That First At Bat

Fraud can be extremely hard to prove because it is often insidious and difficult to notice while it is happening. One can only hope for a receptive judge.

The client was way over his head trading commodities and lost a big piece of his nest egg investing with a fraudulent commodity brokerage firm. But he was a very upstanding man and, thanks to a receptive judge, and him, I "went yard" - hit a home run - in my first at bat, my first solo trial, and recovered all his losses.

Comfortably retired and living on a fixed income from his US Army pension, my client saw an ad for a commodity brokerage firm on Financial News Network (now CNBC). Amid scenes of excited brokers in state of mass hysteria on the trading floor of a commodities exchange, a man that sounded like a carnival barker blurted one exaggerated claim after another: including, claims that there was the potential for immediate, big profits and commodity options had "limited predetermined risk.” The ad gave a hypothetical example in which a five thousand dollar investment in a sugar option yielded a profit of fifteen to twenty-thousand dollars. We had a VCR of this rather cunning ad.

The judge found these claims were materially misleading.  He concluded the advertisement was "so upbeat that the mention of risk was smothered by the hype,” and the fleeting reference to the disclosure document was "an afterthought,”and the example was misleading because hypothetical examples are irrelevant to actual experience.

The judge also determined that the broker made false statements during his very first conversation with our client. He recommended that our client invest in grain options. He told our client there was profit potential because of a drought which was the worst since the depression, that as a specialist the broker would provide expertise and management, and that he would employ an investment strategy that would eliminate the “potential” risk.

In addition, the judge found that the broker sent our client a number of written misleading statements.

First, a letter which referred to "STRICTLY LIMITED RISK" and “UNLIMITED PROFIT POTENTIAL.” The repeated use of the term "limited risk" exemplified the double talk which the judge found was routinely employed by the broker. The broker utterly failed to bring home to the client the truth about commodities investing despite some evidence that the broker made an effort to apprise him of risks.

The judge, after considering firm’s effort, found that it was minimal and bound to fail because the broker undermined i  

32t by downplaying risk. Though the broker sent risk disclosure material, the client did not read it because the broker told our client that the material was a formality. The broker said, "If you want to, read the material later...be sure and tell [the compliance department] that you read it.” Though my client did indeed say "I read it" in a recorded conversation with with the compliance department, according to the judge any risk disclosure was negated by the misrepresentations by the broker and the firm, the fact that the broker downplayed the importance of the risk disclosure material, and the our client's inexperience.

Second was a brochure entitled "Know Your Options.” The brochure stated “your JCC Account Executive is a highly qualified, trained professional whose objective is to serve as your guide to the powerful profit potential of Exchange Traded Options.” The judge concluded the assertions about the expertise of JCC's account executives were false because the credentials of this particular broker in a field as complex as commodity trading could "hardly be classified or described as qualified.” The broker admitted on cross-examination that he left his employment as a waiter in a steakhouse just five months earlier to become a commodity broker. No evidence was produced of his allegedly extensive training during the five months.

The judge found that the client relied on the false and misleading statements by the broker and the firm. The client testified that he would not have opened an account with the firm or invested if he had not seen the advertisement, or if the broker and the firm "hadn't promised me all the expertise and research.” Both the broker and the firm had a fiduciary duty to refrain from making any false and misleading statement of material fact. Notably, the judge stated that as a matter of law, the client had no duty to investigate their statements and was completely justified in assuming, and in relying on the assumption, that the firm and the broker were honest and would not intentionally fail to disclose or conceal any material fact, i.e., —a fact that would be important to an investor’s buying decision.

After the broker left the account, another broker took it over and immediately lost the rest of the client’s money on sugar options. The judge said the second broker’s "statements together with [his] attempts to sell our client more options comes close to lulling by false assurances” but were not damaging only because the client had already been defrauded before the new broker took over their account.

It was almost as though I wrote the decision myself.

Loughrey v. JCC