When a broker recommends the purchase of securities that are overly risky or speculative, in light of that person's stated investment objective, expressed tolerance for risk, or overall financial condition, or generally, based upon their age, income, education, prior investment experience and the existence or non-existence of other assets, that person may have a claim for the sale of unsuitable securities.
The sale of unsuitable investments is actionable under Rule 10(b) of the Securities and Exchange Act of 1934, SEC Rule 10b-5. This body of law is premised, in part, on the New York Stock Exchange Rule 405- "Know Your Customer" rule, which in substantial part provides that: "Every member organization is required to:
- (1) Use due diligence to learn the essential facts relevant to every customer, every order, every cash or margin account accepted or carried by such organization."
FINRA has similar rules. FINRA Conduct Rule IM-2310, states that: "In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs."
The violation of these rules support a claim for securities fraud.
The recommendation, or selection of investments without a reasonable basis for such recommendations is actionable.
With respect to "suitability," and particularly suitability involving retired persons living on a fixed income, the FINRA has reminded and cautioned its members that:
Firms should carefully consider the risk of a product with the age and retirement status of the customer in mind, including its market, inflation and issuer credit risk. Investment involves varying degrees of risk and reward. For many investors who are at or nearing retirement, there can be a temptation to reach for yield to maximize retirement income without the appreciation of the concomitant risk.
Moreover, it can be difficult for some investors to fully appreciate the risks of certain products or strategies, particularly if they are concerned about running out of money. Yet, especially when investments involve retirement accounts or lump-sum pension plan payments, taking undue risks with funds needed to last a lifetime can be financially disastrous.
(See FINRA Notice to Members 07-43)
If you believe that you may have been the victim of the sale of unsuitable investments by your broker, contact us for a free evaluation of your claim.
. A claim for"suitability," or the sale of unsuitable investments arises under Section 10 (b) of the Exchange Act of 1934, and Rule 10b-5, as promulgated thereunder by the SEC, as a "misstatement or omission of material fact in connection with the sale of securities," (i.e. fraud by omission), in that the broker recommended a particular security, but failed to disclose that the security was"unsuitable."
Sources/Additional Reading:
Lefkowitz v. Smith Barney Harris Upham & Co., Inc., 804 F.2d 154, 155 (1st Cir. 1986)(Most courts use the traditional laws regarding omissions under SEC Rule 10b-5 and find that unsuitability is an omission that the recommendation is unsuitable for the customer.).
See Kirkland v. E.F. Hutton & Co., 564 F. Supp. 427, 443 (E.D. Mich. 1983) (SRO rules may be considered as evidence in support of securities fraud claim);
Mihara v. Dean Witter & Co. 619 F.2d 814, 824 (9th Cir. 1980)(suitability rules of the Exchange and the NASD have long been regarded as the standard to which all brokers are held, the violation of which is tantamount to fraud);
Miley v. Oppenheimer, 637 F.2d 318, 333 (5th Cir. 1981);
Keenan v. D.H. Blair & Co., Inc., 838 F. Supp. 82, 86-87 (S.D.N.Y. 1993);
Kirkland v. E.F. Hutton & Co., 564 F. Supp. 427, 443 (E.D. Mich. 1983) (SRO rules may be considered as evidence in support of securities fraud claim).
See, e.g., Hanly v. Securities and Exchange Commission, 415 F. 2d 589 (2d Cir. 1969);
Keenan v. D.H. Blair Co., 838 F. Supp. 82 (S.D. N.Y. 1993);
Gouger v. Bear, Stearns & Co., 823 F. Supp. 282 (E.D. Pa. 1993);
Tiernan v. Blyth, Eastman, Dillon & Co., 719 F. 2d 1 (1st Cir.1983);
O'Connor v. R.F. Lafferty & Co., Inc., 965 F. 2d 893 (10th Cir. 1992)(unsuitability requires a showing that the quality of securities purchased was inappropriate given the customer\\\'s investment goals and objectives).
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