Shabbat Parashat Eikev| 5770
Ask the Rabbi: Compensation for a Falied Investment
Case: The plaintiff (=pl) hired the defendant (=def) to handle an investment sum of $5,000 at his discretion. According to pl, def claimed to be able to reach 50% profits annually. Pl maintained the ability to follow the investment’s progress and withdraw the money at any time. They signed a contract that stipulated the conditions for distributing profits. The contract also mentioned the risk factor, which, it said, corresponded to the great possibility of high returns. The contract also warned against investing more than 40% of one’s portfolio in this type of investment. After achieving a 10% profit in the first few days, the investment plummeted to a mere $36. Pl does not claim that there was negligence in the way the investment was handled but said that he was not sufficiently warned about the degree of danger of loss this investment carried (def disputes this claim). Rather, pl says that since he was misinformed about the investment, the whole transaction should be void and the money should be reimbursed.
Answer: Let us first investigate whether there are grounds to obligate def as one who caused damage. The money that pl invested, while remaining his, was overseen and handled by means of power of attorney by def; thus, def was a shomer (watchman). There is discussion among the poskim on the degree to which a shomer is obligated for indirect damage (gerama) he causes (see Pitchei Teshuva, Choshen Mishpat 55:1). The Chatam Sofer (CM 140) obligates the shomer for even very indirect damage, as this is included in the obligations of a shomer. The Rama (CM 386:3) maintains that there are elements of exemption for gerama even for a shomer.
However, even according to the Chatam Sofer, here there is not an obligation for damages. Beit din’s research revealed that def acted in a normal manner for high potential gain, high-risk investments. In fact, pl did not claim negligence. Furthermore, the contract stated that the investor waived the right to make claims of poor handling of the investment fund. Pl was not able to substantiate his claim that def did not follow the guidelines that pl had given him, as in fact there are clear indications that pl gave def freedom to act as he deemed prudent.
The claim of misrepresentation, justifying voiding the agreement between the parties, also lacks merit. Def’s alleged claim of a projected 50% annual profit was not proven to be unrealistic. In fact, in a matter of a few days, there was a 10% gain. The eventual great losses do not prove that there was no potential for continued gains. Regarding the possibility of great losses, the contract spelled out that the potential for loss was great, like the potential for gain, and suggested not to invest more than 40% of one’s portfolio in such an investment.
Def did not stress orally that there was a chance of a total loss of the principal (which, in effect, happened), something which pl never considered, but pl admits that the contract relates to such a possibility. The Shulchan Aruch (CM 61:13) rules that a husband who agreed to a ketuba with certain conditions cannot say afterward that he was unaware of what was written in it. The Rama (ad loc.) continues that he is even responsible for implications one can draw from the contract’s language, and it is not possible to claim that he is not savvy enough to understand the nuances of the language. The Beit Yosef (CM 45) states further that even if one who signed a contract did not understand the language it was written in, he relinquished his rights to complain about the contract’s provisions when he signed it without reading it. One cannot claim that it is illogical to have agreed to the possibility of losing all the capital of an investment, as Tosafot (Ketubot 47a) says that it is normal for one to put himself in a situation of great loss if it also gives him the possibility of great gain.
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