JPMorgan wins voiding of class action over defunct brokerage

Fri Mar 15, 2013 1:33pm EDT
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By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court on Friday threw out a class action lawsuit against JPMorgan Chase & Co (JPM.N: Quote), making it easier for companies that clear trades to avoid being accountable to investors who are defrauded by their brokerages.

The 2nd U.S. Circuit Court of Appeals in New York said clearing firms need "sufficiently direct" involvement in a brokerage's fraud, by instigating or directing it or through other "extraordinarily high involvement," to create a duty to disclose or correct the improper conduct.

Absent such a duty, brokerage customers could not sue as a group on the ground that they relied on inadequate disclosures, a three-judge appeals court panel said.

"A clearing broker's knowledge of the fraud alone is an insufficient basis on which to impose a duty of disclosure," Circuit Judge Debra Ann Livingston wrote for the panel.

Clearing firms perform such activities as delivering securities, maintaining records, safeguarding customer funds, and sending trade confirmations and monthly statements.


The case concerned activities at Sterling Foster & Co, a defunct Melville, New York-based penny stock firm that federal investigators said was a boiler room that defrauded thousands of investors out of more than $70 million in the 1990s.

Randolph Pace, who prosecutors said ran the fraud, was sentenced to 8-1/3 years in prison in 2002.   Continued...

People exit the lobby of JPMorgan Chase & Co. headquarters in New York May 22, 2012. REUTERS/Eduardo Munoz