by Lawrence C. Melton, Esq., [email protected]
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 (toll free)
This is the final installment of a five-part series on the Sophisticated Investor Doctrine. When a brokerage house defrauds one of its customer, the house will try to absolve itself of guilt by claiming the investor was sophisticated. The brokerage house will call the investor savvy, experienced, educated, resourceful, successful, affluent and so forth. I have argued against this doctrine on the ground that it is incongruent with a fundamental idea in American jurisprudence, namely that the law should treat all individuals in identical fashion, regardless of their wealth or status. This principle holds true in securities law. A sophisticated investor is no more able to guard against broker misconduct than an unsophisticated investor.
CAVEAT EMPTOR VERSUS FULL DISCLOSURE
From a policy perspective, the sophisticated investor doctrine is nothing more than an attempt to bring back the already rejected doctrine of "caveat emptor," or "let the buyer beware." It is well established that, in the context of securities litigation, caveat emptor has been replaced by the policy of "full disclosure."
Historically speaking, Congress designed the securities laws to protect investors who are not capable of protecting themselves. There can be no question that caveat emptor, in the securities context, contributed to the stock market crash of 1929 and the depression of the 1930s. Thus, the securities laws were passed in 1933, 1934 and 1940 based on several concerns, which still apply today. First, investors were being fleeced in the financial markets due to inadequate disclosures. Second, investors were receiving misrepresentations about the products being sold to them. Third, investors were being sold securities products as a result of manipulative schemes. The securities statutes were passed to repair the general loss of confidence in the capital markets and the financial system. The fundamental purpose, common to these statutes, was to substitute a philosophy of "full disclosure" for the philosophy of caveat emptor, and thus, to achieve a high standard of business ethics in the securities industry. The modern sophisticated investor doctrine marks a significant movement away from the "full disclosure" doctrine and breathes life back into the discredited doctrine of caveat emptor.
NULLIFICATION OF EXISTING SECURITIES LAWS
Finally, the securities laws at both the state and federal levels contain anti-fraud provisions which apply to "all" investors. Therefore when a panel takes it upon themselves to only apply the law to what they perceive to be unsophisticated investors, the panel actually nullifies the law. This has led, and will continue to lead, to frustration and genuine distrust by the investing public.
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567(toll free)