Court: Absolute Immunity for Alleged Fraud by Fidelity Brokers

By William Vogeler, Esq. on May 20, 2019

Apparently unwilling to take no for an answer, Fidelity Brokerage Services went around two clients and put up their shares in a deal that went bad.

It got worse than that for AER Investors and its clients. Fidelity reported them to the government for "suspicious activity," accusing them of manipulating the stock price. They spent hundreds of thousands of dollars defending themselves from the claim and beating it. In AER Advisors v. Fidelity Brokerage Services, they sued Fidelity for fraud and other wrongs. Drawing a fine line between civil and criminal liability, however, the U.S. First Circuit Court of Appeals said Fidelity was entitled to absolute civil immunity.

Absolute Immunity

According to the appeals court, Fidelity tried to persuade William J. Deutsch and Peter E. Deutsch to lend the brokerage their stock in China Medical Technologies. The Deutsches declined, and that's where the immunity story began. "Apparently unwilling to take no for an answer, Fidelity lent about 1.8 million of the Deutsches' China Medical shares to short sellers or their brokers between May and early June 2012," wrote Judge Ojetta Rogeriee Thompson. "Fidelity made money from these loans. But the Deutsches got nothing -- no notice of what Fidelity was up to, no collateral to protect their interests, and no compensation."

Actually, they got a huge, costly headache. After the deal blew up, Fidelity filed a Suspicious Activity Report with the Treasury Department and accused the Deutsches of manipulating China Medical's stock price. They survived the scrutiny, but sued when it was over. A trial judge dismissed their case, however. The First Circuit affirmed, saying absolute civil immunity applies even if the report alleged an "objectively impossible" violation of the law. Apparently, absolute immunity really means absolute immunity.

First Circuit Rules

At least that's true in the First Circuit. In the Eleventh Circuit, not so much. Applying the safe harbor provision from the Bank Secrecy Act, the Eleventh Circuit extends immunity only when a financial institution has a "good faith suspicion that a law or regulation may have been violated." In any case, the First Circuit could see the problem. Civil and criminal immunity are not the same, the panel emphasized, suggesting the story may not be over. "(E)ven though private actions are off the table, financial institutions that file malicious or intentionally false SARs are hardly untouchable," the judges said. "Among other things ... the federal government can go after them, with fines and prison time where appropriate."

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