The selling away case: Rethinking the firm’s defenses

Abstract

Few things are more perplexing for a brokerage firm than being sued by someone who is not its customer, for a security it did not sell. The prohibited sales practice formally known as private securities transactions, or more colloquially as “selling away,” often results in just that. And, even worse, the statistical odds are against the firm in the resulting arbitration. The vast majority of such cases in recent years have resulted in a loss to the firm. That is a sobering statistic, for it is difficult, if not impossible, for a firm to prevent a determined broker from selling away. As we show in this article, a firm should be able to protect itself against the acts of an errant broker, but success in doing so requires the firm (a) to establish and diligently execute strong supervisory procedures, and (b) to shoulder the burden of proving to arbitration panels that the broker’s evasion of those procedures could not reasonably have been avoided. Both are essential tasks. The need to be proactive in proving the firm’s defense is perhaps counterintuitive to many defense attorneys. In theory the customer bears the burden of proof on all elements of his claim, and the firm should succeed by merely rebutting the customer’s case. But the recent cases suggest that arbitrators are viscerally sympathetic to customers duped by brokers who sell away from their firms, and in some cases appear to impose liability on the firm not so much in response to the technical weight of evidence, but simply as a “fair” allocation of risk. The cost of the errant broker’s acts probably are visited upon the firm because arbitrators instinctively assume that the firm is better able than the customer both to bear those costs and to police the broker. In evidentiary terms, one could say that, in selling away cases, a presumption has evolved that the firm could have done something to detect and prevent the broker’s acts.

Citation

Frumento, A.J. and Korenman, S. (2003), "The selling away case: Rethinking the firm’s defenses", Journal of Investment Compliance, Vol. 4 No. 2, pp. 7-14. https://doi.org/10.1108/15285810310813022