J.P. Morgan Securities, LLC ("J.P. Morgan") was recently ordered by a three-person arbitration panel to pay two of its clients $485,000 in damages. The clients filed an arbitration against the brokerage firm and registered representative Robert Owen Klein in January 2012 for losses they suffered as a result of an investment strategy that involved short selling treasury bonds.
According to a recent article in Bank Investment Consultant, Klein invested around 40 percent of the clients' assets in these short treasury positions betting that the interest rates would rise. Unfortunately, the concentrated investments lost the clients more than $1 million. Selling the bonds short caused additional damages because it put the clients at risk of margin calls, which wouldn't have been the case if the positions had been held long. When the market moved against the short bets, Klein was forced to close the positions, resulting in substantial losses.
According to Klein's BrokerCheck report, available through the FINRA website, he has already been the subject of three customer complaints revolving around similar claims of misconduct, beginning in fall of 2011. He also has six additional complaints that are still pending, all involving investments in government debt.
One of the claims asserted against J.P Morgan in this case was failure to supervise. Under FINRA Rule 3010, brokerage firms owe their customers a duty to use reasonable care in the supervision of its agents. The rule provides that "each member shall establish and maintain a system to supervise the activities of each registered representative, registered principal, and other associated person that is reasonable designed to achieve compliance with applicable securities laws and regulations."
Failure to supervise claims can include the failure to monitor, review, and investigate red flags in its due diligence efforts, as well as in the handling of clients' investments.