Court Strikes Confidentiality Provision in Customer Settlement Agreement


Clause preventing customer from speaking to regulators is void as against public policy

By John M. Baker, Esq.

California Court Rules Confidentiality Clause Invalid

In a decision that will surprise few securities lawyers, a California appellate court has refused to enforce a confidentiality clause in a settlement agreement that prohibited the customer in a securities transaction from discussing the selling agent’s misconduct with regulatory authorities. Cariveau v. Halferty, No. A087296 (Cal. App. Aug. 18, 2000).

After making some questionable recommendations, a registered representative agreed to repay the investor’s lost funds, with interest, but subject to a strict confidentiality clause. The customer subsequently complained to the representative’s employer, resulting in the representative’s termination and an NASD investigation.

The representative sued for breach of contract and, although she subsequently was shot to death (a tantalizing development with no further details in the court’s opinion), the trustee of her estate was substituted as plaintiff.

Both the trial court and the California First Appellate District refused to enforce the clause on grounds of public policy. The SEC and the NASD have well-established positions that such agreements contravene public policy, but the court did not cite any prior judicial opinions. In re Stratton Oakmont, Release No. 34-38390 (Mar. 12, 1997); NASD Notice to Members 95-87.

The court’s opinion is available online in PDF format at

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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