By: Dana N. Pescosolido
We’ve all heard the warnings, for many years now. The population is aging, the baby-boomers are starting to retire, and as they age, the opportunities for exploitation by unscrupulous brokers will increase exponentially. Some sources say that upwards of $7 trillion in retirement assets will be in play. States like Florida and California (and some others) have enacted financial “elder abuse” or “exploitation” statutes intended to protect aging senior citizens from greedy relatives or fiduciaries who seek to appropriate financial assets of the elderly person for themselves. And arbitration panels in both of those states have issued awards under those statutes, including awards of punitive damages and attorneys’ fees and costs. But how prevalent are these cases, and how successful? Read on for a full explanation, but the short answers are: such cases are not all that prevalent, nor do they enjoy high “win rates” on the elder abuse claims themselves, but when a panel believes that elder abuse has occurred, the awards are very “generous.”
“Recent developments and demographic trends suggest an increasing number of “Elder Abuse” cases will be brought in future years.”
In addition to efforts in many states to protect senior citizens from financial exploitation, perhaps two signs of the future are the new FINRA Rule 2165 and amendments to Rule 4512 (both effective February 5, 2018). See FINRA Regulatory Notice 17-11 (March 2017). New Rule 2165 will permit brokerage firms to place temporary holds on accounts where there is a reasonable belief of financial exploitation of an elderly person. Amendments to Rule 4512 will require member firms to make reasonable efforts to obtain the name and contact information for a “trusted contact person” for a customer’s account. In the view of many, these rule changes only increase the potential for claims against brokerage firms on behalf of elderly clients.
While the amended rules do not “obligate” the member firm to put a freeze on an account, and only require “reasonable efforts” to get the customer to identify a trusted contact person, Claimants will likely argue that the failure to do what the firm had the power to do (i.e. freeze the account to prevent an unusual disbursement suspected to constitute exploitation) is actionable, and that the efforts to get the customer to identify a trusted contact person were insufficient. Firms will be adopting changes to their internal procedures to comply with these new rules, and Claimants will likely point to those procedures as a self-prescribed standard of care, violation of which should be actionable.
While many of you out there might find this suggestion dubious, we call your attention to a recent FINRA Award, in Case. No. 15-02910, Trottier vs. Morgan Stanley Smith Barney LLC, et al. The Award was issued in May 2017, and is currently the subject of a Motion to Vacate filed in state court in Los Angeles. This was a majority decision, and the only reason we know so much about the case is that one of the arbitrators wrote a lengthy dissent discussing the facts and the legal issues involved. It seems that Mrs. Trottier, about 68 years of age at the time, was paranoid (possibly delusional) about her neighbors and got hoodwinked by a crooked security system guy who charged her $300,000 to install a security system at her house. The guy ultimately went to jail for his misdeeds, but this Arbitration case was brought by her Executor (her grandson) alleging that the Morgan Stanley broker knew that she was taking unusual amounts out of her account, and learned at some point why she was taking all this money out. According to the Dissent, the broker told her she was getting ripped off and she should get her son involved, or go to the police. The principle claim was for a violation of California Welfare and Institutions Code, Sec. 15610.30(A)(2), for aiding and abetting Financial Elder Abuse. The theory, according to the Dissent, was that Morgan Stanley had a duty to prevent the fraud by the security system guy, and report it to the police, or a social agency, which they did not do. She herself ultimately did, which led to the prosecution and conviction of the bad guy. But it was too late. She was out $300,000.
Two of the three arbitrators ruled in favor of the estate, awarding $396,623, consisting of $168,000 in compensatory damages, $98,623 in interest, and $130,000 in attorneys’ fees under Section 15657.5 of the Code, which requires such an award when a violation of Sec. 15610.30 is found. According to the Dissent, Claimant argued that MSSB’s failure to fully follow its own internal procedures (which were themselves the firm’s reaction to FINRA’s Regulatory Notice 07-43 that recommended certain best practices to protect vulnerable clients) constituted a breach of duty to Mrs. Trottier. The Dissent points out that FINRA specifically said in its Notice that the steps being recommended were not “requirements” but suggestions to consider, just as the amendment to Rule 2165 does not “require” the freezing of accounts, but only permits it. Nonetheless, two of three arbitrators were persuaded and issued the award that they did. They did NOT issue an award of punitive damages.
