Negligence in Securities Arbitrations

Negligence, in the context of misconduct by a registered representative, is a common-law cause of action, rather than one outlined under a statute. Negligence in securities arbitrations is a very broad term and can refer to a multitude of actions by a broker and/or a brokerage firm that causes harm to a client.

A claim for negligence in a securities arbitration is based on a breach of the duty of care owed by a broker or adviser to the customer to handle the customer’s business in a reasonably prudent manner. A cause of action for negligence involves the following elements: (1) the presence of a duty owed by the broker to the customer, (2) a breach of that duty and (3) damages proximately caused by the breach of duty

In the case of a broker or investment advisor, the question of whether a duty of care is owed to a person rests on whether it would have been foreseeable that the injured party could have been harmed by the broker breaching his or her duty of care. In most cases, the question as to whether a broker owes the customer a duty of care will be straightforward in that there will be a formal broker-client relationship, in which case the broker clearly owes a duty of care to his or her client. In this regard, the appropriate standard of care would be derived from securities law and industry rules governing the conduct of registered representatives.

For example, the standard of care advisors or brokers owe their clients would be to act reasonably when devising an investment strategy. Therefore, a claim of negligence in a securities arbitration might involve a broker engaging in self-dealing in connection with the customer’s investment portfolio, failing to advise a customer of risk, failing to properly diversify a portfolio (overconcentration), recommending unsuitable trading or engaging in unauthorized trading, among others.

Further, a firm may be held liable for the negligence of its staff through what is known as the doctrine of respondeat superior (an employer can be held liable for the negligence of its agents). In this context, a firm may be liable for the negligence of its employees. Additionally, it may also commit negligence itself if it breaches its obligations with regard to the supervision of its staff or the adequacy of its supervisory procedures.

Negligence in securities arbitrations is frequently pleaded as a cause of action because it can encompass such a broad range of activity, as detailed above. Moreover, the standard of proof for a negligent act is lesser than the proof required to sustain a claim of fraud or breach of fiduciary duty.

Calculating the damages owed to a customer who has been harmed by the negligence of a broker or advisor will be similar to the considerations used in awarding damages to a plaintiff in any other negligence case. Here, the damages suffered by the customer must be reasonably connected to the respondent’s misconduct. In customer arbitrations, claims for the negligent actions of a broker and a brokerage firm can include damages for out of pocket losses, lost opportunity costs, interest and attorneys’ fees.

In some rare and extreme cases, the aggrieved party may be awarded punitive damages to punish the breaching party and deter similar conduct in the future.

Defences to claims of negligence in securities arbitrations often hinge on the presenting evidence of the appropriate duty of care owed to a client and whether or not this duty was breached. In some cases, a respondent may claim that the client contributed to the alleged harm that occurred. For instance, proof that a client received and reviewed trading confirmations and monthly account statements, and never complained to the broker or the branch manager, may help to rebut a claim of negligence (and/or unauthorized trading / unsuitable trading) in the handling of the account.

While claims of negligence are frequently asserted in customer arbitrations, the assistance of an experienced securities attorney is necessary to properly set forth the negligence claim and any other causes of action that may be available to an aggrieved client.

Call the experienced securities arbitration attorneys at Lubiner, Schmidt & Palumbo now if you have questions concerning the handling of your brokerage account.