Stockbroker Fraud in Trusts Can Be Caught By Trustees By Investigating

Trustees have fiduciary duties to trusts. When stockbroker fraud has potentially been committed in a trust, what should the trustee do? Investigate.

A trustee has the duty to investigate red flags of fraud or wrongdoing by stockbrokers and to pursue any legitimate claims for the trust’s benefit. Failure to investigate may make the trustee liable to the trust’s beneficiaries.

Trustees should review the brokerage statements and new account documents of the trust’s brokerage account immediately. If the trustee does not have the expertise to decipher potential fraud, he should speak to an attorney who represents investors in securities fraud cases. If there’s a claim, the trustee should commence an arbitration.

However, note that the brokerage firm may file a counterclaim against the trustee for failing to fulfill his fiduciary duty. We think these are meritless counterclaims because the brokerage firm does not have standing to assert them. Irrespective, the trustee will have to defend it.

Counsel should advise the trustee about the potential conflict of interest which may arise due to the counterclaim and create personal exposure for the trustee if he commences the arbitration on behalf of the trust. But the trustee would likely have greater exposure to liability to the beneficiaries if he doesn’t commence a stockbroker fraud claim when a viable one exists.

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