Tort of Giving Negligent Investment Advice

Tort of Giving Negligent Investment Advice



Tort of Giving Negligent Investment Advice

Introduction

This paper is a study of the common-law responsibility of investment advisors to exercise due diligence when providing advice to their clients. The article chronicles the development of the tort of negligent misrepresentation, from its inception in a series of watershed New York cases, through the creation of Restatement (Second) Torts 552, and culminating in analysis of how the courts around the country have applied these concepts to the specifics of securities brokers, investment advisors and others involved in either promoting investments or providing information about them. The number of cases brought by investors against investment banks and brokerages grows every year. A large percentage of these cases involve allegations of negligence. But despite the spate of cases in this area, there has been no significant scholarship. This article fills the gap. In this paper we analyzed the case of John and Brian.

Case Study

John has been left a substantial sum of money by his late uncle whom he now wishes to invest. One evening John meets an old friend, Brian, during a dinner party held at the house of a mutual friend. John tells Brian about his good fortune and asks him for some advice about how he might invest the money. Brian, a part qualified accountant, advises John that a company called Brightwater Ltd. has recently come to his attention as their shares appear undervalued for a company enjoying unprecedented trading success. Brian tells John: “Trust me. I know these things. Buy their shares and you will be on a winner.”

Discussion

A system of legal responsibility founded upon negligence and due care is, of course, vastly different from one based on fraud, scienter, and intent. The existence of a claim for negligent misrepresentation or, more aptly, the negligent provision of information, creates the legal responsibility for businesses and professionals to exercise due diligence when giving investment advice to their customers and clients in return for compensation (Peters, M. 2004).

Recognition of a tort of providing negligent investment advice is especially important in light of several inter-related facts. Recognition of a negligence- based tort regime for investment professionals making investment recommendations requires such professionals to exercise due diligence with regard to any representation or recommendation even when a fiduciary duty is absent. Courts around the nation are now recognizing a tort of negligent misrepresentation in the context of advice provided by investment brokers and advisors (Terry, A. 2005).

The maker of the statement must hold himself out to have special skill. It is not sufficient if the statement is made in a business context, if the maker of the statement did not hold himself out to have expertise in the area. This issue was decided by a narrow majority it was held that a special relationship arises only where the party giving the advice carries on the business of giving advice and lets it be known that he or she claims to have skill and competence ...