Putting aside the legal issues that will likely be argued in the Motion to Vacate, the fact is that Section 15610.30 of the California Welfare and Institutions Code has been invoked on more than one occasion to issue awards of attorneys’ fees, costs and punitive damages. Most recently, see FINRA Case No. 16-00847, with a seven-figure punitive damage award included. In Florida, awards have been issued under Chapter 825 of the Florida Statutes for “exploitation of an elderly person.”
The two recent California awards got us wondering. How prevalent are these cases of “elder abuse” or “exploitation” under state statutes (as opposed to the multitude of garden variety securities cases that involve older customers, where their age may be a factor in the suitability of the recommendations but no allegations of elder abuse are made). How have they been decided? Do they only arise in California and Florida? Are punitive damage awards frequent?
“Elder Abuse” and “Exploitation” claims were not brought all that often, and when they were, they weren’t successful very often. But when they did succeed, compensatory awards were very high, awards of punitive damages and attorneys’ fees were common, and Total Recoveries were much higher than for the average customer case.
We looked at five years of awards, from July 2012 to July 2017. We searched using a number word searches, including “Elder Abuse”, “Exploitation”, “Vulnerable” and “Diminished Capacity”, and various statutory citations – these searches yielded virtually all the awards. We came up with 90 responses, of which there were eight “false positives”, leaving 82 actual awards to study. Of those 82, 38 cases were settled cases where the Respondent sought expungement for the registered representative, and the hearing and award only dealt with that issue. One case was a stipulated award. That left just 43 cases over five years where the Arbitrators actually issued an award on the merits.
In those 43 cases, the Arbitrators clearly sustained the “Elder Abuse” or “Exploitation” claim only 11 times. They clearly rejected the claim in 23 of the cases, and in nine cases, they issued a compensatory award but didn’t say if it was pursuant to the statutory claim. Remember, these “Elder Abuse” claims are never brought in isolation. There could be as many as a dozen other theories of liability raised, from common law negligence to traditional suitability claims. So it’s impossible to be certain as to what the basis for liability was in those nine cases. While we admit to a bit of speculation here, it is our best guess that only two of the nine cases involved a finding of “Elder Abuse,” because only one case awarded both punitive damages and attorneys’ fees, and one case allowed attorneys’ fees. Seven of the nine awarded neither, which is a sign that probably the award was based some other ground. If you add those seven to the 23 clear decisions rejecting the Elder Abuse claim, the count would be 30 rejections against 13 “Elder Abuse” awards. In percentage terms Elder Abuse claims appear to have been sustained in only 30% of the cases (13 of 43 cases) where they were brought. If you only count the clear decisions, the percentage is still only 32% (11 of 34 cases). This does not mean Claimants who included an allegation of Elder Abuse only won “something” 30% of the time, since they may have prevailed on some other claim. They actually won compensatory awards in 24 of the 43 cases (including four where the Elder Abuse claim was clearly rejected). That’s a “win rate” of 56%, in line with what we’ve been seeing for the overall universe of customer cases over the last two and a half years.
What about all those 38 settlements?
Wasn’t that an unusually high number of cases that settled when compared to the number of cases brought? Doesn’t that reflect an unusually high desire on the part of firms to settle these cases? Actually, no. The ratio of settled cases where expungement was requested to contested cases decided by award was roughly the same for these cases as it was for the overall universe of customer cases over the two and a half years we have been studying FINRA awards. And if you were to read all of the expungement decisions, you’d see that in most of the cases (35 of 38 cases where expungement was sought) the panel recommended expungement, and usually gave a pretty clear impression that if they had to decide the case on the merits, it wouldn’t rise to Elder Abuse or Exploitation. We recognize that in the vast majority of these expungement cases, the arbitrators hear only one side of the case, but given the admonitions that FINRA repeatedly issues about expungement being an extraordinary remedy, you’d think that arbitrators would think twice before recommending it. We also recognize that there may be a significant number of cases that are settled quietly, without any award, but we have no reason to believe that such settlements happen any more often than they do with other customer cases.
Why is the “win rate” so low for these claims?
