Investors Sue Brokerage, Claim Losses of $4 Million
A group of investors is suing the Los Angeles brokerage firm of Morgan, Olmstead, Kennedy & Gardner for fraud and negligence, claiming that it lost more than $4 million trading stock index options early last year through an ex-broker at the company’s Woodland Hills office.
The suit includes more than 30 plaintiffs, largely San Fernando Valley investors and trustees of pension plans for medical groups in the area. The suit was filed March 1 in U.S. District Court in Los Angeles.
In the lawsuit, the investors say they were clients of former Morgan, Olmstead broker Tim Harrington, with whom they traded Standard and Poor’s 100 stock index options on the Chicago Board Options Exchange. The losses came, the investors say, after they received “margin calls” after the stock market fell sharply in early April, 1987.
A margin call involves investors who speculate in securities using money borrowed from a broker that is backed by collateral, often stock. When the value of the collateral falls below the amount borrowed, the brokerages issue calls, which require investors to put up more collateral to settle their accounts or face having their securities sold off.
The lawsuit alleges that Harrington told investors not to act on the margin calls, which he said were issued by mistake. It also alleges that he told investors that trading in his program would yield 10% to 15% on their investment in the index options with relatively little risk.
Bet on the Future
Investors in index options don’t buy individual stocks. In effect, they bet on the future direction of the overall stock market by purchasing contracts. The value of those contracts is determined by how a specific package of stocks performs as measured by a gauge, such as the Standard and Poor’s 100 index.
The options give investors the right to buy and sell the contracts at a stated price by a stated date. Losses occur if an investor fails to gauge the market’s direction correctly.
Lawyer Phillip L. Bosl, who represents Morgan, Olmstead, said the company denies any responsibility for the losses, which he said were less than the $4 million claimed in the lawsuit. He added that investors signed documents that explained the risks they were taking in trading the options.
Trading Had Risks
“These people engaged in trading that had certain risks,” Bosl said. “The market fell and they lost some money. There’s no liability.”
Harrington’s lawyer, Timothy J. Sargent, said his client believes that the losses could have been prevented had Morgan, Olmstead not taken away Harrington’s trading authority over the accounts shortly before he was fired from the company in April, 1987. Sargent said that Harrington believes he was capable of steering his clients through the market to regain their losses.
“Mr. Harrington’s position is that had he not had the account taken out of his hands, they would not have lost money,” Sargent said. “He had been in similar situations with most of the same investors on prior occasions where the market was as volatile or more volatile.”
Reasons for Firing?
Sargent said it appears Harrington, who now works in real estate, was fired for one of two reasons: handling of the accounts or because he wrote an unauthorized letter telling clients that the accounts had been taken away from him.
Bosl confirmed Harrington was fired, but would not comment on why. He disputed the claim that Morgan, Olmstead should not have taken away Harrington’s trading authority and issued the margin calls.
“It’s sheer nonsense. . . . Morgan, Olmstead exercised its rights and obligations according to the regulations under which it operates,” Bosl said.
In addition to claiming losses of more than $4 million, the investors also are asking for $20 million in punitive damages, $10 million for emotional distress and $12 million damages under Racketeer Influenced and Corrupt Organizations Act, a violation often alleged in civil fraud suits because it allows plaintiffs to sue for triple the amount of actual damages.
