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Negligent Referrals to Rogue Stockbrokers – New York Law Journal

Can an attorney be liable for the negligent referral of a client to a “rogue stockbroker”, or in the Thanksgiving spirit, a turkey broker?[1]  If an attorney chooses to refer a client to a stockbroker[2], what are the best practices prior to making the referral?[3]  Given the absence of New York case law addressing an attorney’s liability for the negligent referral to a “rogue stockbroker”[4], best practices dictate that at a minimum, an attorney should exercise reasonable care in investigating the stockbroker’s background.  The attorney must also be extraordinarily careful regarding the nature of the referral to the stockbroker.  Initially, it may be best to determine if the person one is referring to is a stockbroker and/or an investment advisor.  Generally, stockbrokers charge commissions per transaction, whereas investment advisors charge fees based on percentages of assets under management.  Some individuals are both stockbrokers and investment advisors.

 

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[1] See De La Bere v. Pearson, Limited, 1 KB 280 (1907).

[2] Under New York law, a stockbroker, or someone holding a Series 7 FINRA license, is referred to as a “salesman.”  See NY CLS Gen. Bus. §359-e(2012).  FINRA refers to the same Series 7 licensed individual as a “representative”.  See FINRA Rule 1031(b).  For statute of limitations purposes, stockbrokers and financial advisors are not “professionals”.  Ironshore Insurance Ltd. v. Western Asset Management Company, 2012 U.S. Dist. LEXIS 76818 (S.D.N.Y. May 30, 2012).

[3] This article does not address an attorney’s best practices when referring to investment advisors, certified financial planners, or trust officers, unless those individuals also maintain Series 7 licenses.  These entities are distinct and warrant different considerations.

[4] The phrase “rogue stockbroker” is not defined.  However, in a 1996 speech, Mary L. Schapiro, the current Chairperson of the SEC, stated, “we are focusing on innovative ways to deal with the problem of rogue brokers, heightened supervision of these brokers, and inadequate supervision of all brokers by firms.”

Securities Law Update – August 2012

Items discussed in this newsletter:

  • Attorney Not Liable for Sale of Unregistered Securities

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Securities Law Update – November 2011

Items discussed in this newsletter:

  • Statutes of Limitation Do Not Apply in Florida Arbitrations

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Securities Law Update – February 2011

Items discussed in this newsletter:

  • Third Party Subpoenas Severely Limited in Arbitration
  • Citigroup Arbitration Agreement Enforceable

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Securities Law Update – August 2009

Items discussed in this newsletter:

  • Trust Not Required to Arbitrate Against Merrill Lynch
  • AIG Name Change
  • Auction Rate Securities Class Action
  • Selling Away Cases – Insurer’s Duty to Defend
  • Punitive Damages Unavailable as a Matter of Law for a Pension Plan’s ERISA §409 Claims
  • Punitive Damages Unavailable as a Matter of Law for a Pension Plan’s ERISA §409 Claims

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The Polygraph Examination – A Valuable Arbitration Tool – The Florida Bar Journal

Securities Arbitration – once a concept foreign to most attorneys, is now a reality for many individuals whose retirement nest eggs have been decimated within the past year. For better or worse, most individual and institutional investors who do business with firms that are members of the Financial Industry Regulatory Authority (hereafter “FINRA”), are required to resolve disputes through a FINRA administered arbitration process. For most Nebraska residents, this means that their dispute will be resolved through an arbitration proceeding that will occur in Omaha. Residents of western Nebraska may be required to travel to Cheyenne,Wyoming for their hearings.

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Securities Law Update – May 2009

Items discussed in this newsletter:

  • Are Arbitration Clauses Within U-4 Agreements Unconscionable?
  • Impact of Granting Motion to Compel Arbitration
  • SEC Affirms FINRA Unsuitability Findings
  • Registered Representatives are Associated Persons of One Firm Only

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Securities Law Update – November 2008

Items discussed in this newsletter:

  • Arbitrability of Military Claims
  • Please Send Wall Street Back to Arbitration!!!
  • Statutes of Limitation Do Not Apply in Arbitration
  • What a Cheapskate!
  • Polygraphs

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Securities Law Update – October 2008

Items discussed in this newsletter:

  • Proceedings Ancillary to Arbitration
  • Think Twice Before Dismissing Your Arbitration
  • Never try a case against a 96 year old deaf and blind client
  • IRA Custodian’s Liability

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Securities Law Update – July 2008

Items discussed in this newsletter:

  • Unauthorized Practice of Law
  • NASD Arbitration Award Vacated
  • Unconscionability of Arbitration Clause
  • Martin Act
  • Where to Sue Your Lawyer?

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