Broker-Dealer Litigation - Greenberg Traurig LLP

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Valentini v. Citigroup, Inc., 2011 WL 6780915 (S.D.N.Y. Dec. 27, 2011).
A district court granted a motion to dismiss filed by a group of investment banks
(“defendants”) against an investor’s negligent supervision claim. The plaintiff-investor
purchased almost two dozen structured notes from defendants for a face value of over
$130 million. Most, if not all, of these notes were equity-linked notes, which are typically
considered conservative investments. However, some of the particular notes plaintiff purchased
contained additional features that made them riskier than ordinary equity-linked notes. At first,
plaintiff obtained positive returns on the notes. However, in 2007 and 2008, plaintiff suffered a
series of losses resulting from the global financial crisis. As the value of the notes declined,
plaintiff borrowed tens of millions of dollars from defendants to purchase additional notes in an
attempt to cover his losses. Nonetheless, as the financial crisis deepened, the value of the notes
continued to decline. Eventually, defendants liquidated plaintiff’s entire investment portfolio of
notes in order to satisfy one of plaintiff’s debts. Plaintiff brought suit in the Southern District of
New York asserting multiple claims, including a tort claim for negligent supervision.
Defendants moved to dismiss the negligent supervision claim on the grounds that they owed
plaintiff no ongoing due to supervise and monitor his investments. The district court rejected
this argument. Even if defendants did not owe plaintiff an ongoing duty to supervise and
monitor his investments, employers can still be held liable for negligence supervision whenever
an employee acts negligently on the employer’s premises and his or her employer knew or
should have known about the employee’s propensity for the conduct. Nevertheless, plaintiff
failed to allege any facts to support a claim for negligent supervision. Plaintiff did not allege any
facts demonstrating that any of the named defendants knew or should have known of their
stockbrokers’ propensity for tortious conduct prior to the wrongdoing alleged in the complaint.
Nor did plaintiff establish which individual employee committed the tortious conduct. While the
court disagreed with defendants’ reasoning, it still granted their motion to dismiss the negligent
supervision claim. The court granted plaintiff leave to amend the complaint to correct the
deficiencies in the complaint with respect to the negligent supervision claim.
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A purchaser of a company sued a broker-dealer asserting various causes of action arising
from its alleged failure to supervise its employee who engaged in an outside business activity,
namely, selling a company to the plaintiff. The trial court granted the broker-dealer’s motion for
summary judgment and plaintiff appealed. The appellate court held that the trial court did not err
in granting summary judgment in favor of the broker-dealer against the plaintiff’s claim for
negligent supervision. The broker-dealer conclusively established that it did not receive
sufficient notice of the registered representative’s outside business transaction with plaintiff to
trigger its supervisory duty under NASD Conduct Rule 3040. The broker-dealer presented the
affidavit of its local compliance officer who declared that the registered representative never
gave the broker-dealer written notice that he intended to sell his shares in two businesses he
owned to plaintiff. The affidavit was not deficient for lack of personal knowledge because the
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