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When Suitability Is a Rule 10b-5 Claim: Fox v. LifeMark Securities Corp.
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Claimed reliance upon alleged misrepresentations of suitability may be doubted where “plaintiff was a relatively sophisticated investor and in a position to make additional relevant inquiries prior to purchasing the investments.”

Fox vs. LifeMark Securities Corp., No. 12-cv-6650 (W.D. N.Y., 1/8/15).

Claims and Defenses

Suitability as a violation of the 1933 or 1934 Act is the primary hallmark of this Court’s decision on a summary judgment motion. The case involves an experienced businessman, now in his mid-70s, who claims that his broker knew he was nearing retirement and yet placed him in losing, illiquid investments. The broker, for his part, maintains that the client was highly sophisticated, unclear about ever retiring (he points to the client’s joking answer to when he expected to retire – “three years after my death”), and insistent about a steady and sizeable income stream in a low interest rate environment. Interestingly, the client does not claim misrepresentations about the products in which he invested – variable annuities, REITs, and two leasing programs – and the broker avers that he described the risks of a declining real estate market, a change in variable rates, and the illiquidity of the investments. Instead, Plaintiff asserts that the broker purposely recommended unsuitable investments.

Elements of a Federal Suitability Claim

The Court describes what must be proved on a claim of unsuitability that satisfies federal securities law requirements: (1) the securities purchased were “unsuited to the buyer’s needs;" (2) defendants knew “or reasonably believed the securities were” unsuitable; (3) defendants recommended the unsuitable securities, nevertheless; (4) defendants, with scienter, made material misrepresentations or “failed to disclose material information relating to” unsuitability; and (5) the buyer “justifiably relied to its detriment” upon defendants’ representations of suitability.

The Claim Fails

For purposes of summary judgment, the Court must weigh the evidence relating to such issues of fact as sophistication of the Plaintiff, Defendant broker’s “knowing” state of mind, suitability of the investments, prospectus delivery and materiality to see if Plaintiff has produced evidence that will “allow a reasonable jury to find in his favor.” The Court must regard all evidence in favor of the non-movant, but, taken together, the evidence must raise “a ‘genuine’ dispute as to the facts.” The Court leafs through the record and finds it “devoid of any evidence of knowing misrepresentations/omissions of material fact made by [broker] Morrison with respect to the suitability of the four investments.” Plaintiff’s contentions “are belied by the documents” and, while Plaintiff asserts a desire to retire in the near-term, he admits not advising Defendant “that he had immediate plans to retire.”

The motion is granted as to the securities fraud claims. The remaining claims mainly rely upon suitability and must fall as well. One relies upon a standard of care set for in FINRA Rules, but “negligence based on the alleged violation of FINRA Rule 2310(b)(2)(B)” does not provide a private right of action. Similarly, the claim of a fiduciary breach must fail because, ordinarily, a broker does not have a duty to monitor a nondiscretionary account. No “special circumstances” are evident here that would change that, particularly in light of Plaintiff’s sophistication.

(ed: *It’s so rare to find a full-fledged, garden-variety, retail client fraud case that is not relegated to arbitration. It’s almost stimulating to see the court forage for precedent, reaching back to old cases, as it tries to shoe-horn the concept of suitability, a negligence-based claim, into the federal securities anti-fraud provisions. **Some of the findings the Court makes as to the lack of any “genuine” issue of fact, we feel, seem to stretch the summary judgment concept to the limit. ***We visited Lifemark’s Website and could find no indication that the firm makes its account agreements available or that it includes PDAAs in those agreements. ****SAC Board of Editor Ross Tulman served as Defendants’ testifying expert.)

(SLC Ref. No. 2015-02-08)

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