Due to their position as trusted advisors to customers regarding investments and savings, and control over those investments/funds, financial advisors are uniquely positioned to commit fraud and crimes resulting in losses of the life savings of their customers. This unfortunately can include outright theft and conversion, investments in ponzi schemes, and other “unauthorized” wrongful acts.
FINRA registered securities Broker-Dealers and brokerage firms often will try to escape liability for these wrongful acts of their registered salespersons and advisors by claiming the agents were “selling away” and acting in an unauthorized manner unbeknownst to the firm. However, the law in Virginia is clear that a firm may be held liable for the wrongful acts of its agents even if the acts weren’t authorized, even if the firm was not aware of the acts, and even if the advisor was acting only for his own purposes. Greco & Greco has had great success holding these firms liable for these wrongful acts in both FINRA arbitration and in Virginia courts.
Liability for the securities firms can be established through three alternative means, any one of which is sufficient for liability:
1. Liability for wrongful acts of agent based on the position of the agent.
The Virginia Supreme Court has described the liability of a principal for its agents, even if the principal/firm is entirely innocent, in the case of Dudley v. Estate Life Ins. Co. of America, 220 Va. 343, 350, 257 S.E.2d 871 (1979):
“A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud. Restatement (Second) of Agency § 261. Comment a. to § 261 reads as follows: The principal is subject to liability under the rule stated in this Section although he is entirely innocent, has received no benefit from the transaction, and, as stated in Section 262, although the agent acted solely for his own purposes. Liability is based upon the fact that the agent's position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to him.” (Emphasis added).
As noted by the Virginia Supreme Court, the brokerage firm is liable even if it is entirely innocent, even if it received no benefit, and even if the agent was acting for his/her own purposes. The liability is based on the position in which the firm places the agent, that allows the agent to commit a fraud on their customer. In other words, even if the advisor stole monies directly from a customer for his own purposes in violation of firm policies, the firm is still liable because it placed that advisor in a position of trust before the customer which led to the theft.
2. Liability for wrongful acts of agent as a result of failure to supervise.
In addition to direct liability under Virginia agency law, a securities firm can be liable for failing to supervise its agent, which then led to the fraud or theft to occur.
FINRA Rules impose on securities firms a very serious duty to supervise their salespersons and agents to attempt to prevent violations of FINRA Rules (such as the duty to make suitable recommendations under FINRA Rule 2111), as well as violations of the law, fraud, and other wrongful acts such as theft or “selling away” (the recommendation of investment in investments and products which were not approved or authorized by the firm).
Violations of these duties to supervise, resulting in failures to detect wrongful conduct, can result in liability for the firm under legal theories of negligence, breach of contract, and violations of FINRA Rules.
A customer can demonstrate failures to supervise by a firm by a number of means. All firms are required to have compliance and supervisory manuals setting out the processes they are supposed to follow for supervision and detection of wrongful conduct. These processes and procedures can and should include inspections of offices and files, both announced and unannounced, review of correspondence and email, review and approval of sales materials, review of trading in accounts and unusual activity in accounts, contact with customers when red flags are triggered, and other means.
The fact that a financial advisor is an independent contractor versus being an employee, or is in a small satellite office as opposed to a large branch, is irrelevant. As stated by the NASD (the former name of FINRA) in Notice to Members 86-65 “Irrespective of an individual's location or compensation arrangements, all associated persons are considered to be employees of the firm with which they are registered for purposes of compliance with NASD rules governing the conduct of registered persons and the supervisory responsibilities of the member. The fact that an associated person conducts business at a separate location or is compensated as an independent contractor does not alter the obligations of the individual and the firm to comply fully with all applicable regulatory requirements.”
3. Liability for wrongful acts of agent under the Virginia Securities Act control person provision.
The Virginia Securities Act is a powerful tool for defrauded investors because in addition to providing for recovery of damages from securities fraud, it also requires payment of “reasonable attorneys fees” by the wrongdoer, and the firm that controlled the wrongdoer.
The provisions of the Act, specifically Va. Code §§ 13.1-502 and 13.1-522, make it unlawful for a) a person to sell a security without disclosing all material facts or misstating material facts, b) a person to give advice as to purchasing or selling securities while engaging in “any act, practice or course of business which operates or would operate as a fraud or deceit,” or c) a person to even “indirectly” be involved in the purchase or sale of a security and to “employ any device, scheme or artifice to defraud.”
Once a defrauded customer proves the agent / salesperson violated the Act, all they have to do to impose joint liability of the advisor’s FINRA securities firm it to show that the firm directly or indirectly controlled the advisor. See 13.1-522(C). Upon a showing of direct or indirect control, the burden of proof then shifts to the firm to show that they did not know of the wrongdoing, and in the exercise of reasonable care could not have known of the wrongdoing.
Proof under any one of the three theories of firm liability above will result in a firm’s liability for its securities agent’s wrongful acts, fraud, theft, or investment in criminal ponzi schemes. If you have lost money as a result of similar wrongful acts of your broker and/or financial advisor, please contact Scott Greco for a free consultation and discussion of your case. Our attorneys have decades of experience protecting the rights of customers and holding securities firms responsible for the acts of their brokers.