Prof. Ed Pekarek comments on the “sophisticated investor” defense

Securities Professor Edward Pekarek spoke with the Dow Jones News Service recently about a change in perception regarding the “sophisticated investor” defense commonly used in arbitration between investors and brokerage firms. The article explained that the economic downturn in 2008 exposed flaws in the defense because countless well educated, wealthy, qualified investors lost money on misrepresented investments.

The “sophisticated investor” defense essentially argues that qualified investors should know the risks involved in working with brokerages and take responsibility for their losses. However recent arbitration results show that this defense has lost its effectiveness. As Professor Pekarek explains, “the arbitrator perception of “sophisticated investor” has evolved as a result of such a substantial market break. Such opaque and complex products and such questionable sales tactics associated with those products resulted in even the most sophisticated investors–institutions–being sold securities later revealed to be toxic.” He concluded that brokerage firms have a responsibility, regardless of the investor’s status, to accurately represent the investment they are selling.


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