Twelve families in Michigan, who have lost more than $7 million thanks to aggressive positioning by hedge fund OptionSellers, have filed loss recovery claims against INTL FCStone, a global provider of financial services.
Over the past two weeks, OptionSellers has been making headlines following its founder James Cordier posting a confessional video on YouTube. In the video, he said that large swings in the gas market have “likely cost me my hedge fund.”
INTL FCStone Was Asleep at the Wheel
According to the claims filed by the investors, the New York-based brokerage was asleep at the wheel when OptionSellers placed tens of millions of dollars of FCStone customer assets in a bet that natural gas prices wouldn’t rise – a high-risk bet.
Commenting on the situation, Jason Albin, one of the attorneys for the investors said: “most of the investors we represent had disclosed risk tolerances of ‘conservative’ or ‘moderate,’ but the trading in these accounts was pure speculation.”
As can be expected the prices did rise, in fact, they spiked, causing the Michigan investors to lose more than $7 million, the statement of claim alleges. One family lost more than half a million dollars in their IRA (individual retirement arrangement). On top of this, FCStone is seeking an extra $250,000 from the family, as the losses of the bet exceeded the assets in their accounts.
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“All the investors were promised safeguards would be in place in place to protect their savings from large losses. They were blind-sided by the news that their savings were wiped out, and then crushed by FCStone’s margin call,” Albin added.
Furthermore, the statement of claim alleges that normally, the trading strategy of OptionSellers included risk protection and hedging strategies specifically to protect investors from the type of situation that occurred.
However, OptionSellers almost completely disregarded these risk prevention and hedging strategies in the months leading up to November 14, the statement said. This exposed the affected customer accounts of FCStone to unlimited downside risk, including the margin blowout.
INTL FCStone Seeks $35.3 Million
Following the events surrounding OptionSellers, INTL FCStone has liquidated around 300 client accounts that were managed by OptionSellers. This is because their balances fell below the minimum margin requirements. According to a filing on November 28, 2018, the brokerage is seeking $35.3 million, which is owed by its clients.
According to Albin, the filing for the Michigan families is the first in a series of cases that are being prepared by his law firm Chapman on behalf of around 85 investors. He said: “investors have been calling daily since OptionSellers blew up their accounts… The losses have left many devastated and terrified of the consequences of not meeting FCStone’s margin calls.”