Standard Causes of Action in FINRA Arbitration

by Robert Neary | May 2019
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My prior article, The FINRA Arbitration Process – Investor Disputes Against Brokers, discussed the Financial Industry Regulatory Authority or “FINRA”—the self-regulatory organization that oversees brokers and financial advisors¹. That article addressed the process for an investor to bring a claim against his/her broker before a FINRA arbitration panel. This article will briefly identify and explain a few common causes of action that the investor can bring against a broker in a Statement of Claim.

The claims that an investor can bring against the broker in FINRA arbitration related to the broker’s fraud or misconduct when recommending or trading certain investments include:

Violation of Blue Sky Laws

“Blue Sky Laws” refer to each state’s laws that regulate the offering and sale of securities. The term “blue sky laws” is believed to have come from the Supreme Court decision in Hall v. Geiger-Jones, Co., 242 U.S. 539 (1917) where the Court referred to “speculative schemes which have no more basis than so many feet of blue sky.”

Florida’s blue sky laws are found in Florida Statutes Chapter 517 and are also known as the Florida Securities and Investor Protection Act (See FL. Stat. § 517.011). The Act gives the State authority to investigate and enforce various provisions of the statute and allows investors to file a claim for violation of the Act. For example, pursuant to Florida Statute § 517.301, the falsification or concealment of certain facts related to an investment is fraudulent. The Act allows investors to demand the sale or purchase of the security be rescinded if the investor’s broker falsified or concealed certain facts.

Breach of Fiduciary Duty

Investors who are defrauded in some manner by their broker (for example, if the broker misrepresented material facts about an investment) may also have a common law claim for breach of a fiduciary duty. A fiduciary duty means that the broker has a duty to act on their clients’ behalf and generally owes the client a duty of loyalty and care of the highest order. To prove a claim for breach of fiduciary duty, the investor must show the arbitration panel that (1) the fiduciary duty existed as to the particular investments; (2) the broker breached that duty; and (3) economic damages flowed from that breach.

Churning

“Churning” refers to when brokers conduct an excessive amount of trades for the purpose of earning themselves commissions. Brokers earn commissions on each trade performed. If the investor discovers that their broker is submitting a large number of trades for the purpose of earning additional commissions, the investor can seek return of the commissions earned or the losses from those trades.

Unsuitable Investments

Brokers should be recommending investments or trades that are in accord with the investor’s goals and investment profile. For example, retiree investors may want to keep their investment in conservative investments that protect them throughout their retirement. If the broker were to put the investor’s funds into high-risk investments and the funds were lost, the investor may have a claim for unsuitable investments.

Unauthorized Trading

Brokers must have approval from the investor to make trades or investments. If the broker makes trades or invests funds without getting consent from the investor, then the investor may have a claim for unauthorized trading. However, investors need to be aware that if they wait too long to challenge the unauthorized trade, the broker can raise a defense that the investor consented to the claim.

The above claims represent a few of the most common claims that can be brought in a FINRA arbitration. However, each investor’s situation is different and the investor’s attorney will need to investigate the facts of the particular investor’s situation to determine whether the above claims (or others) are appropriate. Kozyak Tropin & Throckmorton has successfully brought claims on investors’ behalf in FINRA arbitration. If you believe that you have been defrauded by your broker please send an email to fraud@kttlaw.com.
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¹ This article will use the term “broker” to refer to both brokers and financial advisors.