Schwab Ordered to Pay Clients $4.5M Over Structured Note Loses

Charles Schwab & Co. was ordered to pay a group of investors in Florida more than $4.5 million over allegations that the firm failed to put in proper safeguards to prevent them from concentrating their funds in potentially risky structured products. A Financial Industry Regulatory Authority panel of two public and one non-public arbitrators held Schwab and TD Ameritrade responsible for $4.4 million in compensatory damages plus more than $92,000 in costs, according to an award on Thursday. Schwab acquired TD Ameritrade in 2020. The claimants alleged breach of fiduciary duty, negligent supervision, violations of securities laws and other claims, according to the award. They had requested at least $3 million in damages, as well as compensation for lost income. The customers alleged that Schwab should have done more to prevent them from purchasing complex structured products, particularly those with complex options components, according to their lawyer, Michael Bixby, who runs an eponymous firm in Pensacola, Florida. Bixby said the investors held self-directed brokerage accounts but also worked with an unaffiliated registered investment advisor that used Schwab and, previously, TD Ameritrade as custodians. The majority of the claimants were retired teachers in their mid-60s to 70s and were investing funds that they had been paid from a state retirement pension. They were not sophisticated or high-net-worth investors and did not understand the complexity of investing in structured products, Bixby added. Schwab failed “to implement a guardrail in place in order to ensure that these people should be permitted to trade in these types of complex products,” Bixby said. The structured products were “worst-of” autocallable notes tied to highly volatile, speculative small-cap stocks, many of which lost “essentially 100% of their principal value,” he added. Bixby said that he is pleased with the award, which covered his clients’ full principal losses. Schwab denied the allegations, according to the award. A spokesperson for the firm said: “We empathize with these investors, but the decision was legally wrong.” “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,” the spokesperson added. A source close to Schwab said the firm is assessing steps it can take to appeal the decision. Industry groups have lobbied Finra to reform its arbitration panel in response to high-dollar arbitration awards, including a $92 million one against UBS Wealth Management USA and another for $133 million against Stifel, Nicholas & Co. Finra in May announced that it is examining the sale of high-risk structured products with a focus on non-principal protected “worst-of” structured notes. Finra did not name specific products or firms but said it identified multiple instances where brokers concentrated assets in complex structured products, which exposed investors to losses that were not correlated with overall market conditions.