It’s very hard to say. Part of it may be that Claimants’ attorneys have included such claims when there really isn’t much basis to the claim, based on technical statutory language. In Florida, for example, the definition of “Elderly Person” isn’t just about how old the person is (the minimum age in Florida to be considered elderly is 60, by the way). In order to meet the definition, the person must also be “suffering from the infirmities of aging as manifested by advanced age, or organic brain damage, or other physical, mental, or emotional dysfunctioning, to the extent that the ability to provide adequately for the person’s own care or protection is impaired.” Florida Statutes, Ch. 825, Sec. 101(4). Moreover, the definition of “Exploitation of an elderly person” is not all-inclusive – it requires the “obtaining or using…an elderly person’s…funds, assets, or property with the intent to temporarily or permanently deprive the elderly person… of the use, benefit or possession of the funds, assets or property….” Florida Statutes Ch. 825, Sec. 103(1)(a). That definition does not provide a clean “fit” with the traditional brokerage relationship, unless the broker steals money from the account (which has been known to happen).
In California, the definition of Elder Abuse is equally technical, although the only requirement to be considered elderly is that the person is 65 years old or older, and a resident of the state.
Other states have laws relating to the financial abuse of elders, but they are all over the lot. In our universe of 82 cases, 14 awards came from states other than California and Florida. But all of the 11 cases that clearly found Elder Abuse or Exploitation were from either California or Florida. As more states legislate more protections for elderly investors, this will likely change.
We think that the combination of technically-worded statutes and some over-pleading may explain why the success rate on Elder Abuse and Exploitation claims is so low. It is also true that when state legislatures first began drafting elder abuse laws many years ago, their primary concern was physical neglect and abuse, and later financial abuse, but principally financial abuse committed by relatives, fiduciaries and close “friends.” It is unlikely that state lawmakers were all that concerned about bad brokers bilking elderly clients. They probably figured that existing remedies protected all investors (regardless of age) from unscrupulous brokers. Thus, it is not all that easy to fit the typical suitability or misrepresentation case into the technical language of the elder abuse statutes. With the burgeoning retiree population, however, and more studies highlighting cognitive decline in people over 60, we may see a more direct approach by lawmakers or regulators in the future. We may also see a greater tendency to “work around” the technical requirements of these statutes, as arbitration is “equitable” in nature, after all. If a panel thinks that an older adult was taken advantage of by a bad broker, it might be easier to find, for example, that the elderly customer was “impaired” within the meaning of the statute. As illustrated below, it appears that some panels have found “elder abuse” to have been committed in cases of grossly unsuitable recommendations.
What about compensatory awards, punitive damages and attorneys’ fees? Think BIG.
Where the panel did find Elder Abuse or Exploitation (that’s 11 cases in five years, so the sample size is very small), the average compensatory award as a percentage of the compensatory damages requested was extremely high – 103% of the compensatory amount requested. This compares to an average of about 50% for customer cases as a whole, so these 11 compensatory awards were for twice as much as the average case over the last couple of years, and that is just for compensatory awards. The lowest compensatory award was for 56% of the compensatory claim. Panels also issued punitive damage awards in 8 of the 11 cases where elder abuse was found, and attorneys’ fees in 9 of the 11 cases. So, if the case is a strong case from the Claimant’s perspective, and the statutory definitions can be made to fit the facts, the likelihood of a larger-than-average compensatory damage award, a punitive damage award and an attorneys’ fee awards is high – far higher than in the overall universe of cases.
The amount of the punitive damage awards ranged from a fraction of the compensatory award to over four times the compensatory award, and the average punitive damage award equaled $952,002, which was 77% of the average compensatory award ($1,242,000 in these 11 cases). The attorneys’ fee awards in cases where they were quantified (a few were to be determined in court) averaged $188,000. The Total Recovery Rate (which combines compensatory damages, punitive damages, attorneys’ fees and costs) for these 11 cases was a staggering 322% of the compensatory claims. Even if one were to eliminate the two highest Total Recovery cases as “outliers”, the average Total Recovery Rate for the remaining nine cases would still be 249% of the compensatory claim. To give you a sense of perspective, Total Recovery Rates for all fully contested customer cases in 2015 and 2016 ranged from 60% to 73% depending on year and panel composition. A Total Recovery Rate of 322% is four to five times greater than that.
The message here is that, while Elder Abuse Claims do not prevail all that often (only about a third of the time), when they do, the combination of higher compensatory awards, punitive damages and attorneys’ fees yields average Total Recoveries of more than four times those observed for the universe of customer cases as a whole. These are cases that, when they are proved, tend to incite Panels to issue very generous awards to the Claimant.
Where abuse was found, what were the underlying facts?
Seven of the 11 cases where abuse was found involved the recommendation of investment products that were found grossly unsuitable for elderly investors