Business Memo: Defending Against Allegations of Unsuitability — Part II: The Period of Limitations

Joseph R. Soraghan

By Joseph R. Soraghan



The most frequent allegation brought against broker-dealers and RRs is that of “unsuitability” of recommendations. We discussed avoiding unsuitable recommendations in our July 2003, February 2004 and September 2004 issues. We discussed in our last issue, July 2007, the defenses of ratification, waiver, estoppel and laches. In this issue we will discuss the statute of limitations, or more precisely, the period of limitations.

As now implemented, the cause of action for “unsuitability” in arbitration has become a sort of “malpractice” action against broker-dealers and registered representatives, similar to negligence and recklessness malpractice actions against lawyers and doctors. That development arose out of the recent movement of disputes out of courts and into arbitration over the past, say, thirty years. The roots of the unsuitability” action, even when resolved in arbitration, are actually in the court action of securities fraud. The action was created in state and federal statutes and rules (e.g., Rule 10b-5) and cases beginning early in the last century. And the roots of its period of limitations, not surprisingly, are in that same action of securities fraud.

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Holy Moses, Batman! They’ve Stolen Our Private Placement Exemptions!

Joseph R. Soraghan

By Joseph R. Soraghan



The Basic Requirements: Early History

Any sale of a security to a Missouri resident must either be registered with the U.S. Securities and Exchange Commission (“SEC”) and the Missouri Securities Commission, or have at least one specific provable exemption from each of those two requirements.

In 1953, the U.S. Supreme Court ruled that the “private offering” exemption of §4(2) of the Securities Act of 1933 (the “1933 Act”) required that the issuer prove that all “offerees” (not only purchasers) had sufficient investment sophistication and financial well-being (hereinafter “investment suitability”) to establish that they did not “need the protection of registration” under the 1933 Act. SEC v. Ralston Purina, 346 U.S. 119 (1953) But because of the illusory definition of “offerees” as including possibly every person who learned of an offering (not just those receiving an “offer” in the contract sense), the availability and thus the usefulness of the private offering exemption of Section 4(2), was thereafter seriously curtailed.

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Business Memo: Defending Against Allegations of Unsuitability – Part I

Joseph R. Soraghan

By Joseph R. Soraghan



As pointed out in our July, 2003 issue, far and away the most frequent allegation brought against broker-dealers and RRs is alleged “unsuitability” of recommendations by RRs. As also pointed out in that issue, a claimant alleging unsuitability must show that the securities or investment program recommended were (1) unsuitable to the investor’s circumstances; and (2) that the broker-dealer and RR held sufficient “control” over the investor.

In that issue, we discussed what aspects of the RR’s recommendations could be unsuitable. In the next two issues, i.e., February, 2004 and September, 2004, we discussed what constituted “control” and what constituted a “recommendation.” In this issue we will discuss briefly the defenses available to a broker-dealer to a claim of unsuitability.

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Business Memo: Are You A Fiduciary? Why Do You Care?

Joseph R. Soraghan

By Joseph R. Soraghan



A lawn care service company sells products and provides services. Registered representatives (“RRs”) and broker-dealers (“B-Ds”) also provide services and sell products (securities, etc.) to their customers. The question here is whether RRs and B-Ds have a significantly higher duty—a fiduciary duty—to their customers.

Most RRs and BDs would automatically react that they provide much more sophisticated services and products than a lawn care service and therefore treat their customers with a higher level of care. However, when that customer complains about their service, and perhaps brings a claim in arbitration or litigation, well-advised B-Ds and RRs argue that their duty was not that of a fiduciary.  Liability on such a claim frequently turns on whether, and is much more likely if, the arbitrators or court believes that the B-D and RR had a fiduciary duty to the customer.

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Selling Away: You and Your RR Can Both Be Honest and Still Be Liable to Someone Who is Not

Joseph R. Soraghan

By Joseph R. Soraghan



“Selling away”, as you know, occurs when an RR invests his client’s money without doing so at or through the brokerage firm at which he is employed. Although it occurs in all types of brokerage situations, it occurs most frequently in non-traditional, generally off-site situations. According to the NASD, selling away is the most frequently committed violation by off-site RRs. For example, RRs who also sell insurance products frequently operate in off-site locations, and selling away frequently occurs on the part of independent insurance agents registered only as Series 6 investment company and variable contract products representatives. These RRs are frequently targeted by issuers, promoters and marketing agents to sell variable contracts and promissory notes to their customers. In many instances these products constitute securities, but their promoters market them to RRs as non-securities products that do not have to be sold through the RR’s broker-dealer.

“Selling away”, also known as “private securities transactions”, is a violation by the RR of his obligation to submit to the supervision of his BD, and to allow it is a violation by the BD of its duty to supervise all securities transactions by the RR. “Selling away” is easy to do even without knowing it.

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