Most cases involving the misconduct of a financial advisor or brokerage firm will include a claim for negligence. Under the common law, we all owe basic duties to the world around us to not take any action that puts others at an unreasonable risk of harm. This general concept has been conceptualized and molded by courts for centuries and almost everywhere boils down to the following elements:
- The defendant owed a duty of care;
- That duty was breached;
- That breach was the proximate cause of injury to the plaintiff
Choate v. Indiana Harbor Belt R.R. Co.,2012 IL 112948 ¶ 22. This issue of legal duty is nebulous and complicated. In the context of a professional, like an accountant, a lawyer, or a financial advisor, there are clear duties. For example, a financial advisor owes his or her client the duty to only recommend suitable investments, to not misrepresent material facts or omit to state material facts in connection with the offer or sale of a security, amongst others. These duties are founded in the rules governing the conduct of financial advisors through FINRA, the SEC, and state and federal securities laws. See generally McGraw v. Wachovia Securities,756 F.Supp. 2d 1053 (N.D. Iowa 2012). If your financial advisor recommended an investment to you without disclosing material facts about the investment, like the level of risk, the liquidity, the costs of the investment, for example, there could be a breach of duty. This negligence claim can also take the form of negligent misrepresentation which is a slightly different claim because it requires the defendant to have a duty to disseminate truthful information. See Restatement 2d Torts § 552.Financial advisors surely fall into the category of those required to provide only truthful information.
That is not where the analysis ends for a negligence case, however. Evidence must be presented establishing that the financial advisor actually breached this duty through his recommendations ort conduct. For example, if an investor is a retiree seeking to preserve their principal and a financial advisor recommends an aggressive options trading strategy or solicits the sale of speculative private placement securities, then this would be substantial evidence the financial advisor was negligent and that the brokerage firm likely was negligent in executing its supervisory obligations over the financial advisor. However, in order to prove the financial advisor or the brokerage firm breached the standard of care, expert testimony may be necessary to establish what the standard is and whether it was breached in a particular case.
Finally, the investor must prove any damages sustained was because of the advisor’s negligence. This causation element is satisfied where evidence establishes the alleged misconduct was a substantial factor in the investor being damaged. If the retiree mentioned above sustained losses of $100,000 as a result of the options trading or because of the unsuitable private placement recommendation, then the causation and damages elements may be satisfied. It may not be quite that simple. Defense lawyers are famous for arguing that intervening factors, like the market or the investment at issue was to blame for the losses, not the recommendation in the first place. Afterall, investments increase and decrease in value and nothing is guaranteed. This is where an experienced investor-rights attorney shines and will artfully tune-out the noise about market forces and fund management being the cause of the investor’s damages.