Interactive Brokers Forced by Arbitrators to Pay for Trust Fund's Losses

Leading American brokerage, Interactive Brokers LLC, was ordered by arbitrators today to pay $1.2 million to two trust fund beneficiaries who claim the firm facilitated "reckless trading" by their trust fund overseer, according to a report by Reuters.

This decision seems to put the blame for a fund manager's losses on Interactive Brokers as they failed to stop him from taking risky choices. If such a ruling will be allowed to stand, it can endanger the entire business model by which all online brokers operate.

In 2013, Brian and Jessica Parker first complained to the Financial Industry Regulatory Authority, Wall Street's industry-funded watchdog. According to their claim, a trust fund of $800,000, established for their welfare in their father's will, was reduced to just $75,000 in four years.

The Parkers alleged that the trustee at the time, Robert Dillard, day-traded the account using margin trading and options strategies, resulting in a loss of over 90% of the fund. They claimed that Interactive Brokers "approved and assisted" Dillard's reckless trades and demanded $1.7 million in compensation. The Financial Industry Regulatory Authority awarded them $1.2 million - without any explanation for the decision.

Commenting to Finance Magnates, David M. Battan, Interactive Brokers Group's Executive Vice President, said: "We disagree strongly with the award and we are examining the possibility of appealing it. The case involved trading decisions by a trustee of a family trust and, as an online broker that gives no advice or trading recommendations, Interactive Brokers had no factual or legal responsibility for those trading decisions."

He added: "Two members of the Panel appear to have blatantly ignored the law and ruled against Interactive Brokers based on sympathy for the plaintiffs and based on their (incorrect) belief that the trustee was bankrupt and therefore judgment proof. The decision contains a very well-stated dissent by the Chairman of the Panel, who pointed out very clearly that there was no legitimate legal basis for the award.”