Sucheta Dalal :When Brokers Make You Broke
Sucheta Dalal

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When Brokers Make You Broke  

January 13, 2010

Seven rules to ensure that your broker doesn’t give you a raw deal

In the past fortnight, I received emails from four desperate individuals. Each of their stories had a common theme: that money had simply vanished from their brokerage accounts and they were left with hefty liabilities. Each investor is involved with what seems a futile battle to get the regulator’s attention. Some are tired and are rattling other doors. For instance:

• GS Sahota has written several letters to the Central Bureau of Investigation and wants the bourse to be made a party to the investigation.

• P Srinivas alleges that his broker misused his login credentials to run up fraudulent and unauthorised trades in his account. His loss: Rs40 lakh.

• A Bhargava has been fighting a dispute with at least two brokerage firms in the past couple of years and also lost an arbitration proceeding. He alleges a nexus between the broker and the stock exchange.

• Vijay says his dealer has run up an incredible derivatives volume of Rs1,000 crore in his trading account, leading to a stunning accumulated loss of Rs1.20 crore. His share portfolio was transferred to the broker pool account and is fully eroded. He is clueless about where to start his fight.

Each investor is up against powerful brokerage firms, but it is also most likely that they were careless about how their accounts were handled. In large firms, investors usually end up dealing with junior dealers, who encourage them to drum up volumes by churning their transactions and are quick to blame the investor when their gamble leads to losses.

Escalating complaints usually means being stonewalled or speaking to faceless officials at the end of an email or phone line. At the same time, the firms have a strong legal defence mechanism which immediately stacks the deck against the investor in arbitration proceedings. The broker has legal experts who are well-versed with the systems and procedures of bourses, are armed with an irrevocable power of attorney (PoA) that is usually signed by the investor and know exchange officials personally. Incidentally, education campaigns by the bourses warning investors about PoA are of little use; they are asked to sign with no option to delete one-sided clauses.

On the flip side, far too many retail investors boast of their winnings when the markets are up and are happy to allow brokerage firm dealers to churn their money, but play dumb and act outraged when there is a loss. We have seen all kinds.

A senior citizen, who used tears effectively, had given the dealer her son’s mobile number and didn’t want to be disturbed with transaction details. In another case, the investor falsely claimed that his bank and depository account were forged and probably blew his case, if any. Most often, the brokerage firms are equally wrong. They lure investors into believing that their ‘investments’ in gold or oil futures or equity derivatives are safe and also hide losses from clients.

The bad news for 2010 is that things are unlikely to get much better for investors in defending disputes with brokers. The 2010 Investment Guide of Forbes magazine of the US carries a headline that says, “The brokerage customer is always wrong.” It is worse there. Unlike in India, most firms try and force investors to sign up for binding arbitration. So how do secondary market investors in India protect themselves? Here are seven rules to keep in mind.

1. Don’t be lazy about sending out emails/letters and recording all issues that crop up with a brokerage firm. A communication trail is all-important.

2. Deal with firms that routinely record client calls. Although these recordings are used to protect the firm in disputes, they also are more willing to settle if the dealer is clearly in the wrong.

3. Always place your orders in a clear voice and repeat it. The good brokerage firms train dealers to adopt a standard practice of repeating the order several times during and after the trade. Those who trade online must avoid unprotected computers and delete login and password details.

4. If the firm does not respond to issues in writing but prefers phone calls, it is probably time to worry. Invest in a nice digital recorder that will allow you to tape conversations at your end. But this is a grey area. If you are ethical and tell the dealer you are taping him, he is most likely to stop taking your calls. After all, in every dispute, neither side is 100% correct. On the other hand, if you are squeamish about a quiet recording to protect yourself, you can end up losing sleep while defending yourself. Don’t let anyone fool you about the admissibility of tape recordings in a court of law. Usually, a clear recording clinches your case before the regulator, long before you need to go to court. We have seen disputes getting settled this way.
5. Make it a point to read contract notes and other communication from the broker. The senior citizen mentioned above didn’t even open the envelopes until it was time to pay taxes.

6. If you are a regular trader, make it a point to take your broker’s calls. In a volatile market, you could miss the opportunity to close out transactions and avoid losses only because you are not accessible.

7. When you decide to complain, make sure you stick to facts and don’t worsen the situation with false denials when you don’t know all the rules. Also, it is a good idea to keep your language polite and temperate, although it is the most difficult thing to do when you know you are right.

-- Sucheta Dalal