October 3, 1990
TO: INVESTMENT ADVISER MEMBERS NO. 48-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 43-90
RE: COURT HOLDS THAT ADVISER MAY BE LIABLE FOR CHURNING
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Attached is a decision by the U.S. District Court for the
Southern District of New York refusing to dismiss a churning
claim brought against an investment adviser. The court stated
that even though the adviser did not receive commissions from the
broker who executed the trades, the plaintiff demonstrated that
the adviser did receive indirect benefits due to the volume he
generated such as reduced commission rates for the adviser's own
account and access to the broker's VIP lounge.
The court dismissed a claim against the broker for
secondary liability under an agency theory, but did not dismiss a
controlling person claim or an aiding and abetting claim against
the broker.
We will keep you informed of developments.
Amy B. Rosenblum
Assistant General Counsel
Attachment