Prop trader Loss Accountability?

Hope someone can help me out with my situation as I hope this does not happen to other traders. I traded with a prop firm and I went long FMT (Fremont General) on Friday, 3/2/07, then FMT released the devastating news after the close that the fed is shutting down its lending operations. Since I was long and FMT gapped down on Monday, 3/5, the equity I builded up in my prop account over the years was wiped out and the account was negative. Naturally, the prop firm wanted me to wire more money but I have none since I already wired them to put into this trade. Horrible.

So the prop firm took over my prop account on 3/5 with a negative equity balance. I have zero control at this point. The next 2 days FMT made a monstrous rally and was actually trading at my entry price. So the prop firm liquidated, my other positions, and most of the FMT shares at my entry price with no loss at this point. And my prop account was back to positive balance. But the prop firm kept some FMT shares as of 3/9.

And of the remaining FMT shares, the prop firm then moved them on 3/9 to the house account. Then for the transferred FMT shares, the prop firm assigned a “ZERO” cost basis as my entry price. That is impossible and absurd. With a zero cost basis, and the closing FMT price of $8.03 on 3/9/07, the difference created a gigantic profit to my account that I know is not real. Why would the firm do this?

Then I realize yet more horrors await, at year-end, the K1 for my prop account is going to show a profit to the IRS when actually there is none. I am going to have to pay taxes for the profit that never existed. Can someone please help out with some ideas as what to do. What can I do to straighten out this so that I can reach a fair settlement with the prop firm even though the contract states that I am not responsible for the trading losses? Should I get a lawyer since this is quite a larger amount involved. Please help.

 

What firm? Telling the truth doesn't (usually) get you in trouble.

Most big prop firms seem to have traders and/or representatives on ET. Maybe some can help if they know your situation?

I know zero about it (never stops me from commenting tho ) but I would think it all depends on what is in the contract you signed.

Good luck.

 

I would definitely consult a lawyer, no question about it.

 

Sorry, I don’t want to name the firm as this could get ugly and I don’t want it to be an issue if lawyers are involved later. So right now I am just escalating this matter up the chain to get it resulted.