Forced liquidation, sometimes called forced selling, occurs when a brokerage firm or lender sells securities or other assets in an investor’s account without the investor voluntarily initiating the sale.
Forced liquidations most commonly occur when:
- A margin account falls below applicable maintenance requirements;
- The collateral supporting a securities-backed line of credit declines;
- An investor fails to satisfy a margin or maintenance call;
- A brokerage firm increases its internal “house” margin requirements;
- A security becomes ineligible for margin or collateral purposes; or
- A lender demands repayment of a securities-backed loan.
The sale may occur during a rapidly declining market, potentially causing substantial realized losses, adverse tax consequences, and the loss of investments the customer intended to hold.
Not every forced liquidation creates a legal claim. Brokerage agreements frequently give firms broad authority to liquidate assets when margin or collateral requirements are not met. However, an investor may still have a claim when the underlying leveraged strategy was unsuitable, the risks were misrepresented, the firm failed to follow instructions, or the account was negligently handled or supervised.
An experienced investment fraud lawyer can review the account agreement, recommendations, communications, liquidation records, and resulting losses to determine whether actionable misconduct occurred.
Pursuing a FINRA Arbitration Claim
Most brokerage-account disputes are pursued through FINRA arbitration rather than traditional court litigation.
An experienced FINRA arbitration lawyer can investigate the recommendation to use leverage, review the margin or credit agreement, analyze the liquidation transactions, obtain relevant supervisory records, calculate damages, prepare the Statement of Claim, and represent the investor through discovery, mediation, settlement negotiations, and the arbitration hearing.
Potential damages may include:
- Realized investment losses;
- Excessive interest and fees;
- Losses caused by unsuitable leverage;
- Tax consequences attributable to the liquidation;
- Losses from securities sold unnecessarily;
- A remaining debit balance; and
- Other damages recoverable under applicable law.
The availability and measure of damages depend on the facts and law governing the particular claim.
Investors should act promptly because FINRA’s arbitration eligibility rule and separate limitation periods may restrict the time available to pursue recovery. Learn more about FINRA arbitration deadlines and statutes of limitation.
How Forced Liquidation Works
If you find yourself in a forced liquidation situation, it’s likely because you have failed to meet a margin call or have been unable to repay debts.
When this occurs, the broker or exchange will take possession of the assets and sell them in order to recoup the money that is owed.
In most cases, the assets are sold at a loss, which can be significant.
Can You Take Legal Action After a Forced Liquidation?
A forced liquidation by itself does not necessarily establish brokerage misconduct.
The central issue is often what occurred before and during the liquidation.
A potential claim may arise when the evidence shows:
- An unsuitable investment recommendation;
- An inappropriate recommendation to use margin or a credit line;
- Excessive concentration in volatile securities;
- Fraud or material misrepresentation;
- Failure to disclose leverage and liquidation risks;
- Unauthorized trading;
- Failure to follow the investor’s instructions;
- Negligent execution of liquidation transactions;
- Negligence or breach of fiduciary duty; or
- Brokerage-firm failure to supervise.
For example, a broker may recommend that a retired investor use a securities-backed loan to generate additional investment capital without adequately explaining that a market decline could force the sale of retirement assets.
A claim may also arise when an investor was told that a margin call deadline would be honored but the firm sold the securities earlier, depending on the account agreement, communications, and surrounding circumstances.
Investment Losses? We Can Help
Discuss your legal options with an attorney at The Law Offices of Robert Wayne Pearce, P.A.
or, give us a ring at (800) 732-2889.
What is margin call?
A margin call is a demand from a broker or exchange for an investor to deposit more money or securities into their account.
Margin calls are typically made when the value of the securities in an account falls below a certain level, known as the margin requirements.
If an investor fails to meet a margin call within the grace period, the broker or exchange has the right to sell the securities in the account in order to cover the shortfall.
Can a Broker Liquidate an Investor’s Account without Notice?
Some investors learned the hard way the true meaning of “forced liquidation” when their brokers sold their securities without much warning in order to meet margin calls.
In most cases, brokers will give investors a grace period to meet margin calls, and they are not required to sell the securities in an account without notice.
There can be cases where a broker may sell securities without notice (a “Blow-Out), with the investor suffering substantial investment loss, this is typically only done in the most extreme cases where there is a fear of an imminent market crash and the broker wants to protect their own interests.
We have heard from many investors that when they complained to their respective brokerage firms, they were told that they signed contracts that allowed the broker-dealers to do exactly what they did to them and that they had no recourse.
