Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, February 10, 2010

Georgia Supreme Court Addresses Holder Claims, Loss Causation & Brokers' Duties

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:

  1. 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.
  2. 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.
  3. 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.

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Any thoughts on the issue that, despite the fact Justice Carley expressly stated caustion must be proven at trial, some trial Judges may still consider this element subject to a Motion to Dismiss?

Posted by: HENRY A. TURNER, ATTORNEY AT LAW | Feb 13, 2010 7:13:00 AM

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