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Legal Memorandum: Liability of a Consultant's Employer

Issue: Can a rogue investment or financial advisor be found liable or culpable for his or her actions when the company or firm employing the advisor is not liable?

Area of Law: Banking & Finance Law
Keywords: Liability; Financial advisor
Jurisdiction: Federal, New York
Cited Cases: 506 F.2d 1080; 745 N.Y.S.2d 534; 297 A.D.2d 28
Cited Statutes: None
Date: 05/01/2010

The only case located that supports a finding of liability against a financial consultant while finding that the consultant’s employer was not liable is the relatively early case of Gordon v. Burr, 506 F.2d 1080 (2d Cir. 1974), which is based on federal law.  In Gordon, the court of appeals held that the investment firm was not liable to the investor for misrepresentations, given that the investor was not a regular customer of the firm, the firm did not manage the particular transaction at issue, and the broker had attended a meeting in his private capacity, not as a firm representative.  The court held there was no “record support for a finding that P.A.W. had knowledge of the fraudulent representations or in any meaningful sense culpably participated in them.”  Id. at 1086.

As a general matter, under federal law, a financial consultant may be held liable for fraud or intentional misrepresentation in connection with the sale or purchase of securities.  In re Global Crossing, Ltd. Sec. Litig., No. 02 Civ. 910 (S.D.N.Y. Nov. 7, 2005).  While the securities laws focus on the “primary violators,” id. at 5, the doctrine of respondeat superior applies in the securities context to hold brokerage firms liable for their brokers’ misdeeds, id. at 6 (citing cases).

No New York case was located in which the investment advisor or broker was found liable for misconduct and his employer was not liable.  There are, of course, cases in which both broker […]

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