Skip to main content

Lee v. First Union National Bank

199 N.J. 251, 971 A.2d 1054 (2009)

CONSUMER FRAUD ACT; SECURITIES — The sale of securities is excluded from the purview of the Consumer Fraud Act; therefore, a broker’s conduct in the sale of securities cannot be classified as a “service” covered by the Act because, to do so, would thwart New Jersey’s clear legislative plan to keep the securities marketplace outside of the scope of the Act.

A bank customer met with an investment counselor at the bank. The investment counselor, who was also a registered broker, suggested that the customer open a brokerage account with the bank’s brokerage service and purchase mutual fund shares. The customer gave the broker funds to purchase the shares in cash, but the broker misappropriated the funds and never deposited the money into the customer’s brokerage or checking accounts. As a result, the customer did not have sufficient funds in her accounts to complete the purchase of the mutual fund shares. The bank settled the mutual fund purchase, but the customer had insufficient funds to cover the purchase so the bank debited the customer’s checking account and liquidated some of her mutual funds to settle the transaction.

The customer contacted the broker, but the broker did not pay back the misappropriated funds to the customer. The customer then sued the broker, the bank, and the bank’s brokerage service for misapplication of her funds and for unconscionable business practices under the Consumer Fraud Act (CFA).

The lower court dismissed the customer’s complaint, finding that, under securities law, the customer had to file a complaint within a two-year statute of limitations, which she failed to do. With respect to the CFA claim, the lower court found the claim barred because the sale of securities was expressly excluded from the reach of the CFA.

The Appellate Division reversed. With respect to the misappropriation claim, it found that the correct statute of limitations was the six-year statute of limitations because the case involved the unlawful taking of personal property. It also found that although the securities were not “merchandise” within the context of the CFA, the broker’s misapplication of the funds constituted a “service” that was included in the CFA’s definition of merchandise.

On further appeal, the New Jersey Supreme Court reversed. The Court held that the sale of securities is not included within the CFA’s definition of merchandise and that the broker’s conduct in connection with the sale of securities could not be characterized as a “service” covered by the CFA because its inclusion would thwart the legislative intent to exclude the sale of securities from the CFA. It noted that, even though the CFA is to be construed liberally to protect customers from deceptive business practices, courts must abide by the definitions that control the boundaries of the CFA’s reach. The plain language of the CFA does not include securities within “merchandise” subject to the CFA. The Court noted that a proposed 1967 amendment to the CFA would have augmented the definition of the term “merchandise” to include real estate, securities, services or anything offered directly or indirectly to the public for sale, but the amendment, as enacted, did not include the terms “real estate” or “securities.” A 1976 amendment included the term “real estate,” but did not include the term “securities.” Therefore, the Court found a clear legislative intent to exclude the sale of securities from the purview of the CFA. Having determined that the legislature intended to exclude securities from coverage under the CFA, the Court found that the broker’s conduct could not be classified as a “service” covered under the CFA because, to do so, would thwart a clear legislative plan to keep the securities marketplace outside of the scope of the CFA.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •