Brokerage Firm Liability

As an individual investor your dealings are with your investment professional usually quite satisfactory. The securities industry is graced with an abundance of professional and reliable practitioners. When things go wrong, things go very wrong. Even though you may have a very good relationship with your stockbroker, your stockbroker has a relationship with his brokerage firm. Unless you are dealing with a “boutique stock broker” your individual financial advisor functions as an agent, somewhat close to an employee status, when it comes to his firm. Stockbroker liability extends not only to the pocketbook of your individual financial advisor but to the stock brokerage firm from which he practices. It is almost an employee relationship that establishes the liability of the brokerage firm.

Misconduct including recommendations that are unsuitable, or the pushing of unsuitable investments are very often more a function of pressure from the brokerage firm that extends to the individual investors. We see this increasingly as the number of stock brokerage firms gets smaller and their activity in hedge funds and investment pools becomes more pronounced at their bottom line. There is certainly a cyclical nature to the liability claims against stockbrokers. Section 10 of the Securities Exchange Act of 1934 and rule 10b-5 is the Holy Grail upon which all these liabilities cases are built. Section 10 prohibits any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security. The scope of these examinations goes well beyond the conduct of your individual financial advisor.

Once arbitration is undertaken after an investor has a loss the aggressive securities lawyer will seek to obtain by subpoena the activities of the brokerage firm. There is an inherent conflict between the security and privacy required by financial dealings by the firm, and those of individual investors being serviced by financial advisors. When claims of broker fraud, broker theft and broker false dealings are litigated in arbitration the liability extends almost always to the brokerage firm. Exploring the possibilities of prevailing in arbitration for stock broker fraud cases must by its nature include the activities of the brokerage firm.

Brokerage firms have a liability directly to you the investor, not only the stockbroker is responsible for losses. Because the paying party is often the firm, and not the individual financial advisor, a whole world of issues come to the forefront in any arbitration for claims of financial misdeeds, stockbroker fraud, stockbroker fiduciary breaches etc. When firms are liable for losses it is not necessarily their control of the stock broker but the vehicles and financial tools at the disposal of the stockbroker.

If you feel that your stockbroker has acted against your interests you may find that the stockbroker is himself being directed by the firm to promote or push certain investments. The liability of the stockbroker extends to the firm in most situations and becomes a silent and important factor in any properly orchestrated arbitration against a stockbroker or financial professional practicing in a firm. For that reason alone most savvy investors will deal with stockbrokers from the major wire houses and avoid dealing with financial advisors whose practice, or street practice, is not under the penumbra of a major stock brokerage firm.