The Verbal Order That Grew
Tunde is the sponsored individual on the desk of a Lagos dealing member. His client, Mrs. Okonkwo, a retired teacher, signed a mandate limited to cash-only equity purchases, with no margin and no derivatives. On Monday she telephoned and said: 'Buy some banking stock, maybe 5,000 units, if the price is right.' Tunde bought 50,000 units of a tier-1 bank at NGN 28.40, a consideration of NGN 1.42 million. Her account held only NGN 610,000. The contract note showed a debit balance, and on T+2 the trade failed; the firm's back office settled it from the house account without telling her. By Friday the share price had fallen 12%. Mrs. Okonkwo called to complain that she never authorised the purchase and that she would not pay for the firm's 'gamble.' Tunde replied that she had said 'banking stock' and he had used his discretion on quantity because the price was attractive. There is no recording of the call; the order ticket says 'verbal – client.'
1. Did Tunde have authority to execute 50,000 units? Analyse the scope of the client's instruction and the mandate.
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No. The written mandate is cash-only and prohibits margin. The verbal instruction - 'buy some banking stock, maybe 5,000 units, if the price is right' - is at most an indication of interest, not authority to buy 50,000 units. Quantity, price and settlement capacity are material terms. Even if the client left quantity open, the SI had no discretionary authority; discretion requires a written discretionary mandate, which the client had not given.
The order also breached the cash-only instruction: the account held NGN 610,000 against a NGN 1.42 million consideration, so the trade implied a debit balance or margin. A prudent SI would have queried the order before execution. The order ticket saying 'verbal – client' does not cure the problem because it records neither the client's actual words nor a price limit. The firm should have rejected or confirmed the order before sending it to market.
2. What should the firm have done at T+2 when settlement failed, and what should it do now about the complaint?
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At T+2, the firm should not have quietly settled the trade from the house account. It should have escalated to compliance, contacted the client immediately, explained the failed settlement, and documented her instructions. Market rules on failed trades - buy-in or sell-out - should have been followed. Using house funds to conceal the failure created a misleading impression and exposed the firm to loss.
Now the complaint must be acknowledged promptly, logged, and investigated. The firm should retrieve the call record (none exists), interview Tunde and the back office, and determine the authorised quantity. The unauthorised portion - 45,000 units - should be unwound or transferred to the firm's own account, and the client should not bear the loss. If the client suffered loss from the firm's error, remediation should be considered. The complaint should go through the firm's complaints process with a written response, and the client should be told of her right to escalate to the SEC if unresolved. The SEC may also need to be notified of the settlement failure.
3. What record-keeping and conduct failures does the case reveal, and how should they be fixed?
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The case reveals weak order controls: no call recording, a vague order ticket, no pre-trade cash or mandate check, no same-day written confirmation of the verbal order, and no complaint register. The back office treated a failed trade as a house problem rather than a client issue.
Fixes include recording all client order lines; deploying an order management system with mandate flags for cash-only, no margin and no derivatives; requiring a pre-trade cash check; sending a written confirmation by email or SMS before execution of any verbal order, with a stated quantity, price limit and settlement amount; maintaining a complaint register with root-cause analysis; training staff on agency duties and unauthorised trading; and having compliance review a sample of orders weekly. Disciplinary action may be warranted for Tunde.