CAN A FINANCIAL ADVISER BE SUED BY A NON-CLIENT FOR NEGLIGENCE?

The answer to that question is “probably.” At least in Missouri, New York, and Iowa.

            Missouri courts apply a balancing test when determining if a “non-client” intended beneficiary of professional services can sue for negligence despite a lack of privity. The leading case in Missouri, at least as to accountants, is Aluma Kraft Manufacturing Co. V. Elmer, 493 S.W.2d 378(1973). The Aluma court stated: 

“The determination of whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of several factors: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to him; (3) the degree of certainty that the plaintiff suffered injury; and (4) the closeness of the connection between the defendant’s conduct and the injury suffered. Westerhold, supra, 419 S.W.2d at 81. We believe that these policy factors are satisfied with this case.” 

Aluma at 383. The court relied in part upon a New York accountant case, quoting the infamous Justice Cardozo.

The same principles of non-privity professional liability have been applied to attorneys in Missouri. See Donahue v. Shugart, 900 S.W.2d 624 (Mo. 1995). In Donahue the intended beneficiaries of a decedent’s trust that was declared invalid brought a legal malpractice and breach of fiduciary duty claim against the decedent’s attorneys. Id. At 626. Prior to the decedent’s death he directed Stamper, his attorney, to ensure that a specified sum of monies from his trust account be paid to Mary Donahue and Sundy McClung upon his death. Id. at 625. Donahue and McClung were not beneficiaries of Stockton’s trust. Id. Stockton also directed Stamper to prepare a deed to his home transferring a fifty percent interest in the home to Mary Donahue, effective on Stockton’s death. Id. Upon learning that Stockton’s death was imminent, Stamper sought advice from others in his law firm on how to make the checks and deed effective in accordance with Stockton’s wishes. Id.

Stamper attempted to effectuate the transfers, but they were later declared to be invalid by the Missouri Court of Appeals. Donahue, 900 S.W.2d at 625. The Court determined that the plaintiff’s breach of fiduciary duty claim was properly dismissed as being “dependent on the existence of attorney negligence, not on the breach of trust” because the conduct complained of was merely negligence in the performance of legal services. Id. at 630. 

But the Donahue court stated that the “Determination of whether attorney owed legal duty to non-clients so as to be liable to non-clients in legal malpractice action is determined by weighing factors in balancing test, including: existence of specific intent by client that purpose of attorney’s services were to benefit plaintiffs, foreseeability of harm to plaintiffs as result of attorney’s negligence, degree of certainty that plaintiffs will suffer injury from attorney misconduct, closeness of connection between attorney’s conduct and injury, policy of preventing future harm, and burden on profession of recognizing liability under circumstances. Pleadings were sufficient to establish that attorneys owed duty to non-clients who were intended recipients of client’s gifts causa mortis.”

Finally, the Supreme Court of Iowa applied these same basic principles to an insurance agent to allow a non-client to proceed against the agent. There is no reason to believe that the courts would not apply the same public policy to financial advisers and the intended beneficiaries of their services. Food for thought.

FINANCIAL ADVISER TERMINATIONS

It’s what we do here at Cosgrove Law Group, LLC.

              Believe it or not, there are instances in which a broker-dealer seeks out pre-textual reasons for a termination.  Some reasons are more frivolous than others.  For many advisers, an involuntary termination is nothing more than the first chapter of a multi-chapter nightmare.

            The broker-dealer has 30 days from the date of termination to file the U-5, a disclosure to FINRA that modifies the adviser’s U-4 with information regarding the termination.  The U-5 disclosure includes both narratives and the checking of “yes” or “no” boxes.  Notably, which boxes are checked or not will impact what, if any, information is added to the publicly accessible BrokerCheck Report.

            Once the U-5 is filed, and sometimes before that, FINRA and state regulators will make inquiry as to the disclosure.  Before that, however, potential employers will want to know what is, or will be, on the U-5.  During this early post-termination window, while the adviser is trying to get hired and registered, it is common for the former broker-dealer’s agents to solicit the departing adviser’s clients.  Sadly, these solicitations frequently cross the line between fair competition and tortious interference/defamation.

            It should be obvious from this brief summary that it is critical to retain counsel as soon as you begin to even sense that things are going south with your current broker-dealer.  Sometimes the legal department of the broker-dealer will step in and correct its clients’ improper behavior.  Moreover, there are times when the U-5 language initially intended can be modified to be, while still accurate, less prejudicial or inflammatory in nature.  If all else fails, filing an arbitration claim for compensatory and punitive damages and an expungement is a final avenue of recourse.  Please do not try to navigate these treacherous waters by yourself.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

Arbitration Panel Finds Merrill Lynch Defamed Former Employee

Merrill Lynch, Pierce, Fenner & Smith, Inc., a brokerage firm registered with Financial Industry Regulatory Authority (“FINRA”) and investment adviser firm registered with Securities Exchange Commission (“SEC”), as well as Merrill Lynch International Finance, Inc. (collectively, the “firms”), have been ordered by an Arbitration Panel to pay former employee, Miguel Andres Ballestas, $750,000.00 in compensatory damages based upon the firms having been found liable for defamation on FINRA Form U5 relating to the circumstances of Ballestas’ termination. (FINRA Office of Dispute Resolution Arbitration Award No. 14-01946, April 30, 2018).

According to the Arbitration Award, the firms brought an arbitration against Ballestas alleging unjust enrichment and breach of contract, contending that Ballestas failed to pay a promissory note executed on January 9, 2009. Ballestas counterclaimed, alleging that the firms, inter alia: breached duties of good fair and fair dealing; violated FINRA Rule 2010; wrongfully terminated Ballestas; breached fiduciary and contractual duties owed to Ballestas; and committed Central Registration Depository (“CRD”) Form U5 defamation pertaining to Ballestas’ termination from the firms.

In the “Termination Disclosure” section of the Form U5, the firms were apparently asked if Ballestas voluntarily resigned from the firms, or had been discharged or permitted to resign from the firms, after allegations were made that accused Ballestas of: (1) violating investment-related statutes, regulations, rules or industry standards of conduct; and/or (2) fraud or the wrongful taking of property. Evidently, those questions were answered by the firms in the affirmative.

The Arbitration Award revealed that the firms collectively sought: $407,451.40, which reflected the outstanding promissory note balance, as well as interest, costs and attorneys’ fees; and for Ballestas’ counterclaim to be completely dismissed. However, Ballestas sought a total of $26,000,000.00 in damages from the firms based upon the loss of Ballestas’ book of business, pension, and deferred compensation, and for having suffered from mental pain and anguish by the firms. Moreover, Ballestas sought for his promissory note to be cancelled or at least offset by service payments pertaining to his employment with those firms, and for his CRD Form U5 to be expunged. Evidently, on June 27, 2017, FINRA Office of Dispute Resolution was provided a notice of settlement regarding a portion of the claims made by the firms and Ballestas against each other.

After having considered the evidence, testimony and pleadings, the Arbitration Panel concluded that the firms were jointly and severally liable for CRD Form U5 defamation of Ballestas, and ordered the firms to pay Ballestas $750,000.00 in compensatory damages. Further, the Arbitration Panel recommended that the firms’ answers in the “Termination Disclosure” section of Form U5 be changed to “No” based on the firm’s initial responses being of a defamatory nature.

Cosgrove Law Group, LLC has represented former employees in several U5 defamation cases nationwide, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.