Small Broker/Dealer faces closure as FINRA tightens the noose.

Posted by on Aug 31, 2010 in Uncategorized | Comments(0)

Investment News reports that a small California broker-dealer, Pyramid Securities, has been told by FINRA to close its doors for net capital violations. This is a result of a securities arbitration award against the firm in the amount of $339,000. From reading the article, it appears that the firm does not have the money, or insurance, to pay the award.

And that brings up the scary part of doing business in today’s environment. The entry cost is fairly low for anyone to set up a broker-dealer and then do significant damage. I have represented customers in arbitration claims where I have heard, more than once, “if you win, you’ll put us out of business.” Given what I’ve seen, that would not necessarily be a bad thing.

But Pyramid does have some money. It hired a lawyer to get an injunction to stop FINRA from shutting the firm down. The Federal judge has said no, for now. Which means that Pyramid will go the way of Jesup & Lamont, another firm with net capital issues.

I don’t pretend to know how to calculate net capital. I think computers do it, for now. But the question an investor should ask of him or herself is “what happens if something goes wrong? Who stands behind the guy who is selling me this idea? What if I need legal recourse?” In a number of instances, the broker-dealer is only worth as much as the credit line on the owner’s credit card.

Some of you may say “What about SIPC?” SIPC may cover some unauthorized trading losses, if the firm goes out of business. But SIPC is not an insurer or guarantor against market losses. Neither is a brokerage firm. But there are bad apples out there. There are brokers whose sole interest is lining their own pockets. When that occurs, arbitration is generally the recourse. And if you win against one of these small firms, you may be able to use the award to wallpaper your bathroom, but that’s about it.

So ask questions? What insurance do you have? How much in cash reserves do you have? Who stands behind your company? And get it in writing.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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