Stockbrokers and financial advisors occupy a unique position in regard to a typical investors’ finances. They occupy a position of trust, and are aware of and control much of the net worth of most investors and retirees. Unfortunately, a small percentage of brokers take advantage of this trust and control to steal and convert monies and securities investments from investors’ accounts.
Theft can occur in a number of ways – fraudulent checks from accounts, fraudulent and unauthorized transfers of monies and securities from accounts, the purported recommendation and investment of monies in a company that is actually controlled by the broker, and the creation and distribution of fake and fraudulent account statements showing investments that do not exist to hide the wrongdoing. If you believe you may have been the victim of broker theft, you should contact one of our lawyers as soon as possible.
Although most brokerage firms claim they are not legally responsible for the criminal theft of customer monies and investments by their brokers if their supervisors were not aware of the wrongful activity, this defense is typically without merit. Firms are regularly held responsible for the actions of their registered sales force, and knowledge by supervisors of the wrongdoing should be irrelevant.
First, securities firms have a duty to supervise their salespersons to ensure compliance with the securities laws. Under FINRA Rule 3110: “Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Final responsibility for proper supervision shall rest with the member.”
A customer can demonstrate failure to supervise by a firm in a number of ways. All firms are required to have compliance and supervisory manuals setting out the processes they are supposed to follow for supervision and detection of wrongful conduct. These processes and procedures should include inspections of offices and files, both announced and unannounced, review of correspondence and email, review and approval of sales materials, review of trading in accounts and unusual activity in accounts, review of unusual and repeated withdrawals, contact with customers when red flags are triggered, and other means.
The fact that a financial advisor is an independent contractor versus an employee, or is located in a small satellite office as opposed to a large branch, is irrelevant regarding broker theft. As stated by the NASD (the former name of FINRA) in Notice to Members 86-65 “Irrespective of an individual’s location or compensation arrangements, all associated persons are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements.”
Even if a brokerage firm claims it properly supervised its broker, it can be held responsible for that broker’s wrongful acts. Claims against brokerage firms can succeed based on state law holding principals liable for the acts of their agents, as well as under State Securities Acts. As follows are some examples from Virginia law, but many states have similar laws.
The Virginia Supreme Court has described the liability of a principal for its agents, even if the principal/firm is entirely innocent, in the case of Dudley v. Estate Life Ins. Co. of America, 220 Va. 343, 350, 257 S.E.2d 871 (1979):
“A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud. Restatement (Second) of Agency § 261. Comment a. to § 261 reads as follows: The principal is subject to liability under the rule stated in this Section although he is entirely innocent, has received no benefit from the transaction, and, as stated in Section 262, although the agent acted solely for his own purposes. Liability is based upon the fact that the agent’s position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to him.” (Emphasis added).
As noted by the Virginia Supreme Court, the brokerage firm is liable even if it is entirely innocent, even if it received no benefit, and even if the agent was acting for his/her own purposes. The liability is based on the position in which the firm places the agent, which allows the agent to commit a fraud on their customer and steal the customers funds. In other words, even if the advisor stole monies from his/her customer for his own purposes in violation of firm policies, the firm is still liable because it placed that advisor in a position of trust before the customer which led to the theft.
State Securities Acts are another powerful tool to hold securities firms liable for the fraudulent acts of their agents. The Virginia Securities Act, which is similar to most other state acts, provides for control person liability and further requires the payment of reasonable attorney’s fees and interest, in addition to damages.
The provisions of the Virginia Act, specifically Va. Code §§ 13.1-502 and 13.1-522, make it unlawful for a) a person to sell a security without disclosing all material facts or misstating material facts, b) a person to give advice as to purchasing or selling securities while engaging in “any act, practice or course of business which operates or would operate as a fraud or deceit,” or c) a person to even “indirectly” be involved in the purchase or sale of a security and to “employ any device, scheme or artifice to defraud.” Often a broker theft can be connected to the sale of a security / investment, thereby implicating the Securities Act provisions.
Once a defrauded customer proves the agent / salesperson violated the Act, then the customer can impose “control person liability” on the controlling securities firm if certain requirements are met. See §13.1-522(C).
The lawyers at Greco & Greco have repeatedly been able to recover client monies lost in broker thefts and other selling away activities over the years through settlements and FINRA arbitration awards in claims against the salespersons registered securities firms. If you have lost money as a result of similar wrongful acts of your broker and/or financial advisor, please contact attorney Scott Greco for a free consultation and discussion of your case. Our Virginia securities fraud lawyers represent individuals from all states across the country and have decades of experience protecting the rights of customers, and holding securities firms responsible for the acts of their brokers.