Financial Advisor Malpractice

What Is Financial Advisor Malpractice and Negligence?

Malpractice is a term that typically describes when a professional in a position of trust negligently carries out their duties, causing harm to their customer, client, or patient. The term is most commonly used in a medical context, but also applies to legal malpractice and financial advisor or stockbroker malpractice.

Simple negligence in Virginia is defined by the Supreme Court of Virginia in Gossett v. Jackson, 249 Va. 549, 554 (1995): “… the failure to exercise ‘that degree of care which an ordinarily prudent person would exercise under the same or similar circumstances to avoid injury to another.’”

Similar to doctors and lawyers, financial advisors have their own standards, duties of care, and professional conduct rules which they must follow when dealing with their customers. These standards can be required by law, by industry rules and practice, and by industry regulations. See our firm pages on fiduciary duty, suitability, and regulation best interest to see some of the most common standards which are breached by financial advisors and stockbrokers resulting in harm to their customers.

As stated in Merrill Lynch, Pierce, Fenner & Smith v. Cheng, 697 F.Supp. 1224, 1227 (D.D.C. 1988): “It is clear from the case law that a stockbroker can be held liable to his client for negligence.” The Cheng court went on to state that although it did not find a private right of action based upon NASD [now FINRA] rules, a violation of the NASD rules would be a “factor for consideration by the jury as to whether [the broker] acted as a ‘reasonable’ person in his conduct…” Id.

Our financial advisor malpractice lawyers often prove negligence by a financial advisor through showing a breach of an advisor’s duty of care, and showing that the breach caused damage and/or losses to the customer. For example, a common negligence case against a financial advisor could involve a breach of their duty to act in their customer’s best interest by recommending a high-risk investment strategy to a customer who was seeking low risk. The breach of this duty could then cause damage to the customer through the loss of investment monies in the unsuitable high-risk investment. In this situation, the advisor (and his/her securities firm) could be held liable for malpractice and negligence for the breach of their duties.

As discussed in our Failure to Supervise area of practice, securities and brokerage firms can be held liable for negligent supervision when they fail to meet industry standards for establishing and complying with a supervisory system that is designed to detect wrongful activity by brokers and advisors. This wrongful activity can include unsuitable recommendations, false statements about risk, churning of accounts, sales of ponzi schemes, theft by brokers, and other activity.

The Virginia securities fraud and malpractice lawyers at Greco & Greco, P.C. regularly represent individual investors across the country in claims of financial advisor malpractice and negligence. Please contact our managing attorney Scott Greco for a free initial attorney consultation if you think you might have a case.