The Revolution in Investor Rights: a New Litigation Climate - the Civil Litigator
| Publication year | 2005 |
| Pages | 55 |
| Citation | Vol. 34 No. 5 Pg. 55 |
2005, May, Pg. 55. The Revolution in Investor Rights: A New Litigation Climate - The Civil Litigator
May 2005
Vol. 34, No. 5 [Page 55]
The Civil Litigator
The Revolution in Investor Rights: A New Litigation Climate
by Michael J. Guyerson
The Civil Litigator column addresses issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.
Column Editor:
Richard L. Gabriel of Holme Roberts & Owen llp, Denver - (303) 861-7000, richard.gabriel@hro.comAbout The Author:
This month's article was written by Michael J. Guyerson, Greenwood Village, a solo practitioner at Michael J. Guyerson, LLC - (303) 933-8833, mguyerson@aol.com.
This article discusses the recent trend in the courts and arbitration tribunals in favor of investor rights. It highlights the types of claims being litigated in those forums.
The media provides a seemingly endless barrage of information about scandals involving corporate accounting, mutual funds, and investment houses. Such issues are at the forefront of sweeping changes in Securities and Exchange Commission ("SEC") and National Association of Securities Dealers ("NASD") regulation of the securities industry. In this broad context, it is easy to lose sight of the individual investors involved in such scandals. Many lost life savings at the hands of unscrupulous professionals through malicious acts of deceit, wrongdoing, or simple negligence.1
The law involving individual investor claims and their resolution is evolving as new rules are promulgated and relationships between the investing public, financial advisors, and broker-dealers are rapidly changing.2 The attitudes of the courts and the industry arbitration system that was established to hear these types of cases also are in the process of changing.
This article is directed at this growing area of individual investor rights and remedies.3 It addresses the established line of "old school" cases that are decidedly slanted toward protection of the member firms and their employees. It also covers the developing "new school" of regulation and enforcement that, although far from being investor-friendly, is decidedly more focused on ensuring that industry rules, regulations, and common law duties are being fairly enforced to help protect the individual investor.
The Old School
The "old school" view of a financial representative's duties has been around since the creation of the New York Stock Exchange ("NYSE").4 It viewed a financial representative as a person who merely processed orders and took buy and sell instructions from clients. In this old school world, the liability of a financial representative and his or her broker-dealer was generally limited to situations in which the financial representative failed to follow customer instructions or committed blatant acts of unauthorized trading in a customer account.5
There were no concepts of fiduciary duties owed by a financial advisor or his or her broker-dealer to customers, except in rare cases where discretionary trade authority had been explicitly granted to the broker. Often, no amount of hard selling was considered severe enough to impose liability. In fact, it was typically stated by the courts that brokers were salespeople and that the buyer should beware.6 Statements such as "this investment can't lose" were seen as merely the "common puff of a salesman" and not an actionable misrepresentation.7
To further complicate an investor's chances of success, just as it is today, virtually all brokerage and general security new account agreements contained mandatory arbitration clauses before either an NASD or SEC arbitration panel. As a result, individual investors who filed complaints often found themselves before an arbitration panel with unsympathetic industry members.
In general, the arbitration format was designed to confuse and complicate, rather than to streamline and expedite the complaint resolution process.8 Historically, few investors who filed formal NASD and SEC complaints believed that they would be given a fair chance to present their case to an unbiased panel.9 This perception and the reality around it are now changing, albeit slowly.10
The New School
Although it is difficult to establish a timeline as to when the pendulum started to swing toward protecting the individual investor, sweeping changes clearly are being made in the securities industry. Stockbrokers are now likely to be called "investment advisors" or "financial consultants." Several professional organizations have been at the forefront of reshaping the traditional notion of what financial representatives are and what their duties to the investing public entail.11 These national organizations include The Financial Planning Association,12 the College of Financial Planning,13 and the Certified Financial Planner Board of Standards,14 all based in the Denver metropolitan area.
In some cases, industry groups have unintentionally fostered the notion of fiduciary roles for their advisors through promoting comprehensive financial planning and individual-focused investment advice.15 Comprehensive financial and planning services, percentage fee-based, or hourly fee-based advice and customer asset retention are the new paradigms of the former transaction-based and commission-oriented retail sector.16
The NASD, SEC, and most of the exchanges, such as the NYSE and NASDAQ, have made it clear that an investment advisor should follow several minimum requirements. These include: (1) knowing the customer; (2) acting in the customer's best interests; (3) disclosing all risks; and (4) making full disclosure of and explaining all costs and expenses in any investment.17
The notion of the "suitability" or "unsuitability" of an investment recommendation and the "know your client" rules of the NASD and NYSE logically flow from these evolving industry standards and duties of care.18 Misrepresentations regarding the suitability of an investment have even been held sufficient to constitute potential fraud under SEC Rule 10(b)(5) and § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act").19
The New School in Colorado
The new school philosophy in Colorado can trace its roots to the 1986 Colorado Supreme Court decision in Paine, Webber, Jackson & Curtis, Inc. v. Adams.20 In Paine, Webber, the Court started with the proposition that every stockbroker has at least a limited duty to serve a client's financial interests in connection with the purchase or sale of a security in a customer's account.21 However, the Court went well beyond the cursory application of the old "order taker" notion of a stockbroker.
The Court painstakingly reviewed the major philosophies and positions of other jurisdictions on the fiduciary nature of the broker-dealer and customer relationship...
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