Economic Suicide: The Collision of Ethics and Risk in Securities Law

Abstract:     
The article discusses what has now become apparent: that during the 1990s many investors engaged in risky trading and investing strategies without an understanding of the risks involved. It is settled law that, while brokers owe duties to their customers when they control the account or make recommendations, brokers can, in the absence of fraud, stand by and allow their customers to place financially disastrous trades, considered by the securities industry to be "economic suicide." This article first analyzes whether there are any legal principles to support an expanded view of the broker's duties to prevent the customer's economic suicide. Because most broker-dealer disputes currently are resolved through arbitration, the authors next examine arbitration awards to decide whether, as has been frequently reported, arbitrators are routinely awarding damages to customers in economic suicide cases. The article then addresses whether policy considerations support an extension of brokers' duties. It concludes: (1) arbitrators generally are following the law and not imposing liability on brokers for their customers' economic suicide; and (2) policy considerations, including the regulatory focus on full disclosure, support a modest expansion of brokers' duties to include a duty to warn investors about risky trading strategies.

Number of Pages in PDF File: 47

Keywords: securities, arbitration, investor rights

JEL Classification: K22

Accepted Paper Series