What Securities Litigation Firms Don’t Want Broker Dealers to Know

Broker dealers have a fiduciary responsibility to their clients that obligates them to always act in their best interests. Since investors rely so heavily on their brokers’ expertise, their actions are held to understandably high standards.

The Federal government takes a strict approach to regulating that broker dealers are adhering to these fiduciary responsibilities. However government fines and other penalties don’t do much good for the clients whose trust has been breached.

If and when clients feel this trust has been broken, broker dealers also often face lawsuits to recover lost funds. And more often than not, once a client is compelled to file a suit against their broker, the lawyers are the only ones who win. Let’s look at a few recent investor lawsuits and how firms can avoid these unfortunate outcomes.

Investor Lawsuits against Broker Dealers

Individual broker dealers aren’t the only targets for lawsuits – investors will file lawsuits against large brokerage firms as well:

  • Morgan Stanley – In 2007, investors filed a class action suit against a Morgan Stanley & Co. broker who was trading unlisted securities, despite the SEC banning her from doing so in 1983. Investors claimed that Morgan Stanley breached its fiduciary duties to investors by allowing her to begin trading again.
  • GunnAllen Financial – Two former clients of GunnAllen Financial broker Frank Bluestein filed a 2009 lawsuit against the firm for failing to supervise Bluestein, who secretly sold phony investments to hundreds of clients through a Ponzi scheme. According to the investors’ claim, GunnAllen did not take reasonable efforts to oversee the actions of its brokers, including Bluestein.

Lawsuits like these may lead to larger investigations of broker dealers by the SEC, which could be devastating to an entire firm’s reputation with investors.

Growing Enforcement from the SEC

Since the 1970s, the SEC has settled these investigations and enforcement actions by charging defendants hefty fines without forcing the accused to admit or deny wrongdoing. Apart from loss of investor trust and reputational damage, firms suffer only financial repercussions from regulatory infractions.

However, the SEC may harden its policy by requiring defendants to admit wrongdoing in certain cases where they severely harm a large group of investors or engage in “egregious intentional misconduct.” This proposed policy change would mean that regulatory breaches – such as the market spoofing Panther Energy Trading LLC was recently charged with – become part of a firm’s criminal record, damaging its reputation more harshly (and permanently) than in the past.

Such infractions and legal troubles can be prevented by taking steps necessary to monitor broker activity, such as implementing fundamental regulatory compliance software.

The Benefits of Compliance Products

Firms that use compliance software are much less likely to face investor lawsuits. In the event that investors sue a firm, compliance products can also help reduce liability exposure by offering a paper trail of evidence to defend a broker’s actions. Consequently, compliance software provides numerous benefits to broker dealer firms:

  • Prevents regulatory breaches. Compliance software prevents regulatory breaches by detecting illegal activities carried out by brokers. Even if the software fails to pick up on illicit activity, compliance products enable firms to catch fraudsters sooner, lessening a broker dealer’s repercussions in the event of a lawsuit.
  • Reduces costs. Fighting lawsuits can quickly rack up a firm’s expenses, especially for smaller organizations. Firms that adopt compliance software can avoid costly legal battles and potential fines.
  • Protects against legal action. Many SEC and FINRA regulations include clauses that require broker dealers to make “reasonable efforts” to prevent illicit trading activities. In many lawsuits filed against firms, investors often cite fiduciary failures by broker dealers as the central cause for legal action. Compliance products are one way for firms to prove their fulfillment of the “reasonable efforts” requirement.

It’s imperative that broker dealers proactively preserve their clients’ trust by properly disclosing all information and taking the necessary steps to adhere to regulations set by financial authorities. When firms choose to use compliance software to monitor their activity, they reduce the opportunity for investors to take legal action against them and mitigate the risk of fines and a marred reputation.