A FINRA arbitration panel awarded a hedge fund $63.7 million in its dispute with its broker after arguing that the broker made unexpected margin calls in October 2008 that the hedge fund could not meet, ultimately leading to the hedge fund's collapse. According to news reports of the dispute, as market turbulence worsened in October 2008, losses on the hedge fund's positions mounted and the broker made a margin call requiring the hedge fund to post additional collateral to back its trades. The hedge fund responded that it had never before been required to post so much collateral so suddenly, but the broker stood by its position. Unable to meet the margin call, the hedge fund was required to sell its positions the next morning, a day the DJIA was down more than 700 points. The losses incurred that day effectively put the hedge fund out of business.

Unfortunately, the arbitration decision does not provide details of the facts (including any potential extenuating circumstances), of the arbitration panel's analysis, or of the arbitration panel's reasoning for its ruling. Yet, the arbitration panel's grant of an award seems to indicate that the broker had a duty to the hedge fund to maintain its course of dealing and not exercise its contractual right to make a margin call outside of a range in which it had previously made margin calls. While we are not providing a commentary about whether the actions of the broker were fair or unfair, it seems that the arbitration panel's decision cuts against the general contractual understanding that brokers have significant flexibility in establishing and maintaining margin accounts, and in making margin calls when it deems necessary. The questions arise: Should the broker have provided more notice of the margin call (assuming it had time available)? What duties does the broker have to its client in making margin calls? What additional contractual language could have been included in defining each party's rights and responsibilities under the margin arrangements? What should a broker do the next time it is in a similar situation?

While this decision will likely be appealed to a court, at which time the facts and an analysis should be forthcoming, it marks a significant shift from the general understandings of margin arrangements in the marketplace. We will continue to monitor this case and will provide further analysis as it develops.