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The Duty of a Stockbroker to Its Client

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The Duty of a Stockbroker to Its Client Client Update August 2011 Dispute Resolution The Duty Of A Stockbroker To Its Client Introduction In Eric Preston Pty Ltd v Euroz Securities Limited [2011] FCAFC 11, the Australian Federal Court (Full Court) had the opportunity to consider the relationship between stockbroker and client, and when a stockbroker may be liable for its client’s losses. The Plaintiff client (“Preston”) initially carried out share trading activities using a standard margin lending facility. It then switched to a securities lending facility under which it transferred ownership of the purchased shares to the lender. The lender became insolvent, and as an unsecured creditor, Preston suffered substantial losses. Preston sought to recover these losses from its stockbroker (“Euroz”). Preston’s claims relied mainly on two bases: Euroz’s contractual duty and Euroz’s alleged misrepresentation. Both grounds were rejected by the Court. On the first ground, the Court affirmed that a stockbroker is only obliged to execute the client’s orders, and is not bound in law to give financial advice, unless such duty arises in the specific circumstances of the case. On the second ground, the Court found that no misrepresentation had been made. Preston alleged that Euroz had passed on information from the lender regarding the stability of its financial situation. However, it was held that unless the information was adopted or endorsed by Euroz, it could not constitute misrepresentation. This decision reinforces the general position that a stockbroker’s duty and liability to its client is limited in nature and scope, and that the role of a stockbroker is facilitative rather than advisory, unless the circumstances of a particular case dictate otherwise. Brief Facts (1) Eric Preston Pty Ltd (“Preston”) conducted substantial share trading activities through its stockbroker, Euroz Securities Ltd (“Euroz”). (2) Preston initially used a standard margin lending facility to finance its trading. Under this facility, legal – but not beneficial – title of the purchased shares was transferred to the lender. 1 Rajah & Tann LLP Client Update August 2011 Dispute Resolution (3) Preston subsequently switched to a securities lending facility with Opes Prime Stockbroking Ltd (“Opes”), under which the purchased shares were legally and beneficially transferred to Opes in return for funds. (4) The effect of this facility was that Preston was exposed to the risk of insolvency of Opes. Indeed, Opes eventually entered insolvency, causing Preston to suffer substantial losses as an unsecured creditor. (5) Preston sought to recover these losses from Euroz. After the primary judge rejected Preston’s claims, Preston appealed the decision. Issues Preston’s claim rested on two main grounds, the first of which was that Euroz had agreed to give general financial advice to Preston, including advice relating to financial credit products of third parties which may be used to finance share purchases, and therefore assumed a duty of care in giving such financial advice. The second ground was that of misrepresentation. Preston alleged that Euroz had represented: (i) That the Opes facility was in nature, substance and risk similar to Preston’s earlier standard margin lending facility. (ii) That Preston’s share portfolio was safe under the Opes facility arrangement, and that in order for Opes to become insolvent, the stock market would have to fall 20% in one day, with no Opes client being able to meet margin calls. Holdings Of The Federal Court The primary judge’s findings of fact on the issues of reliance and causation were fatal to Preston’s case both at first instance and on appeal. He found that Preston would have entered into the Opes facility even if it had been advised of the risk, and that the chain of causation had been broken. As the Federal Court found no error in such findings of fact, they were affirmed and Preston’s appeal thus failed. In any event, the Federal Court went on to consider the arguments put forth by Preston, and found that Euroz owed no duty to give financial advice to Preston, and that Euroz was not liable for any misrepresentation. Euroz’s contractual duty The Court held that there was no express agreement or undertaking on the part of Euroz for it to provide financial advice to Preston. Nor was there any implied agreement to that effect on the facts 2 Rajah & Tann LLP Client Update August 2011 Dispute Resolution and circumstances in that case. Accordingly, no duty to advise was owed by Euroz to Preston. In this regard, the Federal Court affirmed the decision in Option Investments (Aust) Pty Limited v Martin [1981] VR 138 (affirmed on appeal), where the Supreme Court held that:- (i) the duty of a stockbroker is to execute the client’s orders. (ii) stockbrokers are not duty bound in law to give advice, but if they do, they must provide competent and honest advice. (iii) a stockbroker’s duties at general law may be added to or varied by special agreement or by the circumstances of the case. Misrepresentation Preston’s contended that Euroz had communicated that the Opes facility was similar to Preston’s prior facility. The primary judge had found that no such representation was made, and the Federal Court found no error in this finding of fact. Preston further contended that Euroz had communicated the safety of Preston’s portfolio maintained under the Opes facility. Specifically, it was alleged that Euroz reported to Preston the assurances provided by Opes to Euroz that its financial position would not be at risk unless the stock market fell by 20% in one day, and none of its clients met their margin calls. It was also alleged that Euroz further added that the stock market was unlikely to fall 20% in one day. The Federal Court found that the transmission of Opes’ assurances by Preston to Euroz did not constitute misrepresentation, as a corporation merely purporting to pass on information without adopting or endorsing it cannot be said to engage in misrepresentation. In this regard, the Federal Court considered that:- (i) Euroz did not expressly state that Preston’s portfolio was safe. (ii) Preston understood that Euroz was not the source of the information as to Opes’ financial position, and that Euroz was merely passing on information from Opes. Any reasonable person in Preston’s position would have understood as much. (iii) whilst Euroz had mentioned that it was unlikely that the market would fall 20% in one day, this in itself was insufficient to constitute an endorsement of Opes’ representation. As such, the claim for misrepresentation founded on the above two allegations failed. 3 Rajah & Tann LLP Client Update August 2011 Dispute Resolution Concluding Words Generally speaking, a stockbroker is not a financial advisor, and he is not obliged to provide any form of advice, unless there is any agreement or undertaking on the part of that stockbroker to the contrary,. The Court highlighted that any duty to provide financial advice does not arise from the stockbroker-client relationship alone, although it may arise from the circumstances of a particular case. Contacts Muralidharan Pillai Danny Ong Partner Partner D (65) 6232 0768 D (65) 6232 0260 F (65) 6428 2123 F (65) 6428 2114 [email protected] [email protected] Please feel free to also contact the Knowledge and Risk Management Group at [email protected] Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai, Vientiane and Ho Chi Minh City, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or e-mail the Knowledge & Risk Management Group at [email protected]. 4 Rajah & Tann LLP.
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