Financial Advisors Who Sell Inappropriate Investments to the Elderly: The Law of Respondeat Superior and Churning

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Elder Abuse Attorney

Imagine there’s an elderly woman who wants to invest her money – let’s call her “Innocent Investor.” While she is making a deposit at her local bank, a Broker walks up to her and asks if she’s interested in making lots of money investing in annuities.  After being persuaded by his salesmanship, Innocent Investor begins following all of Broker’s advice.  A few years elapse and because of Broker’s trading advice, Innocent Investor loses a substantial portion of her savings.  One of her children hears about all of this and tells her that he believes she was financially exploited by the Broker who is employed her local Bank.  They decide to sue the Broker to get back the money she lost.

But, then the Broker files for bankruptcy.  Under the doctrine of respondeat superior, the local Bank can be made liable for all the money Innocent Investor lost; because as Broker’s employer, local Bank should have been monitoring his activities to make sure that he was not exploiting his clients for his personal financial gain.  Local Bank has a duty to all of its clients to prevent the financial exploitation at the hands of its own brokers.  In this case, local Bank breached its duty and has to pay damages for its negligent supervision of its employees.

Just like in the example above, in Rolf v Blyth Eastman Dillon & Co., the court found that the company was liable to compensate the plaintiff for the defendant’s wrongdoings.  In Rolf, the company failed to supervise any accounts being handled by individual brokers, the company allowed a supervisor to recommend an investment adviser who had no knowledge of the plaintiff’s account or financial goals, and they allowed an unidentified person to trade in the plaintiff’s account for a period of time.  For the court, this was clearly a negligently supervised operation.  This negligent supervision constituted a breach of the duty of care that all brokerage firms and financial companies owe to their clients.  Here, the plaintiff was awarded a six-figure judgment.

To discuss your NJ Elder Abuse 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.