The
law of investor rights and securities arbitration is complex. It
cannot be summarized in
a page, but at some risk of oversimplification, below is
a general summary of the types of conduct that support most of the
claims that are filed.
List of Claims 
- Unsuitability
- Breach of Fiduciary
Duty
- Negligence
- Failure To Supervise
- Misrepresentations and Omissions
- Unauthorized
Trading
- Churning
This list is not exhaustive, but it
covers the majority of claims that are made in securities (NASD) arbitration.
- Unsuitability. This
is perhaps the most common of investor claims. It arises out
of Rule 405 of the New York Stock Exchange, the so-called "Know
Your Customer" Rule. Before making investment recommendations,
brokers have an obligation to attempt to learn from the customer
accurate information about the customer's level of investment
sophistication, experience, objectives, net worth, and financial
needs. Based upon that information, a broker has an obligation
to make only those investment recommendations that are in line
with or "suitable" for that particular customer.
If a broker makes unsuitable recommendations, the customer
may have
a valid claim. A classic example is
a broker recommending to an inexperienced elderly
widow $200,000 savings that
she invest all of it in high risk stocks.
Lately,
there have been an increasing number of unsuitability claims
for the sale of variable
annuities where the undisclosed costs and
risks of the variable annunity form the basis of the claim.
- Breach
of Fiduciary Duty. A fiduciary duty is an exceptionally
high degree of care that the law imposes on certain relationships.
Some common examples are therapist-patient, lawyer-client,
and guardian-minor ward. The stockbroker-customer relationship
can be a fiduciary relationship if the customer looks to
the broker for advice, the broker is aware that the customer
is
depending on the broker, and accepts that responsibility.
When a fiduciary relationship exists, a broker has an obligation
to use the utmost duty of loyalty, good faith and care toward
the customer.
- Negligence. Negligence
is the failure to live up to the minimum acceptable standard
of care within a
community or industry. There are many different types of claims
for negligence. Financial advisors and stockbrokers can be negligent
in making recommendations or in managing a portfolio in ways
that the industry recognizes to be inappropriate.
- Failure
To Supervise. Brokerages have specific and detailed
obligations to supervise the activities of their brokers
and their firm. Among other things, brokerages have an obligation
to review every trade ticket that is submitted by the brokers
in the firm. If a broker's client accounts show a pattern
of excessive trading, or the sale of the same investments
across the board to all types of clients, the firm has an
obligation to investigate for abuse. The failure to do so
can lead to liability.
- Misrepresentations and
Omissions. Sellers of securities have strict obligations
to provide accurate information about the investments they
sell. Federal and state securities laws prohibit salespersons
from making any "material misrepresentation" about
investments that they are selling. Further, the laws impose
an obligation not to omit any information that a reasonable
investor would want to know about in making a decision
to invest. If a broker incorrectly represents that a customer
should buy
stock in a company because it is in merger negotiations
with a Fortune 500 company, there may be a claim. If a
broker fails
to mention that the company's largest customer that represented
50% of its revenues has just left, there may be a claim.
Or, if a seller does not fully explain the costs and risks
of a
variable annuity, there may be a claim.
- Unauthorized
Trading. When brokers make trades in a
customer account without first obtaining the customer's
permission, and the broker has not been given discretion
to make such trades, the trade is unauthorized.
- Churning. These
claims, also known as excessive trading, require a
customer to prove that the broker exercised control over
the decision
making in the account, that the trading was excessive,
and that
the broker acted in reckless disregard of the customer's
interests.
Excessive trading is normally measured by cost equity
or turnover ratios.
|
|
