According
to a variety of authorities including the SEC, the much-debated fiduciary duty
for registered investment advisers and their representatives includes a subset
of responsibilities[1]. Common sense would, or should tell you that
the appropriate damage calculation for a breach of fiduciary duty will be
directly dependent upon and vary according to the particular unfulfilled
responsibility. For example, a breach of
the fiduciary duty regarding conflicts of interest or honesty, as opposed to
mere suitability, will call for out-of-pocket damage compensation if these
breaches occurred before any market-losses at issue. Even in a suitability only arbitration,
however, expert witnesses may debate the applicability of out-of-pocket loss
calculations as opposed to model portfolio based market-adjusted damage
calculations.
It is
common in breach of fiduciary duty cases involving trustees to award damages in
the amount necessary to make the beneficiary whole. Restatement of Trusts,
Second, § 2205, (1957), provides that proof of harm from a breach of fiduciary
duty entitles an injured party to whom the duty was owed to damages that: (a)
place the injured party in the same position it would have been in but for the
fiduciary breach;(b) place the non-breaching party in the position the party
was in before the breach; and (c)
equal any profit the breaching fiduciary made as a result of committing the
breach. See also Restatement (Second) of Torts § 874 (1979) (“One
standing in a fiduciary relation with another is subject to liability to the
other for harm resulting from a breach of duty imposed by the relation.”).
Delaware law is consistent with this
principle. In Hogg v. Walker, 622 A.2d 648, 653 (Del. 1993), the court
noted that “where it is necessary to make the successful plaintiff whole” for a
breach of fiduciary duty, courts have been willing to allow the plaintiff to
recover a portion of trust property or its proceeds along with a money judgment
for the remainder. The court in Hogg stated that “[i]t is an established
principle of law in Delaware that a surcharge is properly imposed to compensate
the trust beneficiaries for monetary losses due to a trustee’s lack of care in
the performance of his or her fiduciary duties.” Id. at 654.[2];
see also Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983)
(stating that in measuring damages for breach of fiduciary duty the court has
complete power “to fashion any form of equitable and monetary relief as may be
appropriate, including rescissory damages.”); Harman v. Masoneilan Intern.,
Inc., 442 A.2d 487, 500 (Del. 1982) (finding that “the relief available in
equity for tortious conduct by one standing in a fiduciary relation with
another is necessarily broad and flexible.”) (citing See Restatement
(Second) of Torts, § 874 (1979)).
In O'Malley v. Boris, 742 A.2d
845, 849 (Del. 1999), the court stated that the relationship between a customer
and stock broker is that of principal and agent. The court stated a
broker must act in the customer’s best interests and must refrain from
self-dealing, and that these obligations are at times described “as fiduciary
duties of good faith, fair dealing, and
loyalty.” (emphasis added) Id. The court further found that
fiduciary duties of investment advisors “are comparable to the fiduciary duties
of corporate directors, and are limited only by the scope of the agency.” Id. Bear, Stearns & Co. v. Buehler,
432 F.Supp.2d 1024, 1027 (C.D.Cal. 2000) (finding that reasoning from case
addressing breach of fiduciary duty by a trustee was persuasive in case
involving investment advisor because, “[l]ike a trustee, an investment advisor
may be considered a fiduciary.”).
In sum, it is critical to identify the particular
duty at issue in order to arrive at a proper damage calculation. The broker’s duty of suitability is
essentially a limited duty of care akin to the one at play in a
negligence matter. The fiduciary duty, however, carries within it an entire penumbra
of duties of which portfolio/investment suitability is just one. If an alleged breach of fiduciary duty is
limited to the adviser’s responsibility to recommend or make a suitable investment
only, the damage calculations may indeed mirror the broker-dealer damage
calculation. An adviser’s breach of its
fiduciary duty beyond the mere standard of investment care, however, requires
the finder-of-fact to calculate “make-whole” damages.
[1]Miley v. Openheimer, 637 F.3d 318 (1981) is
“the seminal case on damages in a suitability
case[.]”
[2] A “surcharge” is relief in
the form of monetary compensation for a loss resulting from a trustee’s breach
of duty. The Supreme Court in CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1880
(2011), stated that an ERISA fiduciary can be “surcharged” or ordered to pay
money damages under the ERISA provision allowing a participant or beneficiary
of the plan to obtain “other appropriate equitable relief.” In making this
determination, the court stated that “[t]he surcharge remedy extended to a
breach of trust committed by a fiduciary encompassing any violation of a duty imposed upon that fiduciary.” The court
went on to conclude that “insofar as an award of make-whole relief is
concerned, the fact that the defendant in this case, . . . , is analogous to a
trustee makes a critical difference.”
