Various administrative agencies such as the Securities and Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC) take action to be effective in preventing high-risk gambles in securities. Jeopardy of gambling in purchases of high-risk securities emanates from the falsified financial statements by organizations to reflect the positive performance of the organizations, as opposed to the actual negative performance. For instance, during summer 2012, JPMorgan Chase, one of the biggest banks that operate in the U.S recorded losses amounting to $5.8 billion following poor decisions that were made by the CIO. The reports filed by the bank to SEC were falsified to conceal these losses.
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Since the information that is filed to SEC is open to public scrutiny to help the public in making investment decisions, under the provisions of SEC, any incorrect information submitted, which makes the present and future investors suffer losses, makes the institution assume strict liability to pay damages. Due to the submission of erroneous information, SEC finds the liability for the losses incurred in investment in high-risk securities necessary. Organizations such as JPMorgan Chase needed to have held in the most reasonable contemplations that their acts would result in harming the inventors seeking to buy their securities after being informed to make such a decision on accounts of potentially high returns as reflected in the organization’s financial statements filed to SEC. In the fear of assuming responsibility for losses encountered by security buyers, the organization doubts submitting erroneous information. This way, SEC can take action to be effective in preventing high-risk gambles in securities.
A contract is an agreement between two parties. However, not all agreements amount to a valid legal contract. For an agreement to amount to a contract, it must have an offer, acceptance of the offer, and a lawful deliberation, which must be considered in the agreements. The parties entering the contract must have the capacity to enter into contracts (Kumar, 2012). Agreements entered with minors and persons of unsound mind do not amount to contracts. An agreement amounting to a contract must have lawful objects of trade and free consent. Certainty in meaning and the existence of a possibility of successful performance (Kumar, 2012) are also essential elements of a valid contract. The agreement also needs to follow legal formalities. It needs not to be declared void.
In the banking sector, when customers open accounts with a bank, an agreement is made that the customers would abide by the stipulated legal frameworks and rules that guide the established relationship between the customer and the bank. This aim is usually accomplished through legal formalities. However, before reaching this point, an offer is made to a customer where he or she is required to select several banking products. When the customer selects a particular product, it is presumed that he or she has accepted the offer. Legal formalities follow suit such as signing application forms, which mark the possibilities of successful performance of the agreement. To this extent, a contract is made between the bank and the customer. To ensure that the contract does not suffer frustrations, customers and banks have a duty of good faith and fair dealing in the banking relationship.
A contract entered between a bank and its customers involves the exchange of financial products or objects of the contract. During these exchanges, banks and customers must engage in fair dealings so that none of the two parties is subjected to financial risks or harm. From the context of the customer, this provision is maintained by making sure that the securities and guarantors that the consumer provides to access credit are not falsified. They have to measure up to the credit worth sought. The bank must not engage in fraudulent activities, which may harm customers by exposing their money to unnecessary risks.
In legal terms, a tort encompasses acting in a wrongful manner, which poses a threat to another person referred to as the second party or the aggrieved person. The law of torts articulates various responsibilities that people have towards other people or duties of care that a person owes another person. The tort law provides people who fall victims to wrongful acts with an opportunity to seek legal redress (Morgan, 2006, p.202). Although there are several torts, intentional and negligence torts are the main ones.
In the case of the intentional tort, a poof that an act that amounted or could amount to harm to a second party and that the act was done with the purposeful intent of causing the harm suffered by the plaintiff is required. For intentional tort to hold, no harm on the plaintiff necessarily needs to be caused (Morgan, 2006). The only proof of intent is required. The intent is proved such that the person to whom an action that has a possibility of causing harm on his or her person was owed a duty of care, which the plaintiff was well cognizant about when acting in the manner that he or she did. Some of the intentional torts include defamation, false imprisonment, invasion of another person’s privacy, battery, and assault.
On the other hand, in case of torts of negligence, the plaintiff must prove that he or she was owed a duty of care that the defendant needs to have put in the most reasonable contemplations before acting in the manner she or he acted in breach of this duty of care (Morgan, 2006, p.206). Comparing the negligence torts with intentional torts, the tort of negligence does not require proof that there was intent to cause harm. However, for a court to rule in favor of the plaintiff, the plaintiff must prove that, because of the negligence of duty of care by the defendant, harm was suffered.
Banks and other financial organizations have legal obligations to observe and respect contractual relations and fiduciary duty. Customers invest in securities in organizations on accounts of agreements that the organization would pay returns to the amounts invested in securities. In case an organization makes profits and fails to honor the agreement, the inventors can seek legal redress in a court of law suing the organization in question for interfering with contractual relations coupled with breaching the fiduciary duty (Hawley, Keith & Waitzer, 2011).
In the case of, JPMorgan Chase, the bank was entrusted to take care of the investors’ money besides making decisions that would give returns to the money invested in the bank. Due to wrong managerial decisions, the bank recorded losses, which it further went on to conceal. Hence, it failed to comply with the fiduciary legal obligations placed on it by the investors. It was liable to torts of interference with contractual relations and participating in a breach of fiduciary duty. In case my bank behaves like JPMorgan Chase, it would be incredibly difficult to prevail in such a tort action because, in case of breach of fiduciary duty, the faith and confidence of investors are eroded. This case exposes the bank to even tougher financial problems in the future. Therefore, investors would presume that the bank is incapable of providing reasonable care to the assets of the organization in its custody.
With the advent of increased utilization of technology to improve the effectiveness and efficiency of executing various activities and tasks of organizations, banks have their software that facilities online transactions exposed to security threats. Malicious people who want to have authenticated access to the bank’s confidential information acerbate such threats. The cognition of such threats prompts banks to “protect their software that allows online transactions to occur through automation” (Hawley, Keith, & Waitzer, 2011, p.97). Protection of the software is enhanced through incorporations of mechanisms of mitigating malicious activities such as ACH frauds. Since the software deployed to affect online transactions opens customers’ money to risks, banks insist that customers pay attention and or review their credit and debit balances daily. Should they detect any fraud, they need to report it immediately. In case fraud is detected and not reported within 60 days, consumers normally risk their funds from not being returned. Customers are also required to seek services such as ACH filters coupled with ACH blocks from their banks. When the software is installed on a customer’s computer, it helps him or her in detecting malicious keylogging software that is meant to deceive the customer to install the keylogging software so that fraudsters can steal passwords and bank accounts. For online transactions to run automatically, some organizations such as money bookers run an automatic system that detects unsuccessful log-in attempts into the customers’ online bank accounts in a bid to inform customers about the same in real-time. The customer responds by changing the login details as necessary.
Hawley, J., Keith, J., & Waitzer, E. (2011). Reclaiming Fiduciary Duty Balance. Rotman International Journal of Pension Management, 4(2), 96-107.
Kumar, S. (2012). Business Law: Essential Elements of a Valid Contract. Web.
Morgan, J. (2006). The Rise and Fall of the General Duty of Care. Professional Negligence, 22(4), 201- 211.