Financial advisors, beware. If you transfer assets belonging to a number of your clients without their authorization—even if you’ve done so in anticipation of a downturn in the market—your next stop won’t necessarily be an arbitrator’s table. It could be a court of law.
When former Prudential Securities broker Jeffrey Pickett liquidated the investments of 300 of his Marion, Ohio-area clients in 1998, transferring them into money market funds without their knowledge, he also inadvertently created a group of plaintiffs that eventually became a certified class for the purposes of suing him and his employer. Although Pickett liquidated the accounts because he was trying to protect his client’s assets, doing so without their permission is still a no-no. Not only did he believe he was acting in his client’s best interests, he also didn’t make a dime off those transfers, says his Cleveland-based lawyer, Michael C. Ungar.
While arbitration is the norm for resolving disputes between brokers and clients, Federal law arms your clients with some ammunition for suing you in certain circumstances. The loopholes might be small and rarely applicable, but they do exist.
“The arbitration provisions have exceptions for class actions,” says Columbus lawyer David P. Meyer, one of the plaintiff’s lead attorneys. Meyer relied on both the Ohio and Federal Rules of Civil Procedure that specifically delineates how a group of litigants qualify to become certified as a class.
The court certified the 300 investors as a class based on several arguments. All of the plaintiffs held similar retirement portfolios with Pickett. Their financial losses due to his fraudulent actions and Prudential’s subsequent behavior would have been unwieldy to calculate on an individual basis. Moreover, the financial injuries suffered by the plaintiffs all stemmed from Pickett’s initial fraudulent behavior followed by Prudential’s maneuvers following their discovery of the massive liquidation.
Lawyers on both sides of this case agree that class action litigation against brokers is rare. And Congress recently enacted legislation tightening class action laws, but since this case was filed before the law became effective, it had no bearing.
“You’d have to have another case of unauthorized trading en masse,” for another class to have the chance of being certified, says Ungar. In his 22 years of practicing securities law, this is the first time he’s seen a case like this, he says.