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The Texas Securities Act , when applicable, is an extremely powerful tool for any investor seeking to recover an investment and other damages when they have been a victim of fraud or when the Texas Securities Act (TSA) has been technically violated, and this is particularly true when an investor invests in a private oil and gas deal that may not be compliant with the TSA or when the deal is misrepresented, or perhaps an outright scam.  Oil and gas scams are, in fact, a staple of the enforcement actions brought by the Texas State Securities Board, and even though the Texas State Securities Board often shuts down the scams and the scammers, investors don’t always get compensated for their losses.

With the stock market reaching recent all time highs in late 2017 and going into 2018, private investment will predictably increase, and in Texas, a lot of investment dollars find their way into oil and gas drilling programs and other investments tied to our so-called “black gold.”   One recent Houston Chronicle article made a good case of why we will see more and more money flowing into the oil and gas and drilling sectors in Texas.   In short, with the price per barrel up from lows of last year, and with the Texas economy booming, it is reasonable to predict that there will be much more drilling activity, and investment into drilling activity.  This usually translates to more private investment opportunities for individual investors in the Texas oil and gas sector, and this predictably will attract promoters and other scam artists hoping to exploit gullible and unsophisticated investors hoping to take part in the energized energy sector.  And, surprisingly, it is still common for promoters of oil and gas deals to abscond with investors’ dollars.

Investments in oil and gas can come in many shapes and sizes.  Investors can, of course, invest in a variety of publicly traded securities, including mutual funds, ETFs, Master Limited Partnerships, and specific companies (e.g. Exxon Mobile, Royal Dutch, and many others who are headquartered in Texas) whose share value is tied to the oil and gas industry.  Investing in a public traded vehicle generally eliminates the opportunity for most registration fraud, IF you are investing through a registered broker that makes a suitable recommendation in light of your investment objectives, risk tolerances, sophistication, and financial condition, but when you are investing in a private investment, the potential of securities fraud may be increased.

While we sometimes hear our politicians scream about someone’s “chickens coming home to roost,” the origin really deals with curses and offensive words and actions that may come back to haunt you.  The old adage suggests your curses and offensive conduct are like young chickens, and will eventually come home to roost–meaning your bad conduct will eventually rebound to cause you harm.   Perhaps investing on margin in a bull market is an apt analogy.

Indeed, all of our accounts should be showing substantial gains in the last 12 months, as the Trump bull market continues to run.  Compared to numbers one year ago, margin investing is on the rise, with more and more accounts showing increasing margin debit balances. At the end of November 2017, FINRA reported there was more than $627 Billion in margin debit balances in retail customer accounts, compared to $553 Billion at the beginning of 2017, more than a 13% increase in borrowing to invest in stocks.  So is this a curse that may rebound to cause you harm?  Maybe…maybe not.

Purchasing on margin carries with it significant risks, particularly in the event of a rapid market decline.  Margin can, for the right situation and the experienced and sophisticated investor be a very good tool to increase returns on certain investments, particularly short term investments, but at the same time, margin can decimate an account in a declining market or when a particular investment’s value declines.   When the stocks in the account decline, or even if the firm believes the overall market conditions are not favorable to margin investing, the account holder may face a margin call.  The rules of FINRA and the exchanges supplement the requirements of Regulation T by placing “maintenance” margin requirements on customer accounts. Under the rules of FINRA and the exchanges, as a general matter, the customer’s equity in the account must not fall below 25 percent of the current market value of the securities in the account. Otherwise, the customer may be required to deposit more funds or securities in order to maintain the equity at the 25 percent level. The failure to do so may cause the firm to force the sale of—or liquidate—the securities in the customer’s account in order to bring the account’s equity back up to the required level. If the account holder does not have sufficient assets, they must either make a deposit of additional funds or securities, or their assets in that account, and possibly other accounts, will be sold so that the firm is not at any risk.  Make no mistake about it, most margin account agreements permit the firm to sell out your investments at any time, without any prior notice to you or consent from you.  Even if your broker promises you that he will call you first, such promises may not be enforceable.  In the event of an acute dip in the market, your account may be sold out at the short term bottom without any prior notice.

As a Texas securities attorney I have been involved in the securities industry over much of the last three decades, and it seems the debate over the fairness of mandatory arbitration before FINRA between customers and firms or brokers has been heated, and near constant.  Periods of greater scrutiny seem to only coincide with any rule proposal or legislation which has the potential of tilting the playing field in one direction or the other. During this debate, FINRA statistics seem to used by both sides (the consumer advocates and the industry) to support their respective arguments, but do these statistics tell us anything about “fairness.”

For those that may not have had the pleasure of engaging in this titillating debate,  it may be generally summed up as follows:  “Is FINRA Arbitration Fair, And Does It Offer Any Compelling Advantage to Either the Industry or the Public Customer?”  It is not surprising that each constituency group argues zealously they are “right” in their analysis of fairness, or the lack thereof.  However, and more interestingly, these constituencies can sometimes be found to argue “Yes” before some audiences, and “No” before others, perhaps suggesting a more candid insight while their respective guard is down, if not some resignation, about the current process and maybe a “kiss your sister” type of fairness.

Some background may be helpful for those not familiar with the origins of the debate.  In 1987 the United States Supreme Court decided in the Shearson v. McMahon case that brokerage firms can contractually mandate arbitration for claims brought by their customers, thus forcing citizens to give up their right to the court system  and a jury.  It was heralded as a fair trade-off given the so-called fairness, efficiency, and economy of arbitration versus the court system.  Since then, the debate continues:  Is FINRA arbitration fair, and does it still offer compelling reasons to waive a right to a jury trial? Pragmatically speaking, the answer may not matter because it is likely, if not certain, that the customer agreement used by every brokerage firm contains a provision requiring mandatory arbitration before FINRA, and change to the status quo will only come, if at all, from the legislative and rule making process, or perhaps from a new decision from the Supreme Court, but don’t hold your breath.