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Can a Clearing Firm be Liable for Losses in an Investment Account?

Investors often ask whether a clearing firm can be liable for losses sustained in their accounts.  The answer is “yes.”  Traditionally, clearing firms, also known as clearing houses, are financial institutions established to handle the confirmation, settlement, and delivery of transactions.  To ensure its clients’ transactions are made in a prompt and efficient manner, the clearing firm acts as a middle-man and is essentially the buyer and seller in the transactions.  To attract business and compete with other clearing firms, clearing firms offer an ever-expanding suite of services that go beyond mere routine clearing functions, which often brings them to be actively and directly involved in the actions of brokerage firms and their brokers.  Courts have held that clearing firms that extend services beyond “mere ministerial or routine functions” can be liable to an investor for a broker-dealer or broker’s misdeeds.

On behalf of several investor clients, Malecki Law’s FINRA arbitration attorneys are currently investigating cases involving claims against Pershing, LLC, a clearing house, and its introducing brokerage firm client, Insight Securities, Inc.  The claims involve an SEC-censured entity, Biscayne Capital.  Our clients sustained losses in their accounts due, in part, to Pershing’s alleged negligent supervision of transactions through its shared platform with Insight.

In relationships like this, the introducing firm and clearing firm have a clearing agreement, usually giving the clearing firm discretion to terminate any account, the responsibility to notify the introducing broker of suspicious activity, and to provide training or trained employees to look out for misconduct.  Usually the clearing firm has the responsibility to conduct regulatory monitoring of SEC Financial Responsibility Rules and to be directly involved in Anti-Money Laundering oversight.  Thus, with these heightened responsibilities, a clearing firm can move beyond its ministerial and routine clearing functions.

Upon investigating the complaints of several investors, Malecki Law’s FINRA arbitration attorneys have uncovered situations where clearing firms have negligently or willfully aided and abetted (1) the theft of investors’ money and securities, and (2) a Ponzi scheme, which led to significant losses in our clients’ accounts.  This has included securities and funds being diverted out of our clients’ accounts to unknown third parties, where the transfer instructions came in the form of suspicious emails and clearly forged, “cut-and-paste” signatures. Further, in some instances, and despite the existence of an SEC Cease-and Desist Order, a clearing firm and introducing firm permitted a known Ponzi scheme to flourish by pricing worthless notes, which were purchased in our clients’ accounts, and printed a “market price” on every account statement.

Some of the claims brought against clearing firms are for their active role in schemes, but also for claims that include their own negligence, gross negligence, failure to supervise, and breach of contract.  Through its actions and inactions, a clearing firm may also aid and abet a fraud by become knowingly, actively, and directly involved in the misdeeds of the introducing firm, not to mention its own grossly negligent and reckless execution of its own responsibilities under its clearing agreement and the FINRA rules.  Just like introducing firms, clearing firms are required to know and supervise every transaction, as well as every customer.  However, if a clearing firm also fails in its basic custodial duties to our clients, whose accounts were completely pilfered while in its custody, legal action can and should be taken.

When a clearing firm goes beyond its routine functions of a clearing firm, the firm could be held liable, including for failing to supervise, for damages directly and indirectly related to its actions, regardless if its actions were deliberate or negligent.  For more information regarding claims against a clearing firm, feel free to contact the New York securities fraud lawyers of Malecki Law.

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