Without doubt, contracts with those onerous contract conditions were signed, but that does not mean that the terms of the contract are enforceable.
What Should You Do Immediately After a Forced Liquidation?
You should act immediately after a forced liquidation by preserving records and demanding a clear “account close-out” explanation, because the timing and discretion behind the selloff often determine the size of the loss.
Start by requesting a written breakdown of what triggered the liquidation (maintenance call, house margin increase, SBLOC collateral threshold, or intraday risk control), the exact time stamps, and the prices and order types used. A margin account is a leveraged account; a house maintenance requirement is a broker policy; a close-out report is the proof that ties the policy to your trades.
Next, lock down your evidence: monthly statements, trade confirmations, margin/SBLOC agreements, account-opening documents, risk disclosures, and every email, text, or platform message from your advisor or the brokerage’s margin desk. If the liquidation was concentrated in a single security or options strategy, document your objectives, risk tolerance, and any instructions you gave that were ignored.
At the Law Offices of Robert Wayne Pearce, P.A., our lawyers review whether the account recommendation was unsuitable, the risks were misrepresented, or supervision failed under industry standards. Forced liquidation can be contract-permitted, but “permitted” is not the same as “proper” when the underlying recommendation or handling was flawed.
Can You Take Legal Action After a Forced Liquidation?
If you have been the victim of a forced liquidation, there may be legal action that can be taken against a broker-dealer for breach of fiduciary duty and other causes of action.
You may not have recourse for the issuance of margin calls and/or forced liquidations of all or some of your securities on short notice or no notice at all, but that doesn’t mean that the broker-dealer did nothing wrong.
IMPORTANT: The most important question to ask is: what happened when the securities-backed line of credit and/or margin accounts were recommended by your broker or financial advisor to be opened in the first place. Depending on the situation that led to you opening up your securities-backed line of credit and/or margin accounts, you may have legal action you can take to help recover your investment losses.
In some cases, the recommendation to open the account may have been unsuitable for you.
In other words, if your broker or financial advisor recommended that you open an account that was too risky for you given your investment profile, then they may be held responsible for the losses that you incurred as a result of the forced liquidation.
Suitability and Best-Interest Obligations
A recommendation to use margin or a securities-backed credit line should be evaluated in light of the investor’s financial circumstances and objectives.
Relevant factors may include:
- Age;
- Income;
- Net worth;
- Liquidity needs;
- Investment experience;
- Tax consequences;
- Time horizon;
- Risk tolerance;
- Dependence on portfolio income;
- Ability to satisfy a margin call; and
- Capacity to withstand a forced sale.
The firm’s discussion of FINRA’s Know Your Customer and suitability standards explains the obligations applicable to certain earlier recommendations.
For retail recommendations made on or after June 30, 2020, the SEC’s Regulation Best Interest generally requires a broker to act in the retail customer’s best interest and not place the broker’s or firm’s financial interests ahead of the customer’s interests.
Whether a particular recommendation violated an applicable standard depends on the investor’s profile, the risks disclosed, available alternatives, the broker’s compensation, and the evidence surrounding the recommendation.
Brokerage-Firm Supervisory Responsibilities
Brokerage firms have independent responsibilities to supervise leveraged accounts and their financial professionals.
Appropriate supervision may include:
- Reviewing recommendations to open margin accounts;
- Evaluating securities-backed lending strategies;
- Monitoring concentration and leverage;
- Reviewing customer risk profiles;
- Detecting unauthorized margin activity;
- Monitoring repeated margin calls;
- Reviewing communications about liquidation risk;
- Supervising recommendations to borrow against retirement assets;
- Responding to customer complaints;
- Reviewing exception reports; and
- Escalating accounts showing significant risk of forced liquidation.
A brokerage firm may face potential liability when inadequate supervision permits or contributes to misconduct that causes investor losses.
Investors can learn more about when they may be able to pursue a brokerage firm for investment losses.
Get Your Free Consultation with an Attorney that Understands Credit-Line & Margin Accounts
An experienced stockbroker fraud lawyer can review the complete sequence of events—not merely the final liquidation—to determine whether the broker or brokerage firm bears responsibility for the investor’s losses.
The firm generally handles qualifying investor-loss claims on a contingency-fee basis. Clients ordinarily do not pay an attorney’s fee unless compensation is recovered.
Call (866) 860-9572 for a free and confidential consultation.
