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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).
DISCLAIMER: Vincent DiCarlo, who
authored and maintained this site, has entered
government service and, as of September 1, 2008, is no longer engaged
in the private practice of law. Therefore, this site is no longer
being maintained, may not be accurate, and should not be relied
upon. It is not now and was not ever intended as legal
advice. It is being provided for historical purposes, and for the
benefit of those lawyers who are capable of independently verifying the
information and judging the opinions in it, and then reaching their own
conclusions. You are strongly advised to consult qualified 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, and may no longer be accurate or prudent in any case.
The opinions and statements at this site were solely those of the
author. They
were not and are not those of, nor were they nor are they made on
behalf of, any agency of government or anyone else.
Copyright © 1998-2008 Vincent DiCarlo