Breach of Fiduciary Duty

Breach of Fiduciary Duty is when a broker does not act in a customer’s best interests, is conflicted, engages in self-dealing, lacks candor or honest, or does not exercise due care, that broker has breached their fiduciary duties.

Despite how their services are advertised as “putting your interests first,” there is a striking difference between the positions brokerage firms take when soliciting customers and those they take when those customers arbitrate claims against the same firms. See, See, Advertising Like Doctors, Arbitrating Like Used Car Salesmen: “Huge Disconnect” Seen Between Brokerage Ad Claims and Tactics Used to Fight Aggrieved Investors.”

However, as is the law in approximately 37 states, as a general matter, all or substantially all claims against stockbrokers and investment professionals, including churning, unauthorized trading, the sale of unsuitable investments, the sale of defective financial products and even the failure to supervise, can be characterized as a breach of a fiduciary duty, and specifically, the duty of due care, the duty of loyalty, or the duty of candor.

It is well settled that the relationship between a broker and his customer is one of principal and agent by virtue of which a broker is subject to certain fiduciary obligations to the client. Jaksich v. Thomson McKinnon Securities, Inc., 582 F. Supp. 485, 502 (S.D. N.Y. 1984); Schenck v. Bear Stearns & Co., 484 F. Supp. 937, 946 (S.D. N.Y. 1979).

Securities brokers are fiduciaries that owe their customers a duty of utmost good faith, integrity and loyalty. See Davis v. Merrill Lynch. Pierce. Fenner & Smith, 906 F. 2d 1206, 121 14 (8th Cir. 1990); Biggans v. Bache Halsey Stuart Shields, Inc., 638 F. 2d 605, 610 (3d Cir. 1980); Jaksich, 582 F. Supp. at 502. Davis, 905 F. 2d at 1216 (a fiduciary relationship exists between a securities broker and customer because broker is a licensed professional who holds himself out as a trained and experienced person to render a specialized service); Mihara, 619 F. 2d at 824 (securities broker has a fiduciary duty to customer where broker knows or should have known that trust has been placed in him).

There is a duty to act in a customer’s best interests. See Gouger v. Bear, Stearns, 823 F. Supp. 282, 288 (E.D. Pa. 1993) (“the broker handling a discretionary account has an unequivocal fiduciary duty to the customer with respect to the broker’s investment activities and to any facet of their relationship that pertains to the customer’s money”). The court in Lieb v. Merrill Lynch, 461 F. Supp. 951, 953 (E.D. Mich. 1978), enumerated a number of duties of a broker maintaining an account, including:

  1. The duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price and financial prognosis. Cash v. Frederick and Co., 57 F.R.D. 71 (E.D. Wis. 1972); Hanly v. SEC, 415 F. 2d 589 (2d Cir. 1969).
  2. The duty to inform the customer of the risks involved in purchasing and selling particular securities. See Hanly v. SEC, supra; Cash v. Frederick & Co., supra.; and,
  3. The duty not to misrepresent or omit any fact material to the transaction.

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AboutNicholas Guiliano, Esq.

Nicholas J. Guiliano has more than 25 years of securities related experience, and has represented more than 1,000 public customers in claims against brokerage firms for fraud in connection with the sale of securities principally in arbitration before the Financial Industry Regulatory Authority (“FINRA”) Dispute Resolution, Inc. (formerly known as The National Association of Securities Dealers (“NASD”) Dispute Resolution, and the New York Stock Exchange (“NYSE”) Department of Arbitration.