Georgia's Take On Holmes V. Grubman


Law360, New York (March 09, 2010) -- On Feb. 8, 2010, the Georgia Supreme Court issued an opinion in response to three certified questions submitted by the U.S. Court of Appeals for the Second Circuit, holding 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 nondiscretionary accounts.

The court’s opinion represents a significant departure from existing law and is described further below.

The case’s procedural history was winding, making stops in the U.S. Bankruptcy Court for the Middle District of Georgia; the U.S. District Court for the Southern District of New York, as part of the multidistrict WorldCom Securities Litigation; and the Second Circuit before ultimately landing in the Georgia Supreme Court.

The underlying dispute was not as complex. William K. Holmes alleged that Salomon Smith Barney & Co. Inc. (“SSB”) and its financial analyst, Jack Grubman, convinced him not to sell his 2.1 million shares in WorldCom in 1999 after he verbally ordered his broker at SSB to sell his WorldCom shares.

Instead of selling, Holmes purchased additional shares of WorldCom as the stock price declined. In 2000, Holmes was forced to sell all of his WorldCom shares in order to meet margin calls, resulting in alleged losses of nearly $200 million.

After finding his way to the Southern District of New York, Holmes’ third amended complaint, which included claims of fraud, negligent misrepresentation, negligence in making disclosures, and breach of fiduciary duty, was dismissed, prompting Holmes’ appeal to the Second Circuit and that court’s certification of three questions to the Georgia Supreme Court.

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