A Financial Industry Regulatory Authority arbitration panel has ordered Charles Schwab & Co. to pay more than $4.5 million to a group of public school employees who alleged the custodian failed to protect them from unsuitable investments in complex structured products. The award, issued last Thursday, includes $4.4 million in damages and $92,000 in costs, according to the decision.
The case, brought in 2024 by more than 20 claimants, initially sought $3 million in damages. The claimants, many of whom were teachers, coaches, and other staff in a public school district, alleged that Schwab and TD Ameritrade allowed their accounts to become heavily concentrated in high-risk instruments. According to the award, the portfolios included structured products, non-traditional and leveraged exchange-traded funds, and proprietary ETFs.
Michael Bixby, the plaintiffs' attorney, said the clients were "normal working folks" whose holdings were typically 50% to 80% concentrated in autocallable structured products tied to volatile stock baskets. "The case involved failure to implement heightened compliance and guardrails surrounding purchases of complex structured products by mom and pop investors," Bixby said in an interview.
Structured products are often marketed as bond-like investments but are linked to derivatives and small baskets of stocks, making them highly sensitive to market swings. Their fees and commissions are notoriously opaque, as they are not typically disclosed on client account statements. The arbitrators found that Schwab's supervision was inadequate, even though the firm argued it acted solely as a custodian.
In a statement, a Schwab spokesperson said the firm empathizes with the investors but believes the decision is "legally wrong." The spokesperson emphasized that all investment choices were made by the claimants and their independent financial advisor, and that Schwab's role was limited to custody. The firm has indicated it may seek to have the award vacated.
This is not the first costly arbitration loss for Schwab this month. Earlier in July, a divided FINRA panel awarded a Schwab client nearly $1.34 million in compensatory damages related to unauthorized wire transfers from an elderly client's account to a cryptocurrency exchange. That case, which involved a crypto scam, highlighted similar concerns about oversight of client accounts.
The latest ruling comes as Schwab faces increased scrutiny over its handling of complex products and its responsibilities as a custodian. The firm has recently tightened rules on certain investment strategies, including raising the minimum for its tax-aware long-short separately managed accounts to $10 million, a move that reflects broader industry adjustments. These changes are part of a reshaping of tax strategy offerings.
Industry observers note that the arbitration outcome could prompt other custodians to review their supervision of structured product sales, particularly to retail investors. The case also underscores the growing legal exposure for firms that provide execution and custody services, even when they do not directly advise on trades.
For financial advisors, the ruling serves as a reminder of the importance of documenting suitability and ensuring that clients understand the risks of complex instruments. While Schwab maintains its innocence, the award may encourage more claimants to pursue arbitration against custodians in similar circumstances.
