This case involves alleged securities fraud and breach in fiduciary duty. The plaintiff is an investor who was working with a broker (an employee of a capital market asset management firm). The broker was managing a substantial fund but started to move forward with unauthorized trades into highly speculative investments, disregarding clients’ risk tolerance. He was also soliciting loans from clients of the firm due to personal financial distress. He left the firm on bad terms and started at another brokerage house, which knew of his transgressions. Over the course of 2 1/2 years, the broker continued speculative and unauthorized trading, claiming it was part of a “trading strategy.” He left abruptly in 2013 and turned himself into the FBI and SEC and is currently in federal penitentiary. During his tenure at the initial firm, the broker allowed a wave of options to expire with no value whatsoever. The broker did not advise the investor of those positions or to liquidate at a loss to retain some of the value.
Question(s) For Expert Witness
- 1. Do you have familiarity with the subject matter described above?
- 2. Have you ever published or lectured on this subject / issue?
- 3. What are the fiduciary duties of the broker and brokerage firm in this instance?
- 4. What measure could have been in place to prevent the outcome?
Expert Witness Response E-010297
I am an Approved FINRA Dispute Resolution Arbitrator and a Chartered Financial Analyst, and I have held the following NASD/FINRA securities licenses: Series 7 ? General Securities Representative; Series 55 ? Equity Trader Representative and Series 63 ? New York Uniform Agent. In addition, I have served as an expert witness on similar cases (fraud, suitability and fiduciary duty). I am familiar with this subject matter. By statue, the broker and brokerage are subject to a suitability standard, which definitely applies. By common law, they are subject to a fiduciary standard. I would need more granularity on the case to opine where the fiduciary standard applies. I would need to see the broker’s U4’s and U5’s, review his annual compliance affirmations, and review the client’s brokerage account application and options account application. Other questions may impact this case: (1) were all the trade tickets sent to the client? (2) were account statements sent on a regular basis? and (3) were there failures in the brokerage firm’s compliance procedures that failed to catch unauthorized trading and breaches of account guidelines and the denoted risk profile of account?
Expert Witness Response E-010071
I have familiarity and expertise in this subject matter. I am a CFA charterholder, have held the Series 7 and 64 securities licenses, am on the exam writing team for the Series 64 & 65 securities licenses, and I lecture on investment ethics and standards of professional practice at the University of Wisconsin – Milwaukee. Although likely so, it is not completely clear from the information provided that the defendants had fiduciary duty. Likely they did, arising out of the investment advisory firm, or simply discretionary trading. If so, the duty is to act in the client’s interest – invest within the client’s risk profile, execute trades (including not allowing option expirations), hiring and supervising qualified professional staff, etc. Possible preventative measures include stricter hiring guidelines, proper supervision procedures, or proper client communication procedures.