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Wright,
Ponsoldt & Lozeau,
Trial Attorneys, L.L.P.
1000 SE Monterey Commons Blvd., Suite 208
Stuart, Florida 34996
772-286-5566
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Last
Updated: Aug 15th, 2002 - 15:03:52
Securities Lit/Arbitration
Introduction
An aggrieved investor in Florida has many causes of action available to remedy the harm. Typical claims include fraud, negligent misrepresentation, negligent supervision, breach of fiduciary duty, violation of 10b-5, and violations of chapter 517. Here, only chapter 517 will be discussed.
Purpose
Chapter 517 of the Florida Statutes was enacted to protect the investing public from the acts of unscrupulous brokers. In enacting the chapter, the legislature placed greater restrictions on brokers and gave Florida citizens more protection than the remedies and protections available under Federal law.
This chapter is commonly known as the Security Investor Protection Act ("Act"). Section 517.011, Fla. Stat. The Florida Department of Banking and Finance ("Department") is the state agency responsible for regulating security brokers in the state. The Act requires all brokerage firms and brokers selling securities in the state to register with the Department. Section 517.12, Fla. Stat. When registering, the brokers and brokerage firms are required to authorize the Department to accept service on their behalf. The authorization also creates a venue right in a customer's county of residence. section 517.101, Fla. Stat.
Types of violations giving rise to claims
Negligence
The Act by its own terms creates several approaches for remedying a customer's loss. Additionally, as the Act imposes various requirements, including registering, disclosing background information, and restrictions on the types of representations made to customers, violation of these provisions should provide a more specific indication of a broker=s duty to the customer and a clear indication of a breach of that duty. Palmer v. Shearson Lehman Hutton, Inc., 622 So. 2d 1085 (Fla. 1st DCA 1993); A.G. Edwards v. Weinreich, 572 So. 2d 993 (Fla. 2d DCA 1990). As a result, the Act may be used to assert a claim of negligence.
Misrepresentation of fact or failure to speak
The most common type of claim under the Act is for a misrepresentation of fact. Under '517.301, Fla. Stat., a broker is required to inform a customer of relevant information concerning the securities recommended by the broker. This duty goes beyond prohibiting false representations and includes an affirmative duty to speak. Typically, a broker recommending a security only discusses the good aspects of the security. The Act requires a broker to provide more than the high points of a security. Specifically, it states it shall be unlawful and a violation for a person to omit to state a material fact when in light of the circumstances under which the statements were made the omission is misleading. section 517.301, Fla. Stat. For example, in recommending a bond, a broker may refer to the coupon rate and fail to inform the customer of the bond's call feature.
Suitability
An example of this duty occurs when a broker recommends an unsuitable security. The doctrine of suitability incorporates many of the basic aspects of investing. In making a recommendation to purchase or sell a security, a broker must take into account the investor's age, income level, assets, and sophistication. This is commonly known as the "know-your-customer" rule. The rule is expressed in both the National Association of Securities Dealers ("NASD") rule book and in the New York Stock Exchanges ("NYSE") rules. NASD rule 2310; NYSE rule 401 & 405.
The Act does not expressly discuss suitability. However, the courts have determined that the Act includes these types of violations. Newsom v. Dean Witter Reynolds, 558 So. 2d 1076 (Fla. 1st DCA 1990). Under the rules and the Act, a broker who recommends a security that is not suitable has committed fraud under the Act. Examples of unsuitable investments include placing a large portion of a retiree's liquid assets in high-tech stocks. Although the quality of the stock might be considered acceptable, the volatility is simply inappropriate for someone living off their investments. The prices of these stocks vary widely from day to day. A retiree might need to sell the stock to pay expenses. If this were to occur on an off day, the loss would be realized.
Causation not required
The misstatements or failure to speak need not cause the loss. In a typical 10b-5 case, the investor must show that the information that was withheld had an effect on the stock price and in essence caused the damage. This is not the case with actions brought under the Act. Under Florida law, all a Florida investor need show is that, but for the misstatement or missing information, the security would never have been purchased. E.F. Hutton & Co. v. Rousseff, 537 So. 2d 978 (Fla. 1989). This makes a violation of the Act an easy claim to prove.
Deceptive Words
In selling a security, brokers often make claims as to the safety of the security and their own infallibility. Recognizing that certain words are inherently deceptive, the legislature has limited the sales pitch a broker may employ when discussing himself or a specific security. The use of these words appears to pose a type of strict liability on the broker. They include misrepresenting that a company or broker has been guaranteed, sponsored, recommended, or approved by a governmental entity. Section 517.311, Fla. Stat.
Failure of broker to register with state
Like any regulated industry, brokerage firms and brokers must register with the state prior to selling any securities within it. Section 517.12, Fla. Stat. In light of Florida's retiree population, the Courts have been liberal in determining what constitutes the sale of securities within Florida. Skurnick v. Ainsworth, 591 So. 2d 904 (Fla. 1991). Failure to register is a violation that allows the investor to rescind the transaction at his option. Id. & section 517.211, Fla. Stat. The same holds true for selling securities that are not registered within the state. See sections 517.07 & 517.211, Fla. Stat.
Remedies Available
Once a violation is shown, the Act contains a specific method of computing damages. section 517.211, Fla. Stat. The statute contains a formula for recessionary damages and compensatory damages. They are both basically the same. The investor takes the consideration paid for the security and adds interest at the legal rate. From this sum, distributions from the security are subtracted along with the value of the security on the date of recession or the date of sale. Thus, if a security is purchased for $100 and sold one year later for $50, the damages would be $100 (consideration paid) plus $10 (interest) minus $50 (value on date of sale) equals $60. The damage calculation is mathematical in nature. The court can do the math post-trial if the jury makes an error. Scheurenbrand v. Wood Gundy Corp, 8 F. 3d 1547 (11th Cir 1993). In addition to the statutory damages, the Act provides for attorneys' fees to the successful investor. Section 517.211, Fla. Stat.
Conclusion
As a whole, the Security Investor Protection Act creates a powerful weapon for aggrieved investors. The relaxation of causation makes the tort easy to prove. Moreover, the Act provides for a mathematical calculation of damages and an allowance for attorneys' fees. These remedies are superior to those contained under Federal law, and as an additional bonus, can obtained in state court.
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Copyright 2002 WPL Trial Attorneys L.L.P.
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