Is the 'Sophisticated Investor' Theory Still Relevant?
New York State Bar Assoc. Securities Litigation and Arbitration, Forthcoming
6 Pages Posted: 19 Dec 2011 Last revised: 11 Apr 2012
Date Written: February 2, 2011
What is known as the "sophisticated investor doctrine" as a defense poses significant challenges: it is subjective, ambiguous and in many instances irrelevant to the complaint against which it is offered as a defense. Unlike arbitration, the sophisticated investor defense is generally unavailing in federal securities litigation because the antifraud provisions of federal securities laws are construed objectively and "as a general matter, the securities laws do not distinguish between sophistication and unsophisticated investors; both are entitled to protection, of disclosure and antifraud provisions." In addition, "the Act[s] does not speak in terms of sophisticated as opposed to unsophisticated people dealing in securities. The rules when the giants play are the same as when the pygmies enter the market." This article explains why use of the defense should be challenged in any securities arbitration of a unsuitability claim.
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