Have you been damaged as the result of investment fraud? Representation accepted on a contingent fee basis.  » View Our New Client Questionnaire « 
Arbitration Securities
and Investment Fraud Lawyers
Home > Claims Against Brokers > Failure To Supervise
Explore Claims Against Brokers
Annuity Fraud
Breach Of Fiduciary Duty
Excessive Activity
Failure To Supervise
Misrepresentations And Omissions
Mutual Fund Fraud
Securities Of Financial Institutions
Unauthorized Trading
Common Claims Against Brokers

Investment Literature
The Whistle Blower's Dillemma: Confronting Fraud at AIG

The Whistle Blower's Dillemma: Confronting Fraud at AIG

Financial Serial Killers: Inside the World of Wall Street Money Hustlers, Swindlers, and Con Men

Financial Serial Killers: Inside the World of Wall Street Money Hustlers, Swindlers, and Con Men

Related Articles
  Lawyers Tempt Fate Before Second Circuit and No One Likes What They May Get
  FINRA tries to be less than a day late and a dollar short
  A Glaring Look at Financial Fraud in the United States
  FINRA Says: Don’t get Smoked by Dope Stocks: Lay-off the Weed
  US Third Circuit Court of Appeals: You should have known better than to trust FINRA.
  US Third Circuit Court of Appeals: You should have known better than to trust FINRA.
  Cockroaching, More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities
  Cockroaching, More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities
  Stockbroker to the Stars, Bambi Holtzer, has been suspended FINRA
  Pennsylvania Securities Commissioner Fines Wall Street Financial Group $125,000 Bars Broker For Life

Securities Arbitration Newsletter

Failure To Supervise

The Failure to supervise is a violation of FINRA Rules.  The violation of these Rules while not independently giving rise to a private right or cause of action are cognizable under the broad construction of the antifraud provisions of SEC Rule 10b-5 as an "omission" in the failure to disclose that the broker was unsupervised.

In addition, a brokerage firm's liability for the conduct of its registered representatives, not only arises from its lack of effective supervision but also from the familiar principles of an employer's vicarious liability. In addition to vicarious liability under the common law, Section 20(a) of the Exchange Act of 1934, 15 U.S.C. 78t(a) provides that:

every person who directly or indirectly controls a person liable under any provision of this chapter or any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the acts or acts constituting the violation or cause of action.

15 U.S.C. 78t(a) .

In order to establish liability under Section 20(a), a plaintiff need only allege that the controlling person had knowledge, or at least a duty to know, of the alleged wrongful activity, and the power or ability to control or influence the affairs of the controlled persons.

Many "independent" brokerage firms have hundreds, if not thousands, of financial advisors operating "franchises" under assumed, and often catchy, trade names, in branch offices across the United States." These offices, typically are comprised of one or two sales persons and a clerical assistant, and the brokers, in exchange for a high percentage payout of their commissions, generally pay their own operating expenses.

However, these "franchise" offices have no independent on-site supervision as do most traditional brokerage firms, and as such, the brokerage firm, is substantially unable to directly supervise the sales practices or activities conducted at these geographically dispersed, independent and remote offices.

We believe that this business model is flawed and the securities regulators appear to agree. The structure of non-traditional firms has made it inherently difficult for such broker-dealers to properly design, implement, and maintain a supervisory structure capable of preventing fraud of the type complained of here. See, In the Matter of Prospera Financial Services, Inc., 73 S.E.C. 935 at 6 (Sept. 26, 2000). Such activity as been at the heart of recent cases, both civil and regulatory, involving these firms and their "registered representatives."

"In recent years," as one commentator has observed, "a growing number of securities brokers are discarding the notion of working for a large wire house in favor of working for a non-traditional brokerage firm in a small satellite office. These non-traditional firms typically employ these representatives as independent contractors in geographically dispersed offices containing anywhere from one to four brokers, and offer up to a 80 or 90 percent commission pay out, may be double what a broker can earn at a conventional firm."

If you believe that you may have been the victim of the your brokerage firm's failure to supervise its broker, contact us for a free evaluation of your claim.

Sources / Additional Reading:

See, e.g. Klock v. Lehman Brothers Kuhn Loeb Inc., 585 F. Supp. 210, 216 (S.D.N.Y. 1984)(failure to disclose to the broker's termination may be actionable as an omission under the broad construction of SEC Rule 10b-5).

See Carras v. Burns, 516 F. 2d 251, 288 (4th Cir. 1975); Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 198 1 ), cert. denied, 455 U.S. 938 ( 1982). The doctrine of respondeat superior imposes vicarious liability on the brokerage firm for its broker's misdeeds (vicarious liability may be based on respondent superior and Section 20(a)); Denten v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 88 F. Supp. 176, 1 77 (N.D. Ill.1995)(brokerage firm liable under doctrine of respondent superior).

See also, Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1573 (9th Cir. 1990)("Congress adopted Section 20(a) in an attempt to protect the investing public from representatives who were improperly supervised or controlled")

Arthur Children's Trust v. Keim, 994 F.2d 1390, 1398 (9th Cir. 1993);

Powers v. Eichen, 977 F. Supp. 1031, 1044-45 (N.D. Cal. 1997) ("plaintiff need not show day-to-day control of affairs, only that defendants had possession of the power to influence in order to state a claim under Section 20(a)"). Hollinger, 914 F.2d at 1572 n.16 (same);

Safeway Portland Employees' Fed. Credit Union v. C.H. Wagner & Co., 501 F.2d 1120 (9th Cir. 1974) (same).

See, e.g., In re Royal Alliance Associates, Inc., 63 S.E.C. Docket 1601 (Jan. 15, 1997)(inadequate system of effective supervision over geographically dispersed brokers); See also, In re Consolidated Investment Services, 58 S.E.C. 699 (Dec. 12, 1994);

In the Matter of Prospera Financial Services, Inc., 73 S.E.C. 935 at 6 (Sept. 26, 2000);

In re New York Life Securities, Inc., 68 S.E.C. 102 (Sept. 23, 1998).

P. Michaels, Arbitration of Trading Away Cases Against Non-Traditional Broker-Dealers, Securities Arbitration 2002 (PLI), Volume I at 621. Traditional firms generally have large, centralized branch offices where the majority of registered representatives are full-time employees of the broker-dealer.

FINRA Securities Arbitration
- Arbitration is Litigation
- The Securities Arbitration Process
- The Arbitrators
- Discovery
- Arbitration Awards

Latest Securities News
- Archive

Claims Against Brokers
- Suitability
- Misrepresentations and Omissions
- Mutual Fund Fraud
- Annuity Fraud
- Failure to Supervise
- Breach of Fiduciary Duty
- Unauthorized Trading
- Securities Of Financial Institutions

Investor Resources
- Check Your Broker
- Check Your Brokerage Firm
- Check Your Investment Advisor
- Investor Resource Links
Securities Arbitration Blog
- Archive
- Categories

Contact Us
- Online Contact Form
- Evaluation Process
- Frequently Asked Questions

About The Firm
- The Lawyers
- The Professional Staff
- The Green Initiative
Our Office Location(s):
230 South Broad Street
Suite 601
Philadelphia, Pennsylvania 19102

Telephone: (215) 413-8223
Telecopier/Fax: (215) 413-8223
Toll Free: (877) SEC-ATTY
Email: contact@securitiesarbitrations.com

View Disclaimer
Copyright 2014 ©. All rights reserved. Nicholas J. Guiliano, Esquire
Philadelphia Lawyer - Stockbroker Fraud - Investment Fraud Lawyer