Wednesday, February 10, 2010
The Georgia Supreme Court recently answered three important questions relating to a customer's claims against his broker-dealer. Holmes v. Grubman, 2010 WL 424225 (Ga. Feb. 8, 2010). This is yet another case brought by a WorldCom investor against Citigroup Capital Markets and Jack Grubman. The case got to the state supreme court via a circuitous route. The investor filed for bankruptcy and filed this claim for damages in the bankruptcy proceeding, which transferred the case and consolidated it for pre-trial purposes in the S.D.N.Y. There the district court dismissed the case, but the Second Circuit, on appeal, certified three questions to the Georgia Supreme Court:
- Does state tort law recognize holders' claims? YES, both for fraud and negligent misrepresentations, so long there was a direct communication from the speaker to the plaintiff and the plaintiff can show direct actual reliance.
- Does the customer have the burden of proving loss causation, or proximate cause, at trial in a case involving misrepresentations about publicly traded securities? YES, he musst show that the truth concealed by the defendant entered the marketplace and precipitated the drop in the stock price.
- Does a broker-dealer owe the customer in a non-discretionary account any fiduciary duty apart from the proper execution of the trade? YES, a broker-dealer has a heightened duty to a customer of a non-discretionary account when he recommended an investment that the customer previously rejected or to which the defendant has a conflict of interest. The court does not explain why it chooses not to recognize a suitability obligation whenever the broker makes a recommendation, consistent with NASD Conduct Rule 2310.