Stock brokers and their insurers received support recently from the First Department's decision on Vladimir v. Cowperthwait where the Court opted to further restrict claims against securities brokers after losses in the market. In Vladimir v. Cowperthwait, plaintiff, who was also an attorney and experienced investor, retained the defendant investment management firm to manage his $600,000 in assets. In the course of this retention, plaintiff assessed his “risk comfort level” as 6:10 and stated that his objective was “Beat the Market - High Risk/Return.” Furthermore, he reviewed the broker’s “investment policy statement” and acknowledged the broker had full investment discretion and that returns were not guaranteed. When plaintiff ’s assets fell by 39% to $365,000, however, he sang a different tune and commenced an action against the broker sounding in negligence and breach of fiduciary duty, the latter theory being the only one to survive dismissal.

Plaintiff’s claim rested on the theory that the defendant failed to meet his fiduciary duty by concentrating the portfolio’s assets in volatile industry sectors. He proffered expert economist testimony that the broker’s “single model” portfolio was insufficiently diverse and targeted stocks with “excessively high ratios of stock price to earnings.” The plaintiff claimed that this high-risk exposure was both entirely discretionary and unnecessary, since the broker had over 500 qualifying stocks to choose from yet nevertheless targeted a suspect class.

While the Supreme Court, New York County found a question of fact existed sufficient to deny defendant’s motion to dismiss, the First Department did not. They specifically noted plaintiff ’s own testimony which indicated he wanted to “beat the market” and that he was looking for growth. Equally notable was plaintiff ’s acknowledgement that there was no guarantee of return and that he never once objected to the presence of tech firms in his portfolio. The First Department’s decision reminds us that an investor's disappointment or high expectations do not state claims under New York law. Furthermore, despite regularly reviewing his monthly statements and speaking with the broker, plaintiff never objected to any of the target companies and granted the broker full discretion over his assets.

Importantly for brokers and their insurers, while this case made it to the summary judgment stage, the decision appears to set forth the criteria that may be employed to dispatch disappointed investor claims at the pleadings stage.

First, the Appellate Division expressly cited documents executed and filled out by the plaintiff — such as the plaintiff’s “risk comfort level” and his portfolio objective of “Beat the Market — High Risk/Return.” The First Department expressly relied on the plaintiff’s deposition testimony that repeated these same facts — he was looking for growth and wanted to “beat the market.” Even though this fiduciary claim survived a motion to dismiss, the First Department’s usage of this precise language from his deposition suggests that the identical language in the paperwork establishing the account could suffice at the pleading stage.

Of equal importance would no doubt be the express acknowledgement that returns are not guaranteed and that the broker is vested with full discretion over the funds. Absent such written statements, this would be a perfect example of an appropriate, as opposed to unnecessary, use of nicely crafted requests for admissions to elicit the fact that the plaintiff was not entitled to returns and granted the broker full discretion over the funds to provide the basis for an expedited motion on the pleadings or prenote summary judgment motion. For example, a notice to admit that “plaintiff has no written agreement entitling plaintiff to returns” or an admission that “plaintiff did not object to the defendant’s discretionary acts as described in monthly statements” would, under the appropriate facts, lay the necessary foundation for an expeditious motion for summary judgment under Vladimir. From the broker’s perspective, generating these types of admissions in the normal course of business will prove invaluable in achieving accelerated judgment.

Please contact Matt for assistance or to discuss this issue - (516) 535-4419 or Matthew Bryant.