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Beit Midrash Series P'ninat Mishpat

Chapter 120

Loss of Principal on an Investment

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P'ninat Mishpat (575)
Various Rabbis
119 - A Kibbutz Member’s Unauthorized Use of an Enrichment Course Fund
120 - Loss of Principal on an Investment
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The plaintiff (=pl) had the defendant (=def) handle an investment sum of $5,000 at his discretion, with pl maintaining 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, which were said to be potentially up to 50% annually. It also stated that there was significant risk in such an investment, and def told pl that it was unwise to invest all of his money in this manner. 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 how dangerous the investment could be (def disputes this claim). Rather, pl says that he was misinformed about the transaction, and therefore, he should be reimbursed.

Ruling: Although there is discussion among the poskim on the degree to which a shomer (watchman, which is what def was, considering that the money remained in pl’s possession, with def having power of attorney) is obligated for indirect damage he causes (see Pitchei Teshuva, CM 55). However, here there cannot be such an obligation. 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 that there was negligence. Furthermore, the contract stated that the investor waived the right to make claims of bad handling of the investment fund.
Regarding the claim that there was misrepresentation, there is no evidence that this is the case. Although def admits to having projected a potential of 50% profit, there is no evidence that such a profit was not possible. In fact, in a matter of a few days, there was a 10% gain, and the eventual great losses do not prove that there was no potential for continued gains. Contrary to pl’s claims, def operated against his directions, as all indications are that pl gave def free reign to invest as he saw fit.
The contract spelled out that the potential of loss was great, like the potential of 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 it is clear from the contract that this was a possibility. The Shulchan Aruch (Choshen Mishpat 61:13) rules that a husband who agreed to a ketuba with certain conditions cannot say afterward that he was not aware of what was written in it. The Rama continues that he is even responsible for implications one can draw from the contract’s language. One cannot claim that it is illogical for one to have agreed to the possibility of losing all his capital, 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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