Types of Investor Cases Commonly Arbitrated

While any claim that can be made in court can be made in an arbitration, in practice, cases often fall into certain well defined categories. In one common situation, a broker recommends investments to a client that, in light of the client's circumstances and investment objectives, are unsuitable. Suitability cases involve several different legal theories, all of which may be available to a particular investor.

If the broker ws merely negligent, claims are generally asserted for negligence and breach of contract. Where the broker's recommendation lacks a reasonable basis, claims may be made under the antifraud provisions of the federal and state securities laws, as well as for common law fraud.(1) Where, in connection with the unsuitable recommendation, a misrepresentation is made by the broker, there may be additional grounds for a claim for fraud or deceit.

Another common experience involves a broker who makes unauthorized trades on behalf of a client. The broker may simply fail to consult a client before making trades in a nondiscretionary account. Sometimes the broker buys stock on margin without authority or ignores specific instructions by a client with respect to a discretionary account. Unauthorized trading can result in claims for rescission, breach of contract, or fraud, depending on the facts.

Sometimes a broker who has discretionary authority over an account engages in excessive trading in order to generate large commissions. This practice is known as "churning," and will provide a basis for claims for state and federal securities fraud, common law fraud, negligence, breach of contract, and breach of fiduciary duty.(2)

Finally, a broker may simply misappropriate an investor's funds. This often occurs in situations where the broker is not reporting a particular transaction to his or her employer. This practice is known as "selling away." In connection with "selling away," it is important to remember that, even if the firm employing the broker is unaware of the transaction in question, or even of the existence of a particular customer, the investor often recovers from the firm on a theory of respondeat superior, controlling person liability under both the state and federal securities laws, or negligent supervision.(3)

1. Marx v. Computer sciences Corp., 507 F.2d 485 (9th Cir. 1974)(opinion false under Rule 10b-5); Dyke v. Zaiser, 80 Cal.App.2d 639, 652, 182 P.2d 344, 350-351 (1947)(opinion false for common law fraud when no reasonable basis); Cohen v. S&S Construction Co., 151 Cal.App.3d 941, 946, 201 Cal.Rptr. 173, 175 (1983)(same); Gagne v. Bertran, 43 Cal.2d 481, 487 (1954)(opinion false for negligent deceit claim).

2. See, e.g., Mihara v. Dan Witter & Co., Inc., 619 F.2d 814, 820 (1980).

3. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1574, 1577 (9th Cir. 1990)(controlling person liability in a selling away case under Rule 10b-5); Ingle v. Bay Cities Transit Co., 72 Cal.App.2d 283, 284, 164 P.2d 508, 508 (1945)(employer's inability to prevent wrongful act does not avoid respondeat superior liability); Alhino v. Starr, 112 Cal.App.3d 158, 174, 169 Cal.Rptr. 136, 146 (1980)(neither does the fact that the employer reaps no benefits from the wrongful acts of the
employee).

For more information or a free consultation, call us toll free nationwide at 800-699-2728 or e-mail me at vdicarlo@dicarlolaw.com

DISCLAIMER: The information at this site is provided as a public service. It is not intended as legal advice and should not be relied upon. You are advised to consult legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation.