Interactive Brokers seeks $75k from customer who sues it for negligent position liquidation

“Attack is the best form of defence”, or so one might think when considering the latest developments in the lawsuit filed by Robert Scott Batchelar – a former customer of Interactive Brokers, alleging that Interactive’s trading software was negligently designed, which resulted in an automatic liquidation of the positions in his account that cost him thousands of dollars more than it should have.

Interactive Brokers has failed to dismiss the lawsuit, and had to respond to the plaintiff’s complaint by November 1, 2019. The response, seen by FinanceFeeds, is rather stark, as it includes a counterclaim against the plaintiff.

In the document, filed with the Connecticut District Court on November 1, 2019, Interactive Brokers LLC asserts a counterclaim for breach of contract against Robert Scott Batchelar to collect a current unpaid negative balance in his margin account of (-) $75,244.88, inclusive of unpaid fees and charges. According to the brokerage, Batchelar owes this money to Interactive pursuant to the Customer Agreement between them. Interactive seeks a judgment declaring the mandatory arbitration provisions of the Customer Agreement valid and enforceable and compelling Batchelar to arbitrate the counterclaim.

Interactive says that Batchelar entered into a Customer Agreement on or about August 19, 2011.

As part of the Customer Agreement, Batchelar agreed that: (i) it is his obligation to monitor his account and ensure that applicable margin requirements are met at all times, and (ii) if his account falls below its margin requirements, Interactive has the right (in its sole discretion) to liquidate any and all positions in his account immediately, without notice or margin call. For instance, Section 11(B) of the Customer Agreement states:

“Requirement to Maintain Sufficient Margin Continuously:

Margin transactions are subject to initial and maintenance margin requirements of exchanges, clearinghouses and regulators and also to any additional margin requirement of IB, which may be greater (“Margin Requirements”). IB MAY MODIFY MARGIN REQUIREMENTS FOR ANY OR ALL CUSTOMERS FOR ANY OPEN OR NEW POSITIONS AT ANY TIME, IN IB’S SOLE DISCRETION”.

As part of the Customer Agreement, Batchelar expressly agreed that Interactive did not have an obligation to issue margin calls prior to liquidating positions in his account, and he also agreed that Interactive was authorized to liquidate account positions, without notice, to satisfy margin requirements for his account.

Batchelar further agreed that Interactive would have sole discretion to decide whether and how to liquidate his margin account.

The brokerage argues that, on August 24, 2015, Batchelar failed to ensure that his margin account was in compliance with all applicable margin requirements that existed as of that time. According to the brokerage, to address the margin violation in Batchelar’s margin account, Interactive liquidated the account pursuant to the terms of the Customer Agreement and as allowed by law. As a result of this liquidation, Batchelar’s margin account currently has a negative balance of (-) $75,244.88, which (according to Interactive) he owes to the company.

Batchelar is alleged to have explicitly agreed, as part of the Customer Agreement, to reimburse Interactive for the cost, including attorneys’ fees, of collecting any negative balance in his margin account.

Batchelar, however, claims that the elimination of his positions by Interactive’s software was disproportionate to the market and cost him somewhere between $95,145 and $113,807.

In his Second Amended Complaint, Batchelar alleges that the auto-liquidation was “the result of negligent design, coding, testing and maintenance.” He alleges that the programming flaws were the result of Interactive’s failure to meet industry standards in its design and testing of the software and its failure to include certain instructions in the algorithm.