“Common” Securities Claims

By Timothy Guilmette, Spring 2014 Student Intern

common lawSome investors seek advice from financial professionals when making investment decisions, and others use financial professionals to manage their financial affairs. Unfortunately, professionals make mistakes, communications get crossed and some even act contrary to their clients’ interest. If an investor feels like they were wronged, he or she may have the right to bring legal action against the individual or organization they work for, or both. There are many different claims one can assert in securities arbitrations. Today we are focusing on one type of claim: matters that arise under the common law. This post will discuss two common law claims that are frequently seen in FINRA dispute resolution proceedings: fraud and breach of fiduciary duty.


Fraud is a wrongful or criminal deception intended to result in financial or personal gain. In lay terms, a fraudulent act is when someone lies to you, in order to get you to do something that will benefit them. Fraud generally has five components, all of which must be shown to assert a claim: 1) broker must have made a false statement about an important fact, 2) knowing that the statement was a lie, 3) with the intent to deceive the investor, 4) who justifiably relies on the false statement, and 5) as a result, the investor lost money.

An example of this claim looks something like this: Broker tells his client that he has a new security to sell him, “the product cannot lose,” he says. The investor asks for more information. His broker then tells him about several analyst reports that say the stock is going to sky-rocket this next quarter, and that the broker’s firm will insure any losses. The investor transfers a large sum of money to the broker who sells the investor an underperforming stock that the broker owns and is attempting to offload. Subsequently, the stock declines in value and the investor losses a large of amount of the money invested.

In this example, a fraud claim exists. The broker knowingly made a false statement to the investor, telling him the stock could not lose and that the firm would cover any losses. The broker made this statement with the purpose to deceive the investor, the investor justifiably relied on the broker’s expert recommendation, and because of his reliance, the investor lost his money.

Breach of Fiduciary Duty

A breach of fiduciary duty is another common law claim. A fiduciary is a person who, while acting for the interest of another, holds a position of trust and confidence. If a financial professional holds himself out to the public as a trusted adviser many states will presume that a fiduciary duty exists. In order to bring a claim, a fiduciary must have breached his or her duty and the investor must suffer damages (usually lost money).

An example of a breach of fiduciary duty looks something like this: Investor hires an investment adviser to manage his investments. Investment adviser trades securities in investor’s account, initially making him a profit. Later, broker starts to make trades contrary to the best interest of the investor, doing so only to earn higher commissions on products that have little to no real potential.

In this instance, the investor placed his trust in the professional expertise of the investment adviser, who failed to place the client’s interest above his own. The investment adviser breached his fiduciary duty to purchase securities that were best suited to the customer’s interests. As a result the investor lost money and paid increased fees.

The above claims are two potential common law claims investors could potentially assert. Each case is unique and investors who feel they have been wronged should speak with a licensed attorney in their state, or one of the several Investor Advocacy Clinics around the country to evaluate whether they may have a claim.