In May 2015 Gustav purchased 800,000 shares in the United States that could not be sold until 23 November 2015, when the shares’ restricted status lifted. Gustav expected the value of the shares to drop once the restriction was lifted and wanted to sell them as soon as possible after 23 November.
Discussion about selling shares
In mid-September Gustav contacted Tim, his broker, to discuss selling the shares. At this time the shares were trading for about 7 cents a share. Gustav stressed he needed to sell the shares as soon as possible after 23 November because the share price would drop once the restriction was lifted. Tim initially expressed some uncertainty about the transfer, but as time went by Tim reassured Gustav about the process.
Over the following weeks Gustav and Tim emailed and spoke frequently. Tim explained that his company would need to transfer the shares through the Bank of New York, its custody agent in the United States, because it was not a participant in the DWAC (Deposit Withdrawal At Custodian).
Concern at delayed share transfer
On 23 November Gustav emailed Tim reminding him the transfer needed to happen that day because the share price was dropping. Tim replied that the custody team had all the information and would send it to the Bank of New York that night. Tim also advised the custody team had only just become aware that since August 2014 the Bank of New York would not accept transfers of shares worth less than 5 cents. Even though the shares were trading for about 1 cent a share, Tim reassured Gustav that the custody team should be able to get the transaction through. Gustav and Tim continued to correspond. Gustav expressed concern at the delay, and Tim reassured him the custody team were working on it.
On 10 December a senior broker, Cameron, emailed Gustav to advise the timeframe for a standard share transfer process was 4-6 weeks, and it was possible the transfer may not proceed at all because the shares were trading for less than 5 cents a share.
Broker unable to complete the transfer
On 16 December Cameron emailed Gustav to advise the Bank of New York had declined the transfer because the shares were trading for less than 5 cents a share.
Shares sold at a loss
Gustav needed to find another broker quickly. It took time to open an account with a United States based broker and Gustav finally sold the shares on 23 February for a fraction of a cent each, receiving USD950.
Gustav complained to the Tim’s company. The company said it had processed the transaction as quickly as it could. The delays were caused by the Bank of New York and Gustav could have engaged another broker at any time during the process.
Gustav did not accept the response and referred the complaint to us.
Gustav said Tim knew he needed to sell the shares as soon as the restriction was lifted on 23 November. Tim led him to believe there would be no difficulties with the transfer, and was saying the transfer was imminent right up to 9 December.
Gustav said if he had known his Tim’s company was so unfamiliar with the transaction, or that the transaction would take such a long time, he would have found another broker in the United States to accept the transfer earlier.
Gustav considered that Tim’s company had caused him a loss of about USD16,000. If Gustav had been able to sell the shares a week after the unrestricted status was lifted, when the shares were trading at around 2 cents, he would have received between USD16,560 and USD22,400.
We considered it reasonable for Gustav to rely on his broker to perform a transaction in a field in which it claimed expertise. Tim’s company should have known the Bank of New York’s ‘5 cent rule’ could affect Gustav’s transaction and should have either explained the possible problem, or declined to provide the service when Gustav first discussed the transaction. Instead the company did not mention the ‘5 cent rule’ until 23 November, and played down its significance, reassuring Gustav the transaction should proceed. As such, the company had misrepresented to Gustav the service it could provide.
If Gustav had known about the limitations of the broker’s service we considered it most likely he would have engaged a United States based broker, and been able to sell the shares a fortnight after the restriction was lifted. Instead Gustav was reassured that all would be well until 10 December when a more senior broker from the company advised the Bank of New York might not accept the transaction because the shares were trading below 5 cents. By the time Gustav had opened an account with a US broker, the shares had dropped to a fraction of a cent.
If Gustav had sold the shares on 7 December he would have received USD16,800, so we used USD16,800 as the starting point for our calculation of Gustav’s direct loss. Although Gustav ultimately sold the shares on 23 February, we considered he had contributed to the delay by being on holiday in January and by not making enquiries about opening a United States broker account earlier. We determined that it would be fair to say that Gustav could have sold the shares on 9 February, earning USD2,800.
We determined Gustav’s direct loss as USD14,000. After the sale Gustav converted the proceeds to New Zealand dollars. If Gustav had converted USD14,000 on 8 December he would have received NZD21,065.80. We proposed to recommend the broker pay Gustav NZD21,065.08 as compensation for his direct loss.
We also considered it would have been stressful and inconvenient for Gustav to discover so close to the Christmas/New Year holiday period that the broker was unable to process the transaction, and he would need to find another broker. We proposed the broker pay Gustav NZD500 as compensation for stress and inconvenience.
Both Gustav and the broker accepted our proposed recommendation and the complaint was settled.
This complaint was caused by the financial service provider over-promising the service it could provide and under-delivering.
Be careful when promising to provide a service which may not be part of your usual services, you are able to complete the service. If not, make sure you tell your client at the earliest possible opportunity.