How to Defend Yourself in a Stock Broker Fraud Lawsuit
Since stock brokers typically represent buyers and sellers in stock transactions on the open market, most stock broker fraud lawsuits concern a breach of the fiduciary duty that brokers and all other professionals owe when they act on someone else's behalf.If you are a stock broker and are served with a stock broker fraud lawsuit, consult an attorney as soon as possible. Stock broker fraud can and often does lead to criminal prosecution.
Notifying Relevant Parties
Work with your employer.Assuming you work for a brokerage firm, you must alert your supervisors and the company's directors of the lawsuit as soon as possible.
- In class action lawsuits, the attorney for the plaintiffs are required by federal law to issue a press release with a summary of the allegations. It's likely you'll hear that you're being sued through this press release before you're served with a complaint.
- Contact your board of directors immediately, so they hear the news about the lawsuit first from you rather than from a press release or financial news item.
- Keep in mind that you may not be the only person named as a defendant in the lawsuit. As a stock broker, you typically are considered agent of the firm that employs you. This means managers or directors of the company also may be named.
Contact an attorney.Your company may want to hire an experienced litigation attorney to work specifically with the defense.
- While your firm probably has attorneys – either on staff or on retainer – you might find greater benefit in using an independent litigation firm, depending on the severity of the allegations and the potential for criminal charges.
- The prospect of criminal charges also might necessitate hiring a white collar defense attorney. Keep in mind that civil and criminal litigation are two very different processes that require understanding and experience with different laws and regulations.
Notify your insurance carrier.Stock broker fraud typically is covered by the firm's Directors and Officers (D&O) liability insurance.
- D&O policies typically require prompt notice if a lawsuit is filed against you. Depending on your standing in the company, a director or other manager may be in charge of contacting your company's broker.
- The broker will need a copy of the complaint so he or she can notify your insurance carrier.
Consult with your company's accountants and auditors.The assistance of the company's independent auditing firm will be necessary to budget for litigation expenses.
- If you are a company director or officer, make sure you have meetings with the accountants and auditors on a regular basis to apprise them of the status of the lawsuit.
- Plans concerning reserves can be made after you have a reasonable estimate from your defense attorney regarding the costs of litigation and the possibilities of settlement.
Cooperate with any government investigations.Stock broker fraud lawsuits often go hand-in-hand with investigations by the Securities and Exchange Commission (SEC) and other federal or state agencies.
- Failure to cooperate with a federal investigation may result in you losing your job or your licenses to work as a stock broker.
- You probably want your attorney to advise you on any statements you make to the SEC or other agencies, since whatever you say in a civil investigation may be used against you in a criminal prosecution.
Evaluating the Allegations
Avoid producing written analysis.The plaintiff can request any written documents regarding the lawsuit that are prepared by employees of the brokerage firm.
- While you may think it would be productive to figure out how the lawsuit came about or what mistakes were made so you can avoid them in the future, this type of document will likely be covered by a request for production during the discovery process, and the information contained within could be used by the plaintiff to prosecute the case.
- Any analysis regarding the problems that led to the lawsuit should be undertaken by your defense attorney, so any documents produced are protected by attorney-client privilege.
Work closely with your attorney.The litigation attorney likely will want to interview company directors and employees regarding activity associated with the lawsuit.
- Your defense attorney likely will perform an extensive investigation into the plaintiff's allegations and the activity within the firm. Through this investigation, he or she will determine what went wrong as well as the people or policies responsible for that failure.
Compare the allegations with the plaintiff's contract.Some allegations or lawsuits may be barred by the agreement the plaintiff signed.
- Most clients sign a contract when retaining the services of a stock broker, and this contract typically includes an arbitration clause that requires certain types of disputes to be submitted to arbitration before a lawsuit can be filed.
Take steps to preserve relevant documents.Federal law requires you to keep all documents that are potentially relevant to the lawsuit.
- Issue a memo immediately to anyone who might have access to relevant documents instructing them that all documents potentially related to the lawsuit must be kept and cannot be deleted or destroyed.
- Make sure your defense attorney knows which employees are in charge of handling both electronic and paper documents, so he or she can communicate more specific instructions to them regarding how to deal with this material.
- If your company has a policy of writing over old electronic back-up tapes as new ones are created, this practice should be put on pause until the litigation has concluded.
Talk to other stock brokers.You may be able to gain some perspective from other professionals who have been involved in similar situations.
- Stock broker fraud lawsuits are fairly common. You can ask your corporate counsel to connect you with others who've faced similar lawsuits and reach out to them for pointers on how to handle the lawsuit and what to expect.
- You also can gain an understanding of the pace of litigation and how much of your time will be taken up by dealing with the lawsuit.
- Keep in mind that particularly if you've been sued in a class action lawsuit, litigation moves very slowly. It could be months or even years before the case makes much progress through the courts.
Developing Your Defense
Review the relevant securities rules and regulations.A basic understanding of the regulations that govern stock broker conduct and securities transactions is essential to defending yourself in a stock broker fraud lawsuit.
- The Financial Industry Regulatory Authority (FINRA) is a nonprofit organization with regulatory authority over stock brokers. The latest rules and regulations are available on the organization's website.
- Since traditional tort principles also apply to stock broker fraud lawsuits that involve a breach of fiduciary duty, you also should have a basic understanding of the elements of a tort claim: duty, breach, causation, and damages.
- Essentially, the plaintiff must prove that you had some duty to him or her, you breached that duty, and your breach caused him or her to suffer a monetary loss.
- In a stock broker fraud case, duty is assumed by the fact that you acted as a stock broker for the plaintiff – so the bulk of the case will focus on whether you breached that duty, and what losses the plaintiff suffered as a result.
Analyze all information provided to the plaintiff.If the plaintiff was provided with a company prospectus or other information related to the transaction or the value of the stock, this can support a defense that the plaintiff understood the risks involved.
- When a plaintiff alleges you committed broker fraud, he or she is claiming that you intentionally failed to disclose important information about the investments, or falsified investment reports or statements.
- All documents or information that was communicated or sent to the plaintiff provides proof that the information was not withheld.
- If the correct information was provided to the plaintiff, you can show that he or she failed to evaluate the transaction thoroughly, and that his or her reliance on what the stock broker said wasn't reasonable – even if the stock broker attempted to mislead the plaintiff intentionally.
Assess the plaintiff's responses to broker actions.If the plaintiff later approved transactions that were previously unauthorized, you can argue that the plaintiff ratified the transaction.
- Essentially, the ratification defense argues that although an action was unauthorized, the plaintiff's actions after the action ratify that action, providing retroactive authority for it.
- For example, if the plaintiff is suing because of unauthorized transactions, you can defend yourself in that lawsuit by showing that although the plaintiff did not initially authorize the transactions, the plaintiff did not object when he or she received reports of the transactions.
- Generally, if the plaintiff receives regular account statements and reports, and is in regular contact with you, he or she cannot later dispute transactions by claiming that he or she wasn't aware of them or that they were conducted without authorization.
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