Equitable Compensation for Breach of Fiduciary Duty
A financial adviser manages a client's portfolio of 2.4 million. Without disclosure, the adviser directs 400,000 of the portfolio into a fund managed by a company in which the adviser holds a 20% stake, earning a secret commission of 18,000. The fund underperforms, and the client's holding is now worth 340,000. The client discovers the arrangement after 14 months. The adviser has since left the firm, and the firm says it is not liable because the adviser acted dishonestly and outside its procedures. The client wants to recover the loss and the commission, and asks whether the firm can be pursued as well as the adviser. The client also wants to know whether the remedy is limited to the 60,000 loss.
1. Identify the claims available against the adviser and the measure of recovery.
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The adviser breached a fiduciary duty by placing himself in a position of conflict and taking a secret commission without informed consent. Two remedies are available and the client may elect between them. First, equitable compensation for the loss caused by the breach: the difference between what the portfolio would have been worth had the 400,000 stayed in the authorised investment and its current 340,000 value - at least 60,000 plus lost growth. Second, account of profits, requiring disgorgement of the 18,000 secret commission; the client need not show loss for this, and the two are not simply cumulative for the same loss. The client can also seek rescission of the unauthorised investment transaction and restitution of the 400,000, though the fund's fall complicates restoration. The adviser cannot retain the commission even if the investment had prospered. Dishonesty does not reduce the remedy; it may support a claim for exemplary damages in limited circumstances, but that is exceptional and should not be assumed.
2. Assess the firm's liability and explain the basis on which it may be pursued.
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The firm may be vicariously liable for the adviser's breach if the adviser was acting in the course of employment or apparent authority. The firm's argument that the conduct was outside its procedures is not decisive: vicarious liability can attach to dishonest and unauthorised acts where they are sufficiently connected to the employment - the adviser was placed in the role, given access to the client's portfolio, and used that position to direct the investment. The firm may also be directly liable if it failed to supervise or had inadequate conflicts procedures, which is a separate negligence or breach-of-duty claim. The firm cannot rely on the adviser's departure to escape liability. Practically, the client should pursue both: the adviser for the commission and loss, and the firm as the deeper pocket. The firm may seek contribution from the adviser, but that is between them. The client should also consider whether the fund manager's company is a joint wrongdoer.