A. who I am

1. lawyer who has represented brokers and brokerage firms as well as investors

2. began at Kings County District Attorney

3. 3 years in the Division of Enforcement of the Securities and Exchange Commission

4. principal of Bartel Eng & Schroder

5. many years in own practice

B. what I do

1. All kinds of securities and investor litigation

a. large class actions to small arbitrations

b. claims federal and state courts and NASD

c. regulatory inquiries by NASD, SEC, and Department of Corporations

d. disciplinary proceedings and complaints by individual investors

C. what I am here to tell you

1. the four most common ways to get sued

2. how to avoid them

D. why it's important to you

1. most lawsuits, and many complaints, will never be brought unless at least one lawyer who does what I do thinks that the investor has a chance of succeeding

2. most investors with substantial claims are represented

3. most can't or won't pay

4. most cases are brought for a contingent fee-- the lawyer doesn't get paid unless the investor wins or gets a settlement

5. therefore, the chances are good that you won't get sued unless one of your clients has a case that looks winnable to someone like me. We are going to talk about how to keep that from happening.

II. Most of dispute avoidance consists in doing your conscientious best for your clients. We won't cover that. We will talk about the residuum of purely defensive strategies.

III. Themes

A. Avoid risky behavior

B. Document lack of fault

IV. DiCarlo's first law of documentation: Documentation should proportional to risk. The more risk, the more documentation.

A. Any activity has some risk. There should be some documentation for everything you say to or do with an investor. Low level: telephone notes may sometimes be sufficient.

B. Higher risk means more documentation. Eg., large or unusual transactions, switching mutual funds. Send a letter. Keep forms.

C. High risk requires high degree of documentation. Client wants to do something stupid. At least a letter, in some circumstances consider having it signed by the by the client.

V. What is risky?

A. follow your instincts

B. particular situations

1. unusual type of transaction

2. significant amount of money

3. high risk investment

4. transaction where there's a possible conflict of interest--switching mutual funds, price breaks

5. change in client's goals

6. client tells you not to do your job

7. client fails to follow your advice

8. client wants to do something stupid

VI. What do you document? Document the facts that negate liability. The flip side of the elements of possible claims.

VII. The three pillars of documentation:

A. warnings--risks

B. disclaimers--what you didn't say or do

C. confirmations--what you both said and did

VIII. What not to document: unexpressed misgivings.

IX. Practical techniques

A. include protective material with other subjects

B. be evenhanded

X. How to overcome reluctance--recognize that your warnings, disclaimers, and confirmations have value to the client.

XI. The four most common ways to get sued:

A. unsuitable investments

B. misrepresentations and omissions

C. unauthorized investments

D. churning

XII. Unsuitable investments

A. two types--unsuitable recommendations and unsuitable transactions.

B. unsuitable recommendations

1. types of legal claims

a. federal securities fraud

b. state securities fraud

c. common law fraud

d. negligence

e. breach of contract

2. professional standards

a. NASD Rules of Fair Practice

b. NYSE Rules

c. legal standards

(1) ordinary care

(2) reasonable basis

3. elements of claim for unsuitable recommendation and related precautions

a. recommendation. Claim will not lie where broker simply follows instructions of client. Where client making obviously risky investments, should be a record showing that broker not making a recommendation. XIII. a. reliance. Related to causation. Where client relying on own judgment broker is not liable However, not necessary to show that broker has "control" of the account. Record showing client's experience, knowledge, and intention to make own decisions can be helpful in avoiding liability.

b. unsuitability.

(1) factors in determining suitability. Failure to consider before making any recommendation asking for trouble

(a) investment goals

i) safety of principal

ii) growth

iii) income

iv) protection from inflation

v) tax savings (b) tolerance to risk

(c) financial condition

i) assets

ii) Income

iii) expenses--actual and possible

(d) age

(e) education and experience (sophistication).

(2) common problems

(a) high risk investments. Aggravated by risk intolerant client:

i) retired

ii) dependent on savings

iii) limited assets

(b) concentration

(c) illiquidity

(3) solutions

(a) gather and document information on goals and circumstances of client

(b) document any changes or further instructions

(c) if client's goals seem inconsistent with his circumstances, document your advice to consider other goals

(d) document disclosure of all significant risk factors. Prospectus necessary but not enough For example, it cannot address

i) concentration

ii) client circumstances

A. unsuitable transactions

1. like unsuitable recommendation claim but no recommendation. Instead, causation element is satisfied by broker's control of the account.

2. elements. Similar to unsuitable recommendation but transaction controlled by broker

a. formal control--discretionary account. Best to avoid unless absolutely necessary.

b. de facto control--client allows broker to call the shots. Overlap with recommendation cases. Solution: client control.

XIV. Misrepresentations

A. legal theories

1. negligent deceit

2. intentional deceit (fraud)

3. breach of fiduciary duty

4. Rule lOb-5

5. state securities fraud

B. elements

1. statement. May be an expression of opinion under some circumstances.

2. falsity

3. negligence or worse

4. reasonable reliance

5. damages

C. Suitability cases involving recommendations are sometimes analyzed as misrepresentations.

D. Most common problems

1. assurances of liquidity

2. projections of returns

3. assurances of safety

4. assurances that investments will be constantly monitored

XV. Unauthorized Investments

A. most common situations

1. making trades in a nondiscretionary account without getting authorization. Confirmation slip does not provide absolute protection.

2. making trades inconsistent with instructions.

a. discretionary account

b. nondiscretionary account where customer approved purchase. Customer may not know that specific trade is inconsistent with wishes previously expressed.

3. making trades on margin in a nonmargin account 4. trading in options or futures where the account opening documents do not authorize it

B. damages. Customer can rescind the trade.

XVI. Churning

A. elements

1. control of the account

a. formal

b. de facto

2. excessive trading

B. what is excessive depends on circumstances. A single trade, if it is motivated by a desire to generate a commission, can be excessive

C. most common situations

1. high turnover. Some ratios are presumed to be excessive

2. switching mutual funds without a good reason

3. wash transactions

4. trades that take place before significant commission reductions

D. damages. Client can recover the commissions.

E. how to avoid problems. Evaluate risks. If pattern of high turnover, make sure that it is consistent with the client's stated goals and instructions and make sure the activity is properly documented. For example, may need to update account opening documents that say goals are safety, income, and long term growth. Send a letter when switching mutual funds.

XVII. Customer Remedies

A. out of pocket loss

B. lost profits, interest, and opportunity costs

C. punitive damages

D. commissions

E. rescission

F. injunction

G. attorneys' fees

H. costs and forum fees

XVIII. Forums

A. court

B. arbitration

1. required by many account agreements and, in the absence of an arbitration clause, by NASD if client requests

2. characteristics

a. finality

b. comparative simplicity and lower cost

c. knowledgeable panel with one industry representative Participation of industry representative can work for or against the broker.

XIX. What to tell your client when his last broker may have acted improperly

XX. Your friend the statute of limitations. Three practical rules:

A. start it running

1. some start automatically

2. some start when the clients get the bad news, so document the client's knowledge

3. some start when the relationship ends, so document the end of the relationship

B. don't stop the clock

C. don't start a new one

XXI. Summary of types of claims and ways to avoid them

DISCLAIMER: The foregoing document is part of an educational presentation. It is not intended as legal advice and should not be relied upon. You are advised to consult counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable to your specific situation.

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DISCLAIMER: I have entered government service and, as of September 1, 2008, am no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely my own.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo