Client Complaint of Unauthorized Crude Oil Trades
A client emails on 20 March alleging that six crude oil futures trades executed on 14 March were unauthorized. The broker's order tickets carry the client's account code and were entered by dealer Raza. The recorded phone call that morning contains the client saying, "I am busy, do what you think best," followed by Raza saying, "I will manage it." There is no subsequent trade-by-trade confirmation. Raza's internal chat says, "Client will be fine, he always complains then pays." The account now has a debit balance of PKR 850,000 and the client refuses to pay, demanding reversal. The broker's compliance officer must decide whether to reverse the trades, how to treat the debit, and what to report.
1. What investigation steps and evidence should the compliance officer use to determine whether the trades were authorized?
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Compliance should immediately preserve all records: recorded calls, chat messages, order tickets, confirmations, account statements, emails and dealer notes. It should interview Raza and his supervisor separately and obtain written statements. The key question is whether the client gave actual or apparent authority for each of the six trades.
"Do what you think best" is ambiguous and does not by itself authorize six specific trades. Compliance should check whether there was a written discretionary mandate, whether the client received trade confirmations and objected promptly, and whether the client had previously accepted similar trades. It should reconstruct each trade by time, size, price and margin impact and identify who initiated it. The internal chat is relevant to the dealer's state of mind and supervision, but it does not prove authorization.
2. Should the broker reverse the trades and how should it treat the PKR 850,000 debit?
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The broker should not reverse unilaterally unless the investigation shows the trades were unauthorized and the broker's error caused the loss. If Raza exceeded his authority, the broker is generally responsible for its employee's conduct and should cancel or compensate as appropriate; the debit should not be enforced against the client for those trades.
If the client gave broad discretion or ratified the trades by accepting confirmations or remaining silent, the debit may stand. The same standard should be applied consistently to all six trades, not a blanket reversal. The reasoning and any settlement should be documented. If the client refuses to pay, the broker should follow its complaints and legal recovery process and must not use threats or pressure. The burden should be on the broker to show authorization, because it controls the order records.
3. What regulatory reporting and control remediation does this case require?
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The conduct issue and any suspected fraud should be reported to SECP and the exchange as required. Raza's chat may indicate a pattern, so his other accounts should be reviewed. Control failures include the lack of trade-by-trade confirmation for a non-discretionary account, an unclear discretionary mandate, and inadequate supervision of dealer chats.
Remediation should include mandatory recorded order confirmation, a written discretionary authority process, independent review of dealer trading, and training. Records should be retained for the regulatory retention period. If the client's complaint is upheld, the broker should provide a written outcome and take disciplinary action where warranted.