Georgia Supreme Court Recognizes a Cause of Action for “Holders” of Securities and Limited Duties in Favor of Non-Discretionary Account Customers

In response to three questions certified to it by the U.S. Court of Appeals for the Second Circuit, on February 8, 2010, the Georgia Supreme Court held that, under Georgia common law: (1) “holder” claims are actionable; (2) plaintiffs in misrepresentation or omission claims involving publicly traded securities must prove loss causation; and (3) a limited fiduciary relationship exists between registered representatives and clients, even in non-discretionary accounts.1 The Court’s Opinion represents a significant departure from existing federal law, and is described further below.

“Holder” Claims Are Actionable Under Georgia Common Law

The first question certified to the Georgia Supreme Court is whether Georgia common law recognizes fraud claims based on forbearance in the sale of publicly traded securities (commonly known as “holder” claims). The Court had no trouble finding that Georgia common law does indeed recognize “holder” claims. Justice Carley, writing for a unanimous Court, noted that “it is well settled that one of the elements of the tort of fraud in Georgia is an ‘intention to induce the plaintiff to act or refrain from acting.’ ” Georgia’s well-settled elements for fraud claims, the Court continued, are consistent with both the Restatement (Second) of Torts § 525 and the general rule that “‘induced forbearance can be the basis for tort liability.’ ” The Court found further support for its holding in Blue Chip Stamps v. Manor Drug Stores, a case in which the U.S. Supreme Court held that “holder” claims were not available under Rule 10(b)(5), promulgated by the Securities and Exchange Commission under § 10(b) of the Securities Exchange Act of 1934, but also noted that “holder” claims may be available under State law. The Court also noted that the Georgia Court of Appeals had previously acknowledged that “evidence of fraud . . . includes evidence which supported the conclusion that [the plaintiffs] were fraudulently induced into making and keeping their investments.”