The purpose of this blog is to expose, one by one, the common methods brokers use to manipulate and deceive their clients. Today I want to discuss disclaimers. If you have recently opened an account with a brokerage house you know the general procedure. The broker promises you everything in the world. He tells you he will triple your money, protect your principal and help you achieve high rates of return. Excited at the prospects, you fill out the account opening documents. Like most people, you skim through the text, not paying much attention to the boring, technical jargon. In the process you pass over the carefully placed disclosure statements. Later, when your savings are depleted by the broker’s mismanagement, you file a complaint. In response, the broker shows you the various disclaimers in the account opening documents and the prospectuses. At this point you or your attorney will want to expose these disclaimers for what they really are: unenforceable, vague and meaningless.
BOILERPLATE RISK DISCLOSURE IS INSUFFICIENT
Respondent’s argument sometimes referred to the prospectus defense or the bespeaks caution defense. The prospectus defense (a/k/a bespeaks caution defense) is limited, as “not every mixture with the true will neutralize the deceptive.” In re Donald J. Trump Casino Securities Litigation, 7 F.3d 357, 371 (3rd Cir. 1993). For the doctrine to apply, the cautionary language must not be “boilerplate” and must not be “buried among too many other things.” Salzberg et al v. TM Sterling/Austin Associates Ltd., et al., 45 F.3d 399, 400 (11th Cir. 1995). The cautionary language must be “explicit, repetitive and linked to the projections about which plaintiffs complain.” Id. Warnings of generalized risks are insufficient to trigger the doctrine. Klein v. Foirst Western Government Securities, Inc., 24 F.3d 480, 489 (3rd Cir. 1994). “Blanket warnings that securities involve a high degree of risk [are] insufficient to ward against a federal securities fraud claim.” Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996). Cautionary language cited to justify application of the doctrine must precisely address the substance of the specific statement or omission that is challenged. Donald J. Trump Casino Securities Litigation, 7 F.3d 357, 371-372 (3d Cir. 1993). Here is an example of a common disclaimer statement: “I understand that the product I am purchasing is subject to investment risk including the possible loss of principal amount invested.” This language is clearly boilerplate. It is nothing more than a warning of generalized risks, and it is buried at the back of the application. There is nothing explicit or repetitive about this alleged warning. Therefore, it is insufficient to absolve the broker or brokerage house of liability.
WHAT IF THE DISCLAIMER IS SPECIFIC?
There are certain rights that may not be contracted away, regardless of whether the disclaimer was specific. Even if the disclaimer is not boilerplate, it is still invalid with respect to common law fraud, federal securities fraud and common law negligence.
COMMON LAW FRAUD
A contractual disclaimer will not bar an action for common law fraud. See, e.g., Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614, 630 (4th Cir. 1999) (“a contractual disclaimer of reliance is not a prophylactic against a claim of fraud”); Rodi v. Southern New England School of Law, 389 F.3d 5 (1st Cir. 2003) (holding that a party may not contract out of fraud, such that disclaimers do not automatically defeat fraudulent misrepresentation claims); Northwest Bank and Trust Co. v. First Illinois Nat’l. Bank, 354 F.3d 721 (8th Cir. 2003) (holding that a disclaimer was ineffective to bar plaintiff from asserting claim for fraudulent inducement); UniCredito Intaliano SPA v. JP Morgan Chase Bank, 2003 WL 22339469 (SDNY 2003) (holding that express waivers or disclaimers of reliance will not be given effect, so as to preclude fraud claim); In re Sikes, 184 B.R. 742, 184 B.R. 742 (Bankr. M.D. Tenn., 1995); Bening v. Muegler, 67 F.3d 691 (8th Cir. 1995) (holding that contractual disclaimer will not bar action for fraud); Slater v. KFC Corp., 621 F.2d 932 (8th Cir. 1980) (holding that contractual disclaimers could not bar a suit based upon fraud which induced the defrauded party to enter into the contract); Badger Bearing Co. v. Burroughs Corp., 444 F.Supp. 919 (E.D. Wis. 1977) (contractual defenses of disclaimer, notice, and privity are unavailable to defendant in tort action for misrepresentation).
FEDERAL SECURITIES FRAUD
A disclaimer “cannot bar a federal securities fraud claim because the Securities Act itself precludes agreements waiving compliance with the statute’s anti-fraud provisions.” FS Photo, Inc. v. PictureVision, Inc., 61 F.Supp.2d 473, 480 (E.D. Va., 1999). According to the Securities Act, “[a]ny condition, stipulation or provision binding any person to waive compliance with any provision of this chapter or any rule or regulation thereunder, or any rule of an exchanged required thereby shall be void.” 15 U.S.C. § 78cc(a). “This provision [15 U.S.C. § 78cc(a)] is a manifestation of Congressional concern that such waiver agreements would severely weaken the Act’s remedial power.” FS Photo, Inc., at 480 (citing Harsco Corp. v. Sequi, 91 F.3d 337, 343 (2nd Cir. 1996).
The same rule is applicable to negligence. “[T]here is no doubt that the law is and perhaps always has been that contracts against liability for negligence are not favored by the law, and will be constructed strictly, with every doubt resolved against the party seeking their protection..” Neville Chemical Co. v. Union Carbide Corp., 422 F.2d 1205 (3rd Cir. 1970); Willard Van Dyke Productions, Inc. v. Eastman Kodak Co., 12 N.Y.2d 301, 239 N.Y.S.2d 337, 189 N.E.2d 693 (N.Y. Ct. App. 1963).
An attempted limitation of liability through a disclaimer or otherwise will not exclude liability for negligence. Walsh v. Ford Motor Co., 59 Misc.2d 241, 298 N.Y.S.2d 538 (Sup. Ct. 1969); Willard Van Dyke Productions, Inc. v. Eastman Kodak Co., 12 N.Y.2d 301, 239 N.Y.S.2d 337, 189 N.E.2d 693 (N.Y. Ct. App.1963); McVey v. Phillips Petroleum Co., 288 F.2d 53 (5th Cir. 1961). See also, Butler Mfg. Co. v. Americold Corpl, 835 F.Supp. 1274 (D.Kan., 1993) (holding that a disclaimer that eliminates defendant’s liability for negligence is clearly not allowed).