S.D. Securities Faces 2 Suits on Options Trades
Traditional and conservative.
Even brokers at competing securities and brokerage firms have used those words to describe San Diego Securities, the locally owned securities broker-dealer that recently was forced to sell its assets to Los Angeles-based Thomas Green & Associates in the wake of the Oct. 19 market crash.
But two lawsuits filed recently in Superior Court in San Diego by three disgruntled former clients use words such as negligence and breach of contract to describe allegedly fraudulent dealings by a broker at the 19-year-old firm.
Additionally, another disgruntled client recently took out paid newspaper advertisements in order to track down other clients who “lost money with San Diego Securities in October in an options program based on the OEX-100 index,” a potentially risky stock index options trading program.
Spokesmen for Thomas Green and San Diego Securities have declined to comment on the lawsuits or what caused the potential cash shortage. President Michael Collins acknowledged on Oct. 28 only that the asset sale was forced by “trading positions and margin calls” that portended potential cash flow problems “on the horizon.”
According to the lawsuits and complaints from other disgruntled clients and their attorneys, the sale of San Diego Securities’ assets was forced by margin calls that were made in the wake of the Oct. 19 market crash because of an OEX-100 index options trading program that was operated out of San Diego Securities’ La Mesa office.
According to the lawsuits, those margin calls were driven by a “naked” options trading program that, in addition to wiping out clients’ equity investments, generated a further liability in the form of cash required to meet margin calls. The brokerage that places the investments is responsible for paying the margin calls if individual investors cannot meet their obligations.
San Diego Securities, which has declined to comment on specific margin calls, is “talking about a fairly big number” of losses, according to James Krause, an attorney who represents one group of investors that lost money in the trading program. They have not filed suit yet.
Equity losses by San Diego Securities clients could total $2 million, according to Krause, who said he has talked to four of an estimated 20 investors who were believed to have lost money in the program. Those investors also are being held responsible for as much as $2 million more in order to meet margin calls, according to Krause.
The suits allege that San Diego Securities broker Chik Hylton fraudulently described the index options program as “safe and prudent” when it was actually “extremely risky” with the “distinct possibility” that clients could lose their money.
‘Extremely Risky’
The two lawsuits, filed by attorney Steven M. Green for Richard Sipple and for V. Robert and Hilde Jeanne Hesse, allege that Hylton fraudulently placed money from about 20 clients in the “extremely risky” index options trading program.
The suits allege that the options trading program was “inconsistent with the “needs and desires” of “unsophisticated” investors who were led to believe their equity was in less-risky investments.
One El Cajon investor who asked not to be identified said he was stunned by his equity and margin losses because “I went to San Diego Securities because I’m conservative . . . I haven’t gone to Las Vegas in 30 years because it’s not my nature, and then this happens.”
Another investor, who described himself as a “fairly sophisticated” investor, complained that Hylton “never used the words ‘risky’ or ‘very risky.’ It was always: ‘Don’t worry, this program has been designed to be safe.’ ”
The market crash is expected to generate a flurry of similar investor complaints, according to Securities and Exchange Commission official Irving Einhorn. In a recent speech in San Diego, Einhorn predicted that “the arbitration system set up to handle complaints (between brokers and clients) will be swamped by people who will claim they didn’t understand what a margin call is . . . and that their broker told them not to worry about anything.”
Lots of Work for Lawyers
“Some of these people will be very sophisticated investors while others will be people who really had no business being there,” Einhorn said. “I can guarantee that there will be more than a few years of arbitration involved. This (crash) is the Full Employment Act for the Bar.”
The index option trading program in question, which is traded on the Chicago Board Options Exchange, operates much like an equity options trading program, according to the CBOE, which introduced the trading vehicle in 1983.
Depending on how it is used, a CBOE booklet explains, the index option program can appeal both to “conservative blue-chip equity investors” who want to reduce their overall market risk, as well as to more aggressive investors who are “willing to speculate and assume a higher degree of risk.”
However, unlike equity options, where investors generally own the stock in question, the so-called “naked” index options trading program, such as the one brokered by Hylton, calls for payments to be made in cash when an option to buy or sell is exercised.
Additionally, an investor’s level of risk increases when the market moves dramatically, as it did on Oct. 19, according to one broker who is familiar with the OEX-100, which is based on a “basket” of stock prices from the Standard & Poor’s 100.
‘Not for Widows and Orphans’
“It is a very volatile market,” according to the broker. “And it can get as complex as you want. . . . It’s not the kind of thing for widows and orphans.”
Because of the potential for a heavy cash demand needed to cover margin calls when the market moves against an investor, some brokerage firms “won’t let a client do that kind of thing unless they have some kind of marginable security in their account,” one broker said.
According to the Hesse suit, the couple lost its $75,000 equity investment made with San Diego Securities, and is being held responsible for an additional $125,000 that “is allegedly owed” to San Diego Securities because of a margin call made after the market collapsed.
Sipple lost his $65,000 equity investment and “another $110,000 . . . (that) is a result of (San Diego Securities having placed Sipple) in naked option positions” that resulted in a margin call, according to the suit.
Both suits seek compensation for the losses as well as $500,000 in punitive damages.
