A small Falls Church brokerage company has been forced to close its doors after two customers, who lost $6 million in last week's stock market plunge, left the firm with debts of almost $3 million.
Carole L. Haynes, president of First Potomac Securities Corp., said her firm had to cease operations last week after the two customers failed to come up with $2.6 million to meet margin calls on their accounts. Smaller defaults by several other customers brought the total deficit to almost $3 million, Haynes said. Margin accounts allow investors to finance part of their purchases with borrowed money; when the underlying value of the investment falls, the investor must provide more cash.
One Potomac client lost heavily in a stock and options account; the other suffered major losses in a stock index futures account when the markets fell sharply last Monday Haynes said. She would not identify the investors.
Thomas P. Forde, director of District 10 of the National Association of Securities Dealers (NASD), which covers the Washington area, said he had surveyed local firms and First Potomac was the only firm reporting trouble.
First Potomac had to go out of business because the $3 million deficit far exceeded the firm's capital base, which normally is about $150,000 to $200,000, Haynes said. Brokerage firms are required to maintain minimum amounts of capital to remain in business.
"It's just been a nightmare for me," said Haynes, who opened her brokerage firm three years ago. Trying to remain chipper in the face of the firm's failure, she said, "I'm hoping my million-dollar babies will come in with a wire" for the money owed, but she did not sound optimistic.
Yesterday, two examiners from the NASD, which regulates brokerage firms, were in the firm's offices, going through records and advising Haynes on procedures.
One broker quipped, "They're from the National Association of Solvent Dealers."
Haynes sought to reassure the firm's 700 other clients that their funds and securities were safe and unaffected by the firm's closing.
In a letter to customers, Haynes said the firm's plight "creates no problem whatsoever in terms of the safety of your funds."
The reason, she said, is that First Potomac's individual accounts are held by the Securities Settlement Corp. of New York, and that all accounts are insured by the Securities Investor Protection Corp.
Haynes said she had made arrangements with Lara, Millard & Associates Ltd. in Falls Church to handle sales and purchases for customers. If the customers cannot make good on the money they owe First Potomac, they could be sued by either the brokerage firm, Securities Settlement, or both, Haynes said.
The investor who held the stock and options account owes $1.4 million to First Potomac, and the investor who held the futures account owes $1.2 million, Haynes said. The investor lost on futures contracts on the Major Market Index when the contracts opened substantially lower than the price at which they had closed. But the loss on the futures account was so large, Haynes said, that the contracts were quickly sold out by the brokerage firm with a loss to the customer of $1.5 million. The equity investor lost a total of $4.5 million, Haynes said.
Margin accounts allow an investor to buy stocks and put up only 50 percent of the value involved by borrowing the rest from the brokerage firm and paying interest. The margin on stock index futures is about 10 percent of the value of the contracts, while margins on options are about 15 percent, Haynes said.