Drunk investor [Liability for uncovered account?]

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Global100
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Drunk investor [Liability for uncovered account?]

Post by Global100 » Sun Mar 11, 2018 6:42 pm

What would happen if an intoxicated investor with a new brokerage account (with linked bank account / no margin account) gets emboldened and places a stock or mutual fund equity trade. The investor initiates a $20,000 bank transfer and has the greenlight to buy that market day. However this investor, with $7 in that bank account, has no way to cover that $20,000 trade. The bank transfer fails. Trade has already transacted.

When the investor sobers up and realizes what happened, s/he gets scared and doesn't answer the brokerage's calls.

A. What happens if the equity loses $1,000 in value by the time the brokerage discovers? Will the brokerage immediately sell off that equity and hold the investor accountable for the $1000 loss? Do they go through credit bureau to place it on the investor's credit report? Is pay garnished?

B. What happens if the equity has gained $1,000 in value by time the settlement is due? Will the brokerage sell-off the investment and send the net gain to the investor?

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LadyGeek
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Re: Drunk investor [Liability for uncovered account?]

Post by LadyGeek » Sun Mar 11, 2018 6:53 pm

I retitled the thread for clarification and assume you are asking on behalf of someone in a similar situation.

If you want to retitle the thread further, just edit the Subject: line in Post #1.
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H-Town
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Re: Drunk investor [Liability for uncovered account?]

Post by H-Town » Sun Mar 11, 2018 6:59 pm

Why don't you call and find out? Drunk or not, you'll be liable to your action. Some brokerage house will give you some grace because they want to be nice, but they don't have to.

Nowizard
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Re: Drunk investor [Liability for uncovered account?]

Post by Nowizard » Sun Mar 11, 2018 7:02 pm

The company simply knows the trade was made and that the inability to cover the trade is the problem of the theoretical purchaser, not theirs, other than collecting on the transaction. I suspect a key is whether the individual contacts the appropriate party, explains that the error was made and pays any loss that has incurred since the transaction and forgoes any gain. Waiting for contact should only increase the probability of greater difficulty for the person making the transaction. Just an opinion.

Tim

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LadyGeek
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Re: Drunk investor [Liability for uncovered account?]

Post by LadyGeek » Sun Mar 11, 2018 7:13 pm

Here's some background info: Margin: How Does It Work? | Charles Schwab
What happens if you don’t meet a margin call? Your brokerage firm may sell assets in your portfolio and isn’t required to consult you first. In fact, in a worst-case scenario it’s possible that your brokerage firm will sell all of your shares, leaving you with no shares yet still owing money.
Update: See correction 2 posts down from here.
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Re: Drunk investor [Liability for uncovered account?]

Post by Grt2bOutdoors » Sun Mar 11, 2018 7:30 pm

When you opened “said” brokerage account you agreed to pay “all monies” due and payable upon demand. Drunk or sober, you are legally bound to make the brokerage firm “whole” and they will use all legal tools available to them to enforce the contract. Upon trade settlement, if the good funds do not appear in the account, the broker is going to immediately sell-out the position, any losses incurred by them including market decline in security valuation, interest they may have incurred during trade settlement, bank fees due to your bounced check - you are on the hook for. Oh! And they will most likely either suspend your trading privileges and/or close your account. They may report you to credit rating agencies. Yeah, if this hypothetical event actually occurred - you messed up big time! The “street” is a small place - word can travel quickly if you make these types of events habitual.

Scenario B - you failed to settle the trade with cash, broker sells you out and position would have netted $1,000 gain? - no cigar, the trade never properly settled, and you are still in a heap of trouble. I certainly hope these are hypothetical questions, otherwise you are going to find out how quickly the heat gets in the kitchen. :twisted:
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Re: Drunk investor [Liability for uncovered account?]

Post by Grt2bOutdoors » Sun Mar 11, 2018 7:42 pm

LadyGeek wrote:
Sun Mar 11, 2018 7:13 pm
Here's some background info: Margin: How Does It Work? | Charles Schwab
What happens if you don’t meet a margin call? Your brokerage firm may sell assets in your portfolio and isn’t required to consult you first. In fact, in a worst-case scenario it’s possible that your brokerage firm will sell all of your shares, leaving you with no shares yet still owing money.
Margin - is using borrowed money to trade. The OP is talking about using a “cash” only account where trade settlement is with 100% pure cash equity - margin is borrowed funds, generally as high as 90% of the total purchase price of the securities. In a traditional margin account, brokerage can call for additional cash or security collateral to keep the equity in the account at a certain threshold required by the brokerage, should the client fail to post enough collateral - the broker will then sell enough equities including and up to the full value of the account for it to recoup all of the borrowed funds. Any shortfall in the account will be subject to collections. Playing with margin is like playing with fire, only those who know what they are doing should use it.
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Re: Drunk investor [Liability for uncovered account?]

Post by Global100 » Sun Mar 11, 2018 7:56 pm

Theoretical post; Not a post for personal situation, lol.
I certainly hope these are hypothetical questions, otherwise you are going to find out how quickly the heat gets in the kitchen.

