On February 8, 2010, the Supreme Court of Georgia issued its opinion in Holmes e al. v. Grubman et al., a case brought by a group of former WorldCom, Inc. shareholders against Salomon Smith Barney & Co (Citigroup Global Markets, Inc.) and its financial analyst Jack Grubman. This case was brought in federal court and was later appealed. During the appeal process, the United States Court of Appeals for the Second Circuit certified three questions to the Supreme Court of Georgia. The three questions related to 1) whether Georgia common law recognizes holder claims (holder claims relate to advice given to hold onto a security (to refrain from selling it) with such advice based on some type of misrepresentation or omission of material fact), 2) a question relating to adequacy of pleaded fraud under Georgia law based on claims for misrepresentations or omissions of material facts in connection with the purchase of a security, and 3) does a brokerage firm owe a fiduciary duty to account holders of non-discretionary brokerage accounts.
The Court held that Georgia does recognize holder claims, adding that such a claim requires the"typical fraud context to be one in which the parties knew each other and the alleged misrepresentations occurred through direct communication." In addition, the Court noted that there must be specific reliance on the defendant's misrepresentation. The Court also stated that holder claims could be considered in negligent misrepresentation cases (as opposed to fraud cases).
With respect to the third question, the fiduciary question, the Court agreed with federal precedent that a broker has limited fiduciary duties to customers who have non-discretionary account, with such duties requiring the broker to place trades only after receiving authorization from the client, and the duty to not misrepresent facts that are material to the transaction. The Court found, however, that the fiduciary duties extend further. finding that "The broker will generally have a heightened duty, even to the holder of a non-discretionary account, when recommending an investment which the holder has previously rejected or as to which the broker has a conflict of interest."
