Not all claims against stockbrokers and securities broker-dealers are the result of intentional conduct.  Often investors suffer damages as the result of negligence.

scales of justiceStockbroker negligence includes the failure to conduct due diligence, and other forms of misconduct, by both the individual stockbroker or their brokerage firm, including, for example, the violation of securities rules or regulations.

Negligence does not include the failure to predict the future or opinions that are a matter of judgment, but with the benefit of hindsight turn out to be wrong.  Unlike recklessness which is the intentional disregard of a known risk, negligence is a non-intentional tort.  The elements or legal definition of negligence is (a) the existence of a duty, (b) the breach of that duty, which was (c) the foreseeable or proximate cause in fact of (d) damages.

For example, stockbrokers have a duty to have a reasonable basis to recommend certain securities to their customers.  Reasonable basis suitability means the duty of the broker to ascertain the risks and characteristics of that security.  If the stockbroker fails to conduct such an investigation, or does not have a reasonable basis to make a recommendation, and the result is damages or losses to the investor, in addition to a suitability claim, the injured investor also has a claim for stockbroker negligence.   The duty or standard of care is contained in the FINRA suitability rule. Rule 2111.

Stockbroker negligence may take the form of failure to execute an order, executing the wrong order, the failure to transfer funds, the failure to exercise options, or simply errors. However, most often stockbroker negligence includes the negligent provision of investment advice.

investor justiceAt common law, negligence is a breach of a duty, or standard of care, that is the proximate cause or the cause in fact of damages. As Justice Cardozo once famously wrote: “danger invites rescue.” In the context of stockbroker negligence, superior, or purportedly superior, knowledge, skill, training or expertise, invites “confidence.” Investors have the right to rely upon their investment professionals, and these same professionals and their firms owe their customers certain duties, or standards of care.

These standards of care, or arguably, the minimum standard of care is set forth in the various self-regulatory rules and regulations under which stockbrokers and investment professionals must conduct themselves. For example, under these rules, a stockbroker may only recommend a particular security or investment strategy if they have conducted due diligence, and are sufficiently informed and knowledgeable about the risks and characteristics of a particular security or investment strategy. A stockbroker has the duty to read prospectuses or offering materials, new stories or other readily available information, prior to recommending that particular security to a customer. The failure to conduct product specific due diligence or suitability, i.e. is the subject investment suitable for any customer, is a of breach of that duty and is negligence or stockbroker negligence.

Similarly, securities broker-dealers have a duty to supervise the conduct and activities of their registered representatives. If a stockbroker engages in wrongful conduct, including theft, misappropriation, selling away, deceptive sales practices, or other forms of misconduct, and the broker-dealer fails to reasonably detect or prevent such misconduct, as may be required by self-regulatory rules, and which results in damages to the customer, the broker-dealer may be held responsible under a theory of with money in pocket

Historically, many courts have held that there is no private right of action for the violation of Self-Regulatory rules, but have recognized “the failure to supervise, for example, as an omission of material fact, cognizable under the Exchange Act and SEC Rule 10b-5.  However, the violation of Self-Regulatory is a breach of the standard of care. The best example is where a firm neglects to enforce or monitor rules or supervisory procedures with respect to money laundering, which results in the failure to detect the theft of customer funds by third parties.

Similarly, if a broker-dealer has a duty imposed by federal regulations to detect money laundering, third-party transfers, or the change of beneficial ownership of a securities account, although there is no private right of action and the rule or regulation does not confer upon investors the right to sue for its violation, which may belong exclusively to the government or regulator, that rule or regulation establishes the “standard of care,” or custom throughout the industry, and if as a cause or “result” of the breach of that standard of care, an investor suffers damages, the investor may have a claim for negligence.

Moreover, unlike often intentional torts, such as fraud or theft, claims for negligence are more likely to be covered by any Professional Errors & Omissions Liability Insurance for the stockbroker or their firm.

Contact Us For a Confidential Evaluation of Your Claims

If you have been the victim, or think you may have been the victim of stockbroker negligence, you should consult with ana atttorney to determine your legal rights.  We accept the representation of investors that suffered damages as the result of stockbroker negligence on purely a contingent fee basis meaning that there is no cost to you unless we make a recovery for you.  For a free, no obligation, confidential evaluation of any stockbroker negligence claim you may have, contact us at (877) SEC-ATTY