Traders Sue Brokerage House Over Stock Market Crash With AM-Stocks-Markets Bjt
NEW YORK (AP) _ Two Florida limited partnerships sued a brokerage house Friday for at least $100 million, accusing it of ″panic, mismanagement and indifference″ following Monday’s stock market crash.
The federal civil suit was filed on behalf of Pompano-Windy City Partners Ltd. and East Wind Associates Ltd., which traded in securities and commodities for their own accounts.
The Boca Raton, Fla.-based partnerships accused Bear, Stearns & Co. of liquidating their margin positions without notice.
Buying stock on margin is the use of money borrowed from a brokerage to cover up to 50 percent of the cost of securities.
When the value of a stock falls, a brokerage issues what is known as a ″margin call,″ which is an instruction to the client to provide more assets to bring the percentage of the stock’s value covered by the loan back within required limits. If the call is not met, the brokerage can sell off the stock involved to cover the debt.
The lawsuit claimed that as the Dow Jones industrial average plummeted 508 points on Monday the brokerage had no certain way of knowing the correct margin requirements for many of its clients.
″Many of Bear Stearns’ personnel were in a state of panic and hysteria″ at the time, the suit says.
As a result, the suit alleged, Bear Stearns ″began (on Tuesday) to liquidate Pompano’s positions without first notifying Pompano of a margin call″ or giving the Florida partnership ″an opportunity to meet its margin requirements.″
In seeking $100 million in punitive and compensatory damages, the Florida partnerships accused Bear Stearns of breach of contract and fiduciary duty, violating securities law, fraud, negligence and defamation.
A spokeswoman for Bear Stearns, Fabianne Gershon, declined comment because the firm had not seen the lawsuit.
The lawsuit also accused Bear Stearns of breaching its duty to East Wind by ″liquidating East Wind’s account in spite of the fact that the account had no deficiency.″
The lawsuit claimed that on Tuesday Bear Stearns ″liquidated Pompano positions at or about the day’s lowest prices. That same day, Bear Stearns opened new positions in Pompano’s account, without authority to do so, resulting in further losses.″
East Wind was never notified of a margin call and Pompano was not notified until Thursday that its accounts had a $19 million deficit, although Bear Stearns ″knew or should have known″ that the plaintiffs were ″ready, willing and able″ to meet a margin call, the suit said.