Investment Malpractice -A General Overview

 

With the rise of consumerism, most Americans take for granted the right to sue doctors, lawyers and other professionals for malpractice. But there is one form of professional malpractice that most people, including trial lawyers, are not familiar with. Stockbrokers, investment advisers, money managers and chartered financial analysts, among others, are financial professionals who are required to adhere to strict standards of conduct.

Individuals who work as investment professionals are required to comply with the standards of conduct of the various organizations with which they are affiliated. For example, stockbrokers and brokerage firms are regulated by the Securities and Exchange Commission (SEC) and the states in which they do business. In addition, they are required to comply with the rules of the Financial Industry Regulatory Authority (FINRA, a self-regulatory organization) that establishes industry standards. Similarly, Chartered Financial Analysts are required to comply with the Code of Ethics and Standards of Professional Conduct of the CFA Institute. Those who practice under these and similar professional designations have sets of rules and standards that govern their conduct. Failure to comply with the rules and standards of such organizations is a violation of the professional’s standard of care, or what lawyers call negligence or malpractice.

For instance, the applicable standards of care generally impose duties upon investment professionals to deal fairly with investors, to recommend only suitable investments to their investors, and to provide investors with fair and balanced disclosure (both good and bad) about any investment that they recommend. If a broker fails to satisfy these or other applicable standards, then the broker is liable for the damage that the investor sustains as a result of the violation.

A broker’s liability to an investor is often simply a claim for professional negligence or malpractice based on the violation of applicable standards of conduct. Liability can also be based on a breach of contract claim since the relationship between investor and the professional is defined by a written contract. The account agreement (the contract) between the broker and the investor typically specifies the duties owed?such as the duties to comply with industry standards and regulations. This can be especially important in certain situations because the statutes of limitations for breach of contract claims are typically longer than those for negligence claims.

In cases, where there is a relationship of confidence and trust between the investor and the broker, the duties to the investor rise to fiduciary duties. The significance of a fiduciary duty is that the broker is required to do more than simply comply with the industry standards. He or she is also obligated to act in the best interest of the investor. In broker/investor cases, much attention is paid to whether the standard of care is a negligence, contract or fiduciary standard, because the higher the standard, the easier it generally is to prove that the broker’s conduct was inappropriate.

Of course, when a broker’s misconduct is intentional or reckless, the broker may also be liable for fraudulent misconduct.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in investment-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.