If the brokerage enforces a sale and then goes after the investor for the any losses (Situation A), then they should at least issue that investor a short-term capital loss, just like other investors who tax loss harvested.
Scenario B - you failed to settle the trade with cash, broker sells you out and position would have netted $1,000 gain? - no cigar, the trade never properly settled, and you are still in a heap of trouble.
In event of a gain in Situation B, why shouldn't the brokerage have to distribute the net proceeds (minus a late settlement fee, interest/finance charge, etc) to the investor along with the short-term capital gain for their tax return?
Last edited by Global100 on Sun Mar 11, 2018 8:16 pm, edited 4 times in total.

tmcc
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Re: Drunk investor [Liability for uncovered account?]

Post by tmcc » Sun Mar 11, 2018 8:09 pm

everyone brokerage has a "cash available to trade" figure in their system. if you try to do a book transfer from a checking to the brokerage and you can't cover it from the checking, it won't let it go through.

if its a tiny shop and their controls are so bad that this combined situation can happen, they'll liquidate the position and your accounts to cover the liability. ultimately, you'll get a bill if there is any uncovered additional cost. being drunk is not a protected status in the united states.... yet. this thread is silly at best, lock the thread.

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Re: Drunk investor [Liability for uncovered account?]

Post by Grt2bOutdoors » Sun Mar 11, 2018 8:15 pm

Global100 wrote:
Sun Mar 11, 2018 7:56 pm
Theoretical post; Not a post for personal situation, lol.
I certainly hope these are hypothetical questions, otherwise you are going to find out how quickly the heat gets in the kitchen.

If the brokerage enforces a sale and then goes after the investor for the any losses (Situation A), then they should at least issue that investor a short-term loss for "tax loss harvesting" purposes.
Scenario B - you failed to settle the trade with cash, broker sells you out and position would have netted $1,000 gain? - no cigar, the trade never properly settled, and you are still in a heap of trouble.
Seems that if the brokerage forces the investor to pay for a loss in Situation A that, in event of a gain in Situation B, they should also distribute the short-term capital gain along with the net proceeds (minus a late settlement fee, interest/finance charge, etc).
None of the above is going to happen. Lock this thread.
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jadedfalcons
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Re: Drunk investor [Liability for uncovered account?]

Post by jadedfalcons » Sun Mar 11, 2018 8:16 pm

OP, are you "asking for a friend"? :D

Global100
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Re: Drunk investor [Liability for uncovered account?]

Post by Global100 » Sun Mar 11, 2018 8:20 pm

jadedfalcons wrote:
Sun Mar 11, 2018 8:16 pm
OP, are you "asking for a friend"? :D
Nope. Theoretical question posted in the "theory" section, not "Help with Personal Investments" Haha

Situation could also happen to a sober investor in a rush using a smart phone with a small screen to enter a $200.00 trade with funds transfer, except the decimal didn't register and the trade goes through for $20000.

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Re: Drunk investor [Liability for uncovered account?]

Post by Global100 » Sun Mar 11, 2018 8:39 pm

Here is the penalty at Vanguard:
https://investor.vanguard.com/investing ... -penalties
Freeriding

Freeriding occurs when you buy and sell securities in a cash account without covering the initial purchase.

...

Penalty

Your account is restricted for 90 days. During this time, you must have settled funds available before you can buy anything.
Doesn't sound too bad IF the investor steps up to cover any losses.

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Re: Drunk investor [Liability for uncovered account?]

Post by 123 » Sun Mar 11, 2018 10:18 pm

If the investor does not have "good funds" in the account on settlement day the broker generally has the right to sell $20,000 in assets from the account to cover the cost of the new trade. The broker generally does not have to consider any tax consequences when they sell to get their $20,000. Depending on the balance and activity in the account the broker may call and ask the investor how the investor wishes to handle the situation. The investor is on "the hook" for any shortage to the broker that results from their trading actions.
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willing2try
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Re: Drunk investor [Liability for uncovered account?]

Post by willing2try » Mon Mar 12, 2018 2:49 pm

Wasn't drunk, but I actually did something similar. Wanted to buy $1,000 worth of a fund via Ameritrade, but added an extra zero - $10,000. I realized the mistake almost immediately after and called to see if there was any way to void the transaction. I was told that since I placed the transaction 10 minutes ago, and the fund was now selling for more $ per share, I should simply sell it immediately. I actually made a few bucks.

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Re: Drunk investor [Liability for uncovered account?]

Post by Theoretical » Mon Mar 12, 2018 5:15 pm

The more interesting legal question would be in the situation of involuntary intoxication (allergic reaction or being forced/accidentally taking a mind altering drug (say a delivery of pot brownies with lsd from a regular bakery) or a gun being placed to your or a family member's head.

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Re: Drunk investor [Liability for uncovered account?]

Post by LadyGeek » Mon Mar 12, 2018 6:43 pm

This thread has run its course and is locked (derailed).
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