Securities Litigation and Arbitration

By Edward Pekarek, Esq.* and Christian Obremski

The "sophisticated investor" theory, as it applies to securities arbitration, is derived from the notion that an investor's level of knowledge, experience, wealth and general intelligence has an effect on how panels award damages.[1] The doctrine is typically employed by a respondent as an affirmative defense to suitability claims, designed to persuade the panel the customer-claimant has an appropriate level of knowledge and experience to be capable of evaluating risks associated with investing[2] and was able to properly evaluate the risks of any particular disputed transaction(s).[3] Once an investor is portrayed as "sophisticated," it has the potential to diminish the burden a respondent must meet to establish the customer-claimant was provided a suitable investment recommendation, based on investment objectives, financial needs and other customer based considerations.[4]