Stock Lawyer Stock Broker Fraud Lawyer 5 — Questions and Answers
Question 1: What does a stockbroker fraud attorney typically need to demonstrate to establish 'loss causation' in a securities fraud case?
- That the defendant's fraudulent conduct was a proximate cause of the investor's economic loss (Correct answer)
- That the investor held the securities for at least 12 months before the loss occurred
- That the investor did not contribute to the loss by failing to monitor their account
- That the securities declined in value by more than 20% from the purchase price
Correct answer: That the defendant's fraudulent conduct was a proximate cause of the investor's economic loss
Loss causation requires showing that the defendant's fraudulent misrepresentation or omission proximately caused the investor's actual financial loss, as established in Dura Pharmaceuticals v. Broudo.
Question 2: What is the significance of FINRA's 'BrokerCheck' database in a stockbroker fraud case?
- It provides public access to a broker's employment history, regulatory actions, and customer complaints, which can reveal prior misconduct patterns (Correct answer)
- It is a secure database accessible only by SEC investigators during formal inquiries
- It lists all securities recommended by a broker over their career for audit purposes
- It tracks real-time trading activity of registered brokers for surveillance purposes
Correct answer: It provides public access to a broker's employment history, regulatory actions, and customer complaints, which can reveal prior misconduct patterns
BrokerCheck is a free public database maintained by FINRA that discloses brokers' professional backgrounds, disciplinary history, and customer dispute records, which attorneys use to identify patterns of misconduct.
Question 3: Which type of expert witness is commonly retained in stockbroker fraud litigation to calculate damages?
- A forensic economist or financial analyst who quantifies the investor's actual monetary losses (Correct answer)
- A licensed psychologist who testifies about the emotional distress caused by the fraud
- A retired SEC commissioner who testifies about regulatory standards
- A certified public accountant who audits the brokerage firm's financial statements
Correct answer: A forensic economist or financial analyst who quantifies the investor's actual monetary losses
Forensic economists or financial analysts are typically retained to calculate out-of-pocket losses, lost profits, and the difference between what was received and what was represented.
Question 4: What is 'market manipulation' under Section 9(a)(2) of the Securities Exchange Act of 1934?
- Engaging in a series of transactions to create a false appearance of active trading and thereby artificially affect the price of a security (Correct answer)
- Spreading false information about a company's earnings through social media
- Failing to disclose material information in an SEC filing
- Purchasing securities on margin in excess of Regulation T limits
Correct answer: Engaging in a series of transactions to create a false appearance of active trading and thereby artificially affect the price of a security
Section 9(a)(2) prohibits effecting transactions that create the appearance of active trading or that raise or depress the price of a security through artificial means.
Question 5: An investor's broker falsely represented that a bond fund was 'government guaranteed.' Under which legal theory could the investor sue the brokerage firm directly?
- Negligent supervision, for failing to properly oversee the broker's misrepresentations to clients (Correct answer)
- Strict liability, because selling financial products imposes absolute liability on firms
- Vicarious immunity, because the firm is shielded once it registers with FINRA
- Contributory negligence, because the investor should have verified the guarantee independently
Correct answer: Negligent supervision, for failing to properly oversee the broker's misrepresentations to clients
Brokerage firms can be held liable for negligent supervision when they fail to adequately supervise brokers who make fraudulent misrepresentations to clients.
Question 6: What is a 'selling away' violation in securities law?
- A broker selling investment products not approved or sponsored by their member firm, without the firm's knowledge or consent (Correct answer)
- A broker transferring client accounts to a competing firm without authorization
- A broker recommending clients sell their securities to avoid an anticipated market decline
- A broker selling restricted securities to non-accredited investors outside of an exempt offering
Correct answer: A broker selling investment products not approved or sponsored by their member firm, without the firm's knowledge or consent
Selling away occurs when a broker sells investment products outside their firm's approved list without the firm's knowledge, violating FINRA rules and exposing both broker and firm to liability.
Question 7: In FINRA arbitration, what is the purpose of a 'bifurcated' hearing on the issue of punitive damages?
- To hold a separate proceeding to determine if punitive damages are warranted only after liability and compensatory damages have been established (Correct answer)
- To divide the arbitration hearing between two different panels of arbitrators simultaneously
- To allow the SEC to intervene in the damages phase of a private arbitration
- To permit the claimant to present punitive damage evidence first before proving liability
Correct answer: To hold a separate proceeding to determine if punitive damages are warranted only after liability and compensatory damages have been established
A bifurcated hearing separates the liability/compensatory damages phase from the punitive damages phase, allowing arbitrators to assess punitive damages only after finding underlying liability.
Stock Lawyer Stock Broker Fraud Lawyer 5
What does a stockbroker fraud attorney typically need to demonstrate to establish 'loss causation' in a securities fraud case?