Negligence in the Securities Industry Leading to Legal Claims
Negligence is a legal concept with a broad application. A person is negligent if he or she fails to behave according to a predetermined standard of care. Although negligence is often the basis for personal injury lawsuits, the concept is also useful to assess the actions of securities brokers. If a broker fails to abide by the duty he or she owes to clients, that person may be liable for negligence. A basic negligence claim relies on proving four elements: duty, breach of duty, causation, and damages.
Investment advisers who counsel their clients on the wisdom of investing in certain securities owe their clients a fiduciary duty, which sets a high standard of care. Essentially, a fiduciary duty requires that the adviser place the clients’ interests before his or her own. Brokers owe their clients a duty of suitability, which is not as stringent as a fiduciary duty. Both brokers and investment advisers owe their clients a duty of reasonable care, which is not as stringent as a fiduciary duty but requires that brokers avoid unreasonable behavior that puts their clients at risk for financial injury.
This simple duty requires that brokers perform due diligence on potential investments to ensure that they are what they purport to be. Brokers who recommend an investment that turns out to be a scam or fraud may have acted with negligence. Another common example of broker negligence occurs when a broker fails to diversify a particular clients’ portfolio. Many people believe that a diversified portfolio is inherently less risky than a concentrated one. If, for instance, a client cannot afford a large loss in the area of concentration, a broker who fails to adequately diversify a client’s account may be guilty of negligence.
Generally, a professional who has failed to take reasonable care has likely also breached the applicable fiduciary duty or duty of suitability, since failing to take reasonable care would violate his or her professional obligation to clients. However, some behavior that may not constitute simple negligence would still breach the fiduciary duty.
After proving that the broker breached a prescribed duty, a plaintiff must also show an injury and that the broker’s behavior caused the injury. The money the plaintiff invested and lost is the most obvious injury in many broker negligence cases. In some circumstances, plaintiffs might also claim missed profits from market gains.
Broker Malpractice
Malpractice is negligence in a professional context. In most states, to prove a malpractice claim, whether against a doctor, attorney, or stock broker, the plaintiff must prove the same elements as negligence. A traditional negligence claim usually alleges a duty of reasonable care, but professionals often owe a higher or different duty of care to their clients or patients. Thus, a malpractice claim against an investment adviser might allege that the broker owed and breached a fiduciary duty and that the client suffered a financial loss as a result. Regardless of the fact that it may be referred to as a malpractice claim, the initial pleading will resemble that of a negligence claim.
