Victim of Financial Fraud? Call Now
Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

How Stockbrokers Can Breach Their Contract with Investors

When investors open an account with a financial firm, they usually enter into an investment contract. An investment contract is a document meant to protect your interests as well as shield your stockbroker from certain legal liabilities. In the event of a breach of contract, you will want to be able to point to your investment documents to help fight for your rights as an investor.

What Is an Investment Contract?

An investment contract puts into writing the legal obligations of the investor and the broker. This contract also outlines the boundaries of the parties’ professional relationship. A stockbroker commits a breach of contract when the broker’s behavior deviates from the investment contract. A breach of an investment contract can constitute a form of securities fraud. Securities fraud of any form, including breach of contract, is a serious issue that should not be ignored.

If you think that your broker has breached your investment contract and thereby caused you to suffer financial losses, you may be entitled to damages. Speaking with an experienced securities fraud attorney is the first step on the road to financial recovery. 

Elements of a Breach of Investment Contract

Forming an Investment Contract

All contracts, including investment contracts, have four essential elements. A valid contract needs to contain all four elements. These elements are:

  • An offer;
  • Acceptance of the offer;
  • Valid consideration; and
  • Mutual agreement.

For the contract to be truly valid, both parties need to have the intent to enter into a contract at the time that they form the contract. For example, a person might tell a stockbroker, “I’d love to talk to you about investing my money.” The stockbroker could not simply call up that person’s banker and access the individual’s funds. That simple statement, standing alone, did not constitute an intent to form an investment contract. Rather, the person simply expressed an intent to discuss options for investing money and did not want to create an investment contract. 

Investment contract terms are typically customized to each client’s needs, goals, and intentions. This helps your stockbroker to meet your investment needs. And a potential breach of contract issue may arise if your stockbroker isn’t a good fit for your risk tolerance or doesn’t understand your needs. Make sure that you clearly understand what goes into any investment contracts that you sign. Better yet, discuss the contract terms with a securities lawyer before you sign the agreement.

Breach of Investment Contract

Once an investment contract has been formed, a breach of contract can occur if a stockbroker deviates from the contract. There are numerous ways for stockbrokers to breach investment contracts. One common scenario where brokers breach investment contracts is when a stockbroker fails to do what is agreed or promised under the terms of a new customer contract. Another common example of a breach of contract by a stockbroker happens when the broker fails to follow the customer’s instructions, as outlined in the existing investment contract. It’s important to note that all these actions are not merely a -breach of contract issues; they can also be types of securities fraud.

There are three main types of breach of contract actions:

  • A broker failed to perform promises contained in the investment contract;
  • A broker engaged in conduct that made it impossible for another party to perform their obligations; or
  • A broker expressed intent not to perform their own obligations.

If you find yourself in any of these situations, you should contact a securities lawyer. An experienced securities fraud lawyer can help you understand the breach of contract issues at play concerning your investment contract. They can also advise you on how to begin recouping any losses and seeking any damages to which you may be entitled.

Remedies for Breach of Investment Contract

When your stockbroker breaches your investment contract, you may be able to recover damages for your losses. Speaking with an experienced securities lawyer is a crucial step on the road to recovery.

Investors who have suffered financial losses due to breach of contract by unscrupulous stockbrokers may be entitled to various remedies. Such remedies include:

  • Compensatory damages,
  • Liquidated damages, and
  • Punitive damages

Compensatory damages are common in breach of contract matters. These damages are designed to compensate the investor for a stockbroker’s breach. Liquidated damages are less common because they are contract-specific. Some investment contracts contain “liquidation clauses,” which means that the parties have pre-agreed that a non-breaching party will be paid a certain amount in the event of a breach. Liquidated damages clauses are more common in contracts where damages would be difficult to calculate. Punitive damages are designed to punish one party’s intentional misconduct and are rarely awarded in breach of contract matters.

Breach of Contract and FINRA Arbitration

The securities industry is heavily regulated, so you may have many options when considering where to file a claim for breach of contract. While regulation of the securities industry legally sits with the U.S. Securities Exchange Commission (SEC), the SEC typically delegates its authority to self-regulatory organizations (SROs). This means that when you file a claim for breach of contract, it likely won’t be with the SEC.

FINRA Membership

One of the main SROs regulating the financial industry is the Financial Industry Regulatory Authority (FINRA). FINRA and other SROs enforce rules designed to protect investor interests. Stockbrokers must register as members with FINRA before they can sell securities. Stockbrokers must also maintain certain licensing requirements. You can check if a stockbroker has registered with FINRA by asking for their Central Registration Depository number (CRD Number) and looking it up on FINRA BrokerCheck. FINRA also offers dispute arbitration services to investors who have been victims of a breach of contract by a FINRA member.

FINRA Arbitration

FINRA arbitration is similar to traditional litigation—however, FINRA arbitration is typically cheaper and faster than traditional litigation. Arbitrators are professionals who usually know and understand the securities industry well. This makes them more businesslike than jurors or judges, who sometimes misunderstand key evidence involving investment contracts and decisions. 

However, FINRA arbitration still retains some characteristics of traditional litigation. Parties conduct discovery, present evidence, and agree that an arbitrator’s final decision is binding. FINRA arbitration for a breach of contract claim differs from a court case in that a losing party has few rights to appeal the decision.

FINRA Statement of Claim

If you ultimately decide that you want to file your breach of contract claim in FINRA arbitration, you’ll need to submit:

  • A Statement of Claim, and
  • A FINRA Submission Agreement.

These documents are the fundamental documents for beginning FINRA arbitration. The Statement of Claim is similar to a complaint in a lawsuit. This document describes the dispute, identifies parties, and identifies the damages you are requesting. This document is incredibly important because it acknowledges that FINRA will conduct the proceedings and that the final ruling will be binding on all parties.

If you decide to pursue your breach of investment contract claim in FINRA arbitration, the most important thing you can do is speak to an experienced securities lawyer. An experienced securities lawyer can help guide you through the arbitration process to help you get the best possible result for the facts of your case.

How Kurta Law Can Help

Kurta Law is a nationally recognized securities law firm with over 25 years of experience litigating securities fraud cases. The firm has represented investors—both nationally and internationally—with exceptional attention to detail. We pride ourselves on our aggressive advocacy and excellent client relations. Kurta Law represents clients on a contingency basis, which means that the firm only earns compensation if it recovers money on your behalf.

Founding attorney Jonathan Kurta is a member of the Public Investors Advocate Bar Association (PIABA), which works to reduce risks for investors. The firm also only represents investors—we never represent financial institutions or bankers. So, if you are involved in litigation, may be involved in litigation soon, or need an experienced securities lawyer to go over a contract before you sign, don’t delay. Contact us today for a free consultation. 


Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.