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All brokers owe a standard of care or fiduciary duty (for commission based accounts) to their clients. Negligence claims benefit from the fact that a plaintiff does not need to prove intent or scienter, as in a fraud claim.
Duty of Care
As investment professionals, brokers and brokerage firms owe their customers certain duties, or standards of care. If these professionals breach any of those duties, resulting in financial losses for their clients, a lawsuit may be appropriate.
To succeed in a negligence claim against a broker, an investor must prove four elements: duty, breach, causation, and damages. A stockbroker’s duty is to act within an industry standard or FINRA suitability rule when making investments in their client’s accounts. When a broker breaches this duty, causing injury to an investor, he or she can be held liable.
A breach of this duty might include recommendations that are unsuitable for an investor’s individual goals, investing profile, or risk tolerance levels; over concentration in one type of investment; and misrepresentation or omissions of material information about an investment. Your Los Angeles investment fraud attorney can help you determine whether a broker’s negligent conduct caused your harm. In negligence claims, investors do not need to prove scienter or intent, which is a requirement in fraud cases.
Duty of Suitability
Stockbrokers and investment advisers owe an industry standard (for commission accounts) or fiduciary duty (for % fee based accounts) to only recommend investments that are suitable for their clients. Brokers must take time to learn the client’s essential facts, including investing experience, risk tolerance, net worth, educational level, and other information. Brokers who fail to properly obtain this information and recommend unsuitable investments can be found liable for negligence.
Examples of brokerage negligence include recommending an inappropriately risky or complex product to someone without the necessary investing experience, or recommending a long-term, speculative investment to an elderly person. A basic negligence claim requires proof of four elements: duty, breach, causation, and damages.
Negligence claims differ from fraud claims in that the plaintiff does not need to prove scienter, or intent, on the part of the broker. Instead, the plaintiff must show that the broker breached a duty owed to them and this breach directly caused them financial losses.
Duty of Informed Consent
When you invest your money with a broker, you expect that person to make prudent decisions about where your funds will go. Broker negligence is the type of wrongful behavior that can result in you sustaining significant losses. When brokers make investments that are not in their clients’ best interests, such as placing funds into a stock that they know is going to decline or engaging in unauthorized trading such as “churning” where they buy and sell securities on their client accounts for the sole purpose of earning commissions, investors can file negligence claims.
Investors can demonstrate that their brokerage firm and broker breached their duties of care by proving that the recommendations they received were unsuitable for their investment goals, age, financial needs, risk tolerance, or tax situation. This does not necessarily rise to the level of willful misconduct that is considered fraud, but rather a failure to meet the standard of care that would be expected of a reasonable and prudent broker under similar circumstances.
Duty of Due Diligence
Many investors believe that to recover investment losses caused by broker negligence they need to show a brokerage firm committed securities fraud. However, a broker’s failure to adhere to the industry standards of due diligence can also be a valid basis for a claim of negligence in FINRA arbitration.
The standard of due diligence in a broker-dealer relationship is generally established by a rule or regulation promulgated by FINRA, industry practice, or custom. If a broker fails to meet this standard, and as a result, investors suffer damages, they may have a viable negligence claim.
Examples of failing to meet this standard include account churning, recommending unsuitable individual investments, or failing to verify information in offering documents such as PPMs. Unlike a fraud claim, a negligence claim does not require proof of scienter (intent). However, it is critical to partner with an experienced attorney. The team at Erez Law can investigate your case and determine if you are eligible to file a claim for broker negligence.
