Finra Panel Orders Schwab To Pay $4.4M In Second 'Unsuitable' ETF Case This Year

A Financial Industry Regulatory Authority arbitration panel has ordered Charles Schwab to pay more than $4.4 million to a group of investors who accused the firm of failing to catch a pattern of unsuitable, high-risk trades in their brokerage accounts—the second such award against the custodian in six months. The Jacksonville, Fla., panel found Schwab, along with its subsidiaries TD Ameritrade Clearing and TD Ameritrade, responsible for $4,412,646 in compensatory damages and $92,048 in costs, according to the award filed yesterday. It denied requests for punitive damages, treble damages and attorneys' fees. The complaint, filed in August 2024, covered 27 claimants and alleged Schwab and TD Ameritrade concentrated their accounts in complex structured products and nontraditional, leveraged and proprietary ETFs that they should have known were inappropriate, according to the award. The investors alleged negligent supervision, breach of fiduciary duty and violations of securities laws and consumer protection statutes. A spokesperson for Schwab, which purchased TD Ameritrade in 2020, did not respond to a request for comment. Schwab told AdvisorHub that it “acted only as a custodian” and that investment decisions were made by the claimants and their independent financial advisor, who was not named in the complaint. Schwab called the panel's decision “legally wrong” and said it was weighing an appeal, AdvisorHub reported. The claimants' attorney, Michael Bixby of Bixby Law in Pensacola, Fla., did not respond to a request for comment by press time. This is the second time this year a Finra panel in Jacksonville ruled against Schwab and its two subsidiaries, with both cases based on nearly identical claims. In March, a different panel awarded 13 claimants a combined $3.83 million. Both cases were filed Aug. 28 and were argued by the same attorney against the same three entities. Neither Schwab, TD Ameritrade Clearing nor TD Ameritrade faced allegations that they gave bad investment advice directly. The investors in both cases instead accused them of failing to supervise or flag concentrated positions in accounts held and directed by an unaffiliated advisor used the firms as custodian. News outlets have reported that the advisor was Mario Payne of TOAMS Financial, a Jacksonville-based registered investment advisor, and that many of the claimants in that case were retired Duval County teachers who had rolled pension distributions into their accounts. Payne did not return a call for comment by press time. Payne is not currently registered as a broker, according to BrokerCheck. He worked at Edward Jones from 2007 to 2013 and at Raymond James Financial Services from 2013 to 2019, both in Jacksonville, before founding TOAMS Financial, where he has served as owner and chief compliance officer since 2019. His BrokerCheck record lists eight customer disputes, all tied to his time at Raymond James, alleging he “improperly engaged in a high-risk, illiquid, complex, and unsuitable investment strategy” involving structured products misrepresented as “safe, guaranteed, and insured.” Four of those disputes have settled for between $39,312.50 and $159,500; two remain pending, seeking $3 million and $4 million. TOAMS Financial had about $108.8 million in assets under management as of March 30 across more than 600 clients, according to regulatory filings. The firm listed Altruist Financial and the "Florida Retirement System" as its two largest custodial relationships. Neither Schwab nor TD Ameritrade appears among TOAMS's custodians. Finra said in May that it was examining brokerage firms' sales of high-risk structured notes industry-wide. The regulator has extracted large settlements over structured-note sales practices from UBS and Stifel, Nicolaus & Co. in recent years.