Friday, May 12, 2006
Brokers beware: The erosion of the doctrine of bespeaks caution
Bespeaks Caution 101
Once upon a time, broker dealers and other sales organizations could take shelter behind cautionary statements and general disclosures of risk under a legal concept called The Doctrine of Bespeaks Caution.
Under this doctrine, unhappy customers could not collect damages from vendors for misstatement of facts, if the original statement—the product literature, or prospectus, or other communication with the buyer—contained cautionary language regarding possible risks. If the client is appraised of the risk, then the communication is said to ‘bespeak caution,’ and the buyer could not have been deceived. In other words, as Georgetown University Law School Professor Donald Langevoort, explains it, "It's not a fraud to mispredict the future, if you've given people adequate warning that the future is difficult to predict.''
Recent trends in securities caselaw, though, have significantly eroded this once powerful protection for registered reps. A recent 2nd Circuit case* held that misstatements going to the heart of an investment decision could not be covered under the ‘bespeaks caution’ doctrine, reversing the ruling of a lower court. Boilerplate risk disclosure language doesn’t cut it. As another Federal judge put it: “The doctrine of bespeaks caution provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.”
*P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92 (2nd Cir., 2004)
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Once upon a time, broker dealers and other sales organizations could take shelter behind cautionary statements and general disclosures of risk under a legal concept called The Doctrine of Bespeaks Caution.
Under this doctrine, unhappy customers could not collect damages from vendors for misstatement of facts, if the original statement—the product literature, or prospectus, or other communication with the buyer—contained cautionary language regarding possible risks. If the client is appraised of the risk, then the communication is said to ‘bespeak caution,’ and the buyer could not have been deceived. In other words, as Georgetown University Law School Professor Donald Langevoort, explains it, "It's not a fraud to mispredict the future, if you've given people adequate warning that the future is difficult to predict.''
Recent trends in securities caselaw, though, have significantly eroded this once powerful protection for registered reps. A recent 2nd Circuit case* held that misstatements going to the heart of an investment decision could not be covered under the ‘bespeaks caution’ doctrine, reversing the ruling of a lower court. Boilerplate risk disclosure language doesn’t cut it. As another Federal judge put it: “The doctrine of bespeaks caution provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.”
*P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92 (2nd Cir., 2004)
