Wiped-Out Fund Investors Seek to Recoup Losses From Broker

(Bloomberg) -- Twelve investors of wiped-out investment firm OptionSellers.com are seeking to recoup more than $7 million in losses from INTL FCStone Inc., the brokerage that handled their accounts.

ChapmanAlbin LLC, a Cleveland-based law firm, said it filed for arbitration with the Financial Industry Regulatory Authority on behalf of the Michigan-based investors, who lost all the funds in their accounts and now also owe money to FCStone.

The brokerage "failed to know its customers, failed to know the advisor trading its customer accounts" and didn’t have have procedures in place to protect and prevent losses in the accounts, according to Jason T. Albin, a lawyer at ChapmanAlbin.

Vanessa Mays, director of marketing at FCStone, declined to comment on the arbitration. OptionSellers also declined to comment. A spokesman for Finra said the agency doesn’t comment on pending claims.

Disastrous trading in the natural gas market prompted FCStone to liquidate about 300 client accounts managed by OptionSellers.com after their balances fell below minimum margin requirements. The brokerage said last week in a filing that customer agreements oblige account holders to reimburse it for any deficits, which stand at $35.3 million.

OptionSeller’s implosion garnered international attention after founder James Cordier posted a confessional video on YouTube in which he said extreme volatility in the natural gas market had “likely cost me my hedge fund.” Cordier has written articles on options for publications such as Futures Magazine and co-authored The Complete Guide to Option Selling.

Naked Options

"Investors have been calling daily since OptionSellers blew up their accounts," Albin said in an emailed statement. "The losses have left many devastated and terrified of the consequences of not meeting FCStone’s margin calls."

Tampa-based OptionSellers specialized in writing naked commodity options for high net-worth individuals. Options are said to be naked when they’re unhedged, and when a market moves violently against a naked short options position, it raises the prospect of almost unlimited risk.

OptionSellers’s "overconcentration" of naked natural gas calls -- options that give the holder the right to buy futures -- and crude oil puts -- options conferring the right to sell futures -- meant investors "lost big" when markets moved in opposite directions on Nov. 14, according to ChapmanAlbin.

"OptionSellers was on the wrong side of both trades which caused investors to lose every penny in their FCStone accounts and more," Albin said.

‘Unlimited Risk’

Gas futures jumped as much as 20 percent in New York trading on Nov. 14. Oil futures fluctuated that day and plunged 8.6 percent at one point on Nov. 13.

While OptionSellers’s trading strategy normally included some risk protection, in the lead-up to Nov. 14, hedging strategies were "almost completely abandoned, subjecting FCStone customer accounts to unlimited downside risk including margin blowout," the law firm said.

This isn’t the first gas-related controversy FCStone has been involved in. In 2013, the Commodity Futures Trading Commission fined the company $1.5 million for what it called a failure “to prevent an unchecked customer from taking grossly excessive risks” in a case where FCStone ended up with losses of $127 million, according to a CFTC notice in May of that year.

FCStone has sent forbearance agreements to investors who still owe money, according to Albin. If signed, the accords would release the broker from any future claims or actions from investors, while FCStone would agree to forego interest on the money owed plus other fees associated with the collection of the funds. FCStone declined to comment on the agreement.

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