This is a securities fraud case where a broker, the employee of a large asset management firm in Illinois, was accused of breaching his fiduciary duty. While soliciting loans from the firm’s clients and claiming personal financial distress, the broker allegedly began to engage in increasingly risky and unauthorized trades. Many options were allowed to expire altogether, with no value whatsoever. The broker did not advise his investors of these positions or to liquidate them at a loss to retain some of their value. After disregarding his clients’ risk tolerances, it was claimed that he had violated the fiduciary duties owed to an investor by their company. Subsequently, a professional with knowledge of fiduciary duties owed by investors, anti fraud, brokers and brokerage firms was brought in to opine on any breach in the standard of care.
Question(s) For Expert Witness
- 1. What are the fiduciary duties of the broker and brokerage firm in this instance?
- 2. What measure could have been in place to prevent the outcome?
Expert Witness Response E-010297
I am an approved Regulatory Authority Dispute Resolution Arbitrator and Chartered Financial Analyst at FINRA, the Financial Industry Regulatory Authority. I have held multiple FINRA and National Association of Securities Dealers licenses, including General Securities and Equity Trader Representative. I am familiar with cases of fraud, suitability, and breach of fiduciary duty. By statute, the broker and brokerage are subject to a suitability standard, as well as the customary fiduciary standard. I would need to see the broker’s U4 notice of registration and the consequent U5 notice of termination, and review his annual compliance affirmations as well as his options account application.
Expert Witness Response E-010071
As a Chartered Financial Analyst, I have held the Series 7 and 64 securities licenses, am on the exam writing team for the Series 64 and 65 securities licenses, and lecture on investment ethics and standards of professional practice. Although the broker and his firm likely had fiduciary duties arising from the investment advisory firm or simple discretionary training, it is not completely clear from the information provided. If they did, there was duty to act in the client’s interest, including investing in the client’s profile, executing trades and avoiding option expirations, and hiring qualified professional staff while ensuring their supervision. Possible preventative measures in this case would be instituting stricter hiring guidelines, proper supervision procedures, or more efficient policies of client communication.