Is Churning An Elderly Client’s Brokerage Accounts an Act of Elder Financial Abuse and Exploitation? (Part 3 of a 3 part series)

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Probate Litigation Attorney

In Part 1 and Part 2 of this series I introduced you to the topic of churning by a stockbroker as well as discussed the elements of churning. In our final part I will now review how to be successful on a respondeat superior claim.

Respondeat Superior

If the salesman is bankrupt we could potentially go after the companies which approved him to sell their products. Respondeat superior is a well-known tort doctrine, but just for referential purposes, the primary elements of a successful claim are produced below. Conveniently, the Rolf case has a discussion on this vicarious liability applied to a churning matter, so a discussion on the court’s commentary will follow.

To prevail on respondeat superior claim, one must prove that (1) a master-servant relationship existed and (2) the tortious act occurred within the scope of employment.

To determine whether a master-servant relationship existed one must prove the following elements and consider the corresponding factors:

“(1) A servant is a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance of the services is subject to the other’s control or right to control.

(2) In determining whether one acting for another is a servant or an independent contractor, the following matters of facts, among others, are considered:

(a) the extend of control which, by the agreement, the master may exercise over the details of work;

(b) whether or not the one employed is engaged in a distinct occupation or business;

(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;

(d) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;

(f) the length of time for which the person is employed;

(g) the method of payment, whether by the time or by the job;

(h) whether or not the work is a part of the regular business of the employer;

(i) whether or not the parties believe they are creating the relation of master and servant; and

(j) whether the principal is or is not in business.” Carter v. Reynolds, 175 N.J. 402, 409-410 (2003)

To determine whether the tortious act occurred within the scope of employment Carter court says the following, “[Scope of employment] refers to those acts which are so closely connected with what the servant is employed to do, and so fairly and reasonably incidental to it that they may be regarded as methods of carrying out objectives of employment.” Id. at 411.

“An employee’s conduct falls within the scope of employment if:

(a) it is of the kind he is employed to perform;

(b) it occurs substantially within the authorized time and space limits;

(c) it is actuated, at least in part, by a purpose to serve the master,

(2) Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.” Id.

Rolf on Churning and Respondeat Superior

In Rolf, the plaintiff asserted that the securities brokerage firm failed to supervise the broker and activity in the plaintiff’s account under (1) the doctrine of respondeat superior or (2) as a controlling person liable under Section 20 of the Exchange Act. 424 F. Supp. At 1043. The court notes that several other circuit courts affirmed that respondeat superior applies to brokerage firms in damages actions. Id. at 1044.

The court distinguishes between the two concepts above: “the key difference between respondeat superior and controlling person liability is “not entirely esoteric”. Sincere there us a good faith defense to the latter charge which is unavailable at common law.” Id.

The firm in Rolf failed to “satisfy good faith” because the controlling person did not maintain and enforce a reasonable and proper system of supervision and internal control over controlled persons so as to prevent, so far as possible violations of Section 10(b) and Rule 10b-5. Id.

The court lays out the reasons for finding the company liable; (1) The company completely failed to supervise any accounts being handled by individual brokers. (2) The company was exceedingly lax – they permitted a supervisor to recommend an investment adviser with no knowledge of the plaintiff’s account. (3) they allowed an unidentified person to trade in the plaintiff’s account for a short period of time. Id.

To discuss your NJ Estate Probate and Litigation matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.