.
Is your brokerage firm is suing you to collect a margin debt due. We can help defend you against the prosecution of your margin debt by your brokerage firm. You may have available defenses that could reduce or eliminate any debt that your brokerage firm is trying to collect. For a free consultation on how legal representation can assist you in your margin collection action call 888-760-6552.