Heartburn For the Securities Industry

Eleventh Circuit Rules Investor Claim Of Negligent Hiring, Supervision and Retention Does NOT Require Existence Of A Broker Client Relationship. Late last month the U.S. Court of Appeals for the Eleventh Circuit in the case of Martha F. Owens et al. v. Stifel Nicolaus and Company, Inc., et al., 2016 WL 3033158 (11th Cir. 2016) reversed a trial court order granting summary judgment in favor of Stifel relating to various claims asserted by the Plaintiffs including one based upon negligent hiring, retention, and supervision. The case arose from the solicitation and sale of certain promissory notes issued by a company called Cardiac Network, Inc. (CNI) by Stifel broker Anthony Fisher. CNI defaulted on its obligations to investors including Plaintiffs Donald Pope and Refuse Materials, Inc. who invested approximately $345,000 in CNI securities. Fisher, was ultimately fired by Stifel for among other things engaging private securities transactions involving CNI notes — a practice commonly referred to in the securities industry as “selling away”. Plaintiffs Pope and RMI who were also not formal clients of Stifel, asserted various claims against Stifel arising from the losses they sustained in CNI notes including inter alia, a claim for negligent hiring, retention, and supervision. The trial court in ruling on a motion for summary judgment filed by Stifel ruled that “… Pope and RMI “failed to establish that SNC owes a duty to exercise any degree of care toward non-clients,” [and] concluded that Pope and RMI’s negligence claims failed as a matter of law.” On appeal however the Eleventh Circuit ruled the trial court’s decision on this issue to be error finding that: Neither the lawyer who runs a red light nor the accounting firm that fails to warn of a slippery floor could escape general tort liability by arguing that the plaintiff was not a client. RMI’s negligence claim against SNC is not that SNC negligently gave RMI bad investment advice.4 Rather, RMI claims that SNC negligently hired, supervised, and retained Fisher, a fraudster who used his employment with SNC to gain RMI’s trust and thereby perpetuate his scheme. The availability of this tort theory does not necessarily require a broker-client relationship. [emphasis added]. Although an unpublished opinion, the decision is significant as it confirms the general principal that securities broker dealers may not limit their tort liability to only those with whom they have a formal broker customer relationship.