Brokerage firms, and sometimes their owners, are liable for the wrongs committed by their salespersons under three theories, i.e. 1) failure to supervise; 2) control person liability and 3) ordinary legal principles applicable in most cases which would hold a principal or employer liable for the acts of its agents or employees carried out within the ordinary course of the agency or employment.

Since the salesperson is often unable to pay an award, it is important to join the brokerage firm in any proceeding.

Failure to properly supervise is a violation of SEC Rule 10b5. Also, under NYSE Rule 405, "Every member organization is required ...to... (2) supervise diligently all accounts handled by registered representatives of the organization".

Under the Federal Securities Exchange Act of 1934,

Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with...such controlled person..., unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

The brokerage firm is liable for the acts of its employee if the registered representative was acting in the ordinary course of his employment under general principles of agency established in state court cases.

Finally, in cases involving fraud the brokerage firm is liable if the firm accepted the fruits of the fraud (increased commissions).

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net