For years a battle has been waged between investors (and their advocates - ie, attorneys) and the broker-dealer industry over whether brokers have a fiduciary duty to their clients. A fiduciary duty is a legal obligation to act solely and faithfully in another’s best interest, typically a client’s best interest. Brokerage firms however will often insist, during a dispute over misconduct or malfeasance, that they do not have such a duty; that they are rather simply order-takers executing the wishes of their clients.
Just the other day, a FINRA (Financial Industry Regulatory Authority) arbitration panel found Wells Fargo liable for $2.8 million because Wells Fargo failed to adequately supervise a major account in which there was significant fraudulent activity. As we've mentioned in previous posts, even though Wells Fargo did not perpetrate nor was it a party to the misconduct itself, the fact that Wells Fargo (back then it was Wachovia) served as the supervising broker-dealer of the investment accounts in which fraud was taking place under FINRA's regulations means that it's on the hook. This is important from the standpoint of fiduciary responsibility and internal financial industry checks-and-balances, as well as from the practical legal and economic standpoint of recovering losses suffered due to financial misconduct of various kinds. From a fiduciary standpoint, it's vital that brokerage firms and not just individual brokers or investment advisors (or in the Wells Fargo case, a secretary at a law firm representing the aggrieved Boca Raton-based family investment partnership) be held accountable for misconduct occurring within client accounts. When something goes wrong, in the eyes of FINRA, brokerages cannot simply point the finger at rogue brokers or scheming secretaries and say it's strictly the other guy's/gal's fault. Now, not only is this good internal practice, forcing brokerages to monitor and regulate themselves as the first line of defense against misconduct, but legally it often enables clients who lose money--in this case, some $6 million--at the hands of crooks to go after the brokerage firm, too. In the Wells Fargo case, the family investment partnership successfully prosecuted the secretary who perpetrated the fraud against them in civil court. Unfortunately, the secretary was unable to pay the damages. Surprise, surprise. The partnership's legal team then smartly took their case to FINRA, and shined the spotlight of accountability on Wells Fargo. Although the secretary was the agent of fraud and not working for Wells Fargo, the bank was found by a FINRA arbitration panel to be liable for negligence to the tune of $2.8 million, since they didn't catch the fraud and losses in the accounts as soon as they should have. Obviously, the partnership has a much better chance of recovering money from Wells Fargo than from a disgraced secretary.
If you or anyone you know has been the victim of broker misconduct of any kind, please contact us immediately for a free consultation.