Do Investment Advisers Have a Duty to Non-clients?

There has been an uptick in more sophisticated fraudsters posing as registered representatives, investment advisers and their firms. In December, the SEC charged three individuals with impersonating financial professionals in fraud scheme targeting retail investors. With the money stolen does the victim have a case against the legitimate firm?

Mark Frank Harding fell victim to one of these schemes. Mr. Harding received a telephone call from an someone who identified himself as “Daniel Cory Payne,” who claimed to be a representative of Lifetime Financial, which was taking over his accounts. Mr. Harding did some diligence on Mr. Payne and Lifetime. Feeling okay, he started sending money according to the instructions he received. The rest of the case makes it sound like this was a very good spoof. Then, nothing.

Mr. Harding reached out to Lifetime corporate to find out why Daniel Cory Payne was not returning his calls. The problem was easily identified when Lifetime noted than Mr. Payne goes by Cory. They discovered the email domain used by the imposter was lifetimefinancialinc.com. That is not the company’s domain.

Mr. Harding sued alleging that Lifetime had a duty to duty to warn prospective clients like Mr. Harding that an imposter was posing as one of their representatives. Essentially, imposing a duty between the firm and a non-client. Lifetime has learned of a few other possible spoofing instances.

That didn’t go far. The court stated:

“We have found no statutory or case authority holding that an investment advisor owes a duty to nonclients to post a notice on its website or notify law enforcement that someone has been impersonating the investment advisor.”

Mr. Harding also argued that Lifetime owed a duty to report the inquiries about the imposter to FINRA under FINRA Rule 4530.

The court did not agree.

“reporting duty under this rule, they would have had to receive a written complaint which alleged Defendants engaged in theft, misappropriation of funds or securities, or forgery, and that written complaint would have had to come from a person whom Defendants engaged or sought to engage in security activities.”

Ultimately, the court declined to create a new branch of fiduciary duty.

“As the trial court aptly put it, “The fundamental problem is that there is no fiduciary relationship [between Harding and Defendants]. Although Payne and his firm would owe a fiduciary duty to his or her customer as to investment decisions, [Harding] was not their customer. And [there is no] authority that holds a fiduciary relationship could arise merely because the imposter used Payne’s name and credentials as a licensed investment advisor to perpetuate the fraud.””

I may include this case next semester in my Compliance Law class. Thanks to Keith Paul Bishop for pointing this case out to me.