Opinion ID: 2182704
Heading Depth: 2
Heading Rank: 2

Heading: Fiduciary Duty Claims

Text: The relationship between a customer and stock broker is that of principal and agent. [11] The broker, as agent, has a duty to carry out the customer's instructions promptly and accurately. In addition, the broker must act in the customer's best interests and must refrain from self-dealing unless the customer consents, after full disclosure. [12] These obligations at times are described as fiduciary duties of good faith, fair dealing, and loyalty. [13] They are comparable to the fiduciary duties of corporate directors, and are limited only by the scope of the agency. [14] In this case, the O'Malleys gave their agent relatively little discretionary authority, but the choice of sweep account funds was an investment decision that Everen made for its customers. As such, it is a decision for which Everen is accountable under fiduciary standards. The O'Malleys allege that Everen and its directors breached their duty of loyalty by switching the sweep account funds for Everen's benefit. They allege that their failure to object to the switch does not constitute consent because they were not told how Everen acquired its interest in the venture with Mentor. This lack of information also forms the basis for the O'Malleys' claim that Everen and its directors breached their fiduciary duty of disclosure. The O'Malleys' remaining claims, against Mentor and affiliates, are for aiding and abetting Everen's alleged breaches of fiduciary duty. Each of these claims directly or indirectly turns on the adequacy of Everen's disclosures about its interest in the venture. Everen's negative response letter says little; it simply refers the reader to the attached prospectus for information about its ownership interest in Mentor. The prospectus states: ... [I]t is expected that promptly after [the] reorganization, EVEREN Securities, Inc. will acquire 20% of the outstanding shares of Mentor Investment Group. EVEREN may thereafter acquire additional shares in Mentor Investment Group (not to exceed an additional 30% of Mentor Investment Group's outstanding shares) depending principally on the amount of assets in investment companies sponsored by Mentor Investment Group or it affiliates (including the Funds) attributable to shares held by clients of EVEREN. The Court of Chancery found that this language adequately discloses the nature of Everen's interest in the Mentor venture since it explains that Everen's ownership will increase if its clients increase their investment in Mentor. In other words, Everen will benefit from bringing its customers to Mentor. The prospectus does not discuss what Everen contributed in exchange for its initial 20.2% share in the venture, but the Court of Chancery apparently found that omission to be immaterial because the equity-for-customers arrangement was strongly implied. It is settled law in the corporate context that directors must disclose all material facts when seeking stockholder action, [15] and that materiality is measured by the following standard: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote .... It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. [16] We adopt this standard, which is consistent with the full disclosure mandated for agents, to evaluate the O'Malleys' disclosure claims. The omitted information, in this case, is the fact that Everen paid for its interest in the venture by agreeing to transfer its clients' accounts to Mentor funds. The significance of that omission depends, in part, on the information that was disclosed  that Everen had a 20.2% interest in the venture at the outset and that Everen's interest would increase with any increase in the amounts that Everen's customers invested in Mentor funds. The question is whether reasonable investors, knowing that Everen stood to profit from the switch in sweep account funds, would consider it important to know what Everen exchanged for its initial share in the venture. If they would, the remaining question is whether something less than a direct statement of the material facts satisfies a broker's fiduciary duties to its customers. On the first question, we are satisfied that the claim withstands a motion to dismiss. The determination of materiality is a mixed question of fact and law that generally can not be resolved on the pleadings. [17] Since Everen allegedly controls approximately $3.1 billion of its customers' money in sweep accounts, those customers might consider it important to know the basis for Everen's choice of sweep account funds. The disclosed fact that Everen will participate in Mentor's profits gives part, but not all, of the answer. The O'Malleys allege that it would have been significant also to know that Everen used the transfer of its clients' money to buy its share of the venture. We cannot say that a reasonable investor would not share the O'Malleys' view. The financial impact on each investor's sweep account may be minimal, but the fact that the broker used the investor's money to advance its own interests may be important not only to the choice of sweep accounts, but also to the investor's choice of brokers. At the very least, this issue must be developed factually before the materiality of the omitted information may be assessed properly. Assuming for present purposes that the information about Everen's investment in Mentor is material, the remaining question is whether anything less than express statements of fact will satisfy the fiduciary duty of full disclosure. The Court of Chancery found that, from the information that was disclosed, a reasonable investor could not miss the point that Everen was using its customer base to participate in the venture with Mentor. We think that full disclosure requires more than strong inferences. Investors should not be required to correctly read between the lines to learn all of the material facts relating to the transaction at issue. While there may be cases where the disclosures are adequate because the undisclosed information inescapably follows from the disclosed facts, this is not such a case. The disclosures about Everen's interest in Mentor leave open at least two reasonable possibilities as to how Everen acquired its interest  by investing its own money or by transferring its clients' money. Under these circumstances, the information about how Everen acquired its interest in Mentor cannot be deemed to have been disclosed. Accordingly, the O'Malley's disclosure claim must be reinstated. Our decision on the disclosure claim controls all the remaining state law claims. The duty of loyalty claim was dismissed on the theory that the O'Malleys consented to the switch in sweep accounts after full disclosure. If their consent was invalid because it was based on inadequate disclosures, their duty of loyalty claim remains. Similarly, the aiding and abetting claims were dismissed because there were no underlying breach of fiduciary duty claims. With the restoration of the breach of fiduciary duty claims, the aiding and abetting claims also must be reinstated.