A FINRA arbitration panel ordered JP Morgan Securities to pay two clients $485,000 in compensatory damages for overly concentrated investments in U.S. Treasuries made by one of its brokers, according to a recent FINRA filing.
Robert Owen Klein invested about 40% of the clients' assets in short positions in U.S. Treasury bonds betting that interest rates and inflation would rise, said Theodore Cohen, a lawyer with Spolin Cohen Mainzer in Manhattan Beach, Calif., who represented the claimants, Benjamin and Holly Hoch.
The extremely concentrated positions proved disastrous for his clients, Cohen said. Within three months, their portfolio lost half its value for a total loss of more than $1 million, he said.
According to FINRA's dispute resolution filing, the Hochs requested $2.6 million in damages plus $750,000 in attorneys' fees, expert fees, stenographic costs and punitive damages.
"Because they [the investments] were so concentrated, the Hochs suffered huge losses," Cohen said. Selling the bonds short further aggravated the situation because it put his clients at risk of margin calls, which wouldn't have been the case if the positions had been held long. As such, when the market moved against the short bets, Klein was forced to close the positions and the clients consequently "got totally whacked," Cohen said.
According to Cohen, Klein put 70% of the couple's liquid net worth into Treasury positions and precious metals, even though the clients expected a capital appreciation portfolio, which the firm's advisory agreement described as consisting of mostly equities. Instead, Cohen said, the clients got "a bunch of short Treasuries, [or] fixed income."
"It wasn't taking 10% of the portfolio or 15% of the portfolio and making some aggressive bets," Cohen said.
JP Morgan's troubles may not be over. Klein has six similar claims pending against him, according to BrokerCheck. The claims allege that he made unsuitable or over-concentrated investments in short Treasury bond positions.
"Klein's philosophylike a lot of people'swas that we're going to see inflation and increasing interest rates at some point. Against that micro perspective, he loaded up back in 2011, and we're all sitting here still waiting for rates to go up," said Cohen.
Paul Schumacher and Jason Lindsay of Los Angeles law firm Greenberg Traurigthe attorneys for JP Morgan Securities and Kleindid not return phone and email messages seeking comment. Robert Carosella, Jr., a spokesperson for JP Morgan Securities, declined to comment.
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