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.