Securities Lit/Arbitration
Unscrupulous brokers and Florida law
By William R. Ponsoldt Jr.
Dec 19, 2000, 4:18pm

The Tale

Mr. and Mrs. P are both over 65. Mr. P is suffering from alzheimers and has left the finances up to Mrs. P. After seeing your estate planning seminar, Mrs. P calls you to have you prepare a trust so that she can avoid probate. Mr. P's medical expenses are also steadily increasing and she wants to know whether she should put Mr. P in a nursing home. You have her fill out a questionnaire as to her assets and their value.

When you review the questionnaire, you notice that Mr. and Mrs. P have approximately 50% of their investable assets, $450,000, in limited partnerships and the other 50% in high tech stocks like Qualcom, Compaq, and Oracle. Mrs. P believes the limited partnerships she bought several years ago are worth approximately what she paid. She has asked the broker about the value and he assures her they are still worth what she paid. The broker also told her that the limited partnerships are safe, conservative and 100% government guaranteed. Mrs. P does not know exactly what the stocks are worth because their value jumps around from day to day. As far as income, Mr. and Mrs. P live off of social security and the income provided from the limited partnerships.

You quickly check with your friend at Merill Lynch who tells you that the limited partnerships are illiquid, which means they can not be sold. As far as the alleged guarantee, the limited partnerships are really mortgage backed securities. The government guarantees the mortgages not the limited partnerships. The stocks are liquid but if you sell them today they are only worth $150,000 as the technology sector is off this week.

What are Mr. and Mrs. P to do? Perhaps more importantly, what can you do to help Mr. and Mrs. P?

The Tip

The Florida legislature enacted Chapter 517 of the Florida statutes 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 Act imposes various requirements, including registering, disclosing background information, and restricting the types of representations a broker may make to customers.
The most common type of claim under the Act is for a misrepresentation of fact. Under section 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 the limited partnerships to Mr. and Mrs. P, most likely the broker never told them that they were going to get their own money back for several years and could not sell the limited partnerships on the open market.

Another example of this breach of the duty to speak 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 both of the ones made by Mr. and Mrs. P. Placing a large portion of a retiree's liquid assets in high-tech stocks is unsuitable because 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. Placing volatile stocks with illiquid limited partnerships simply exacerbates the problem.

Unlike the typical fraud case, 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.

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. Thus, Mr. and Mrs. P's broker committed an express violation of the act.

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

In addition to The Act, Mr. and Mrs. P have many other remedies available to them. When you run across a situation such as theirs, its best to refer the case to an attorney that handles that type of matter. In many instances the attorney will take the matter on a contingency fee type arrangement.

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