Ratification

As previously discussed, where a broker executes unauthorized transactions for a customer and the customer fails to complain in a timely manner or doesn't complain because the stocks are gaining, then later complains about another unauthorized transaction that resulted in losses, the customer may be deemed to have ratified all the transactions by virtue of his conduct. Acquiescence to the conduct of a broker by a customer will be viewed as acceptance of that conduct. It is imperative that when a broker executes unauthorized transactions, the customer complains in a timely manner and demands that the transactions be reversed. Except in those instances where it can be demonstrated that a broker quelled a customer's concerns by representing that the transactions were merely a mistake and that they would be corrected, failure on the part of a customer to act within a reasonable period of time may be viewed as ratification of the broker's conduct.

Other behavior that may be deemed to ratify broker conduct is similar trading by the customer at another firm. For example: A customer complains that his broker put him into speculative, penny stocks which were entirely unsuitable and, had he known the risks associated with such securities, he never would have invested in them. If he had other accounts in which he was trading speculative stocks, before, during or after the time complained of, the claim may not succeed.

Misrepresentations of "Inside Information"

If we tracked the number of times we hear a client say "My broker told me that he personally knew the president of the company and that he couldn't tell me the specifics because it was inside information, but that something really big was going to break which would make the stock skyrocket", we would probably be amazed at the percentage of investors who tell this story.

The customer thinks he has the advantage of trading on inside information and thinks he's going to make a lot of money because he knows something no one else knows. Does the fact that the broker may have lied about having the "inside information" make the customer any less guilty for trying to use it for his own gain? An arbitrator looking at these facts is most likely going to believe that they are both guilty and, justifiably, refuse to award the customer all of his or her losses for trying to profit under these circumstances.

Mitigation

Where a customer has an opportunity to limit his losses, he has an obligation to do so. For instance, a customer buys a stock at $10.00 per share. The purchase is based upon the blatant misrepresentations of the broker, which can be demonstrated. Month by month, little by little, the market value of the stock declines until it is worth only $1.00 per share and the customer sells the stock. Can the customer expect to recover the full amount of the loss from the broker and/or firm? Probably not. The customer had an obligation to minimize his losses. At some point between $10.00 and $1.00 per share, the customer could have and should have sold the stock in an effort to limit his losses.

The exact point in time when the sale should have occurred will be the subject of great debate. The arbitrator will want to establish a time when the customer could have reasonably determined that the stock was only going to move in one direction -- down. The arbritator will also look hard at the issue of justifiable reliance as discussed earlier.

There are, of course, instances in which a customer cannot mitigate his damages and will not be expected to do so. For instance, a customer purchases a $10,000.00 interest in a limited partnership. Again, the purchase is based upon the blatant misrepresentations of the broker, a fact that can be demonstrated. The partnership becomes insolvent after eight months and the units have no value. The customer could not have limited his damages since the units quickly became worthless and there was no market to sell them.

In summary

Look at the events through the eyes of the Respondents. What is the broker going to say about you and the events that led up to the loss? What documents or information might the broker or firm have that would contradict what you are saying? Remember that, in simplified arbitration cases, exhibits are key.