Court of Appeal of the State of California
Second Appellate District
Division One
Oravecz bought investment securities in Tradex through broker-dealer Steve Roth, allegedly an employee of New York Life Insurance Company. What Oravecz believed to be an offshore trading fund was actually a Ponzi scheme. When the Ponzi scheme collapsed, and Oravecz had lost the money invested in Tradex, Oravecz sued New York Life alleging several causes of action, including breach of fiduciary duty.
New York Life successfully demurred on each of Oravecz's causes of action and was awarded summary judgment. The trial court based its decision to sustain the demurrer on the breach of fiduciary duty cause of action because, under federal law [e.g., Independent Order v. Donald, Lufkin & Jenrette, 157 F3d 933 (1998)], a fiduciary duty only arises when the investor gives discretion to chose investments and control trading authority.
Oravecz appealed, and the appellate court held that the trial court had correctly ruled on the existence of summary judgment under the federal law, but under California common law the investor need not provide a showing of discretion or control by the securities broker. As such, the trial court erred in finding that Oravecz's allegations did not sufficiently allege a claim for breach of fiduciary duty.
The federal requirement that a broker-dealer have discretion and control over an investor's assets for a breach of fiduciary duty to be owed is a reasonable standard. If not for such a duty, negligent and careless decisions by broker-dealers failing to conduct reasonable due diligence would carry few consequences. That California has no such requirement of discretion and control in effect makes each broker-dealer a babysitter for each investor, and begins a shift of responsibility to conduct due diligence away from the party making investment decisions and onto the broker. The slope is steep and icy, broker-dealers, be careful where you step.
No comments:
Post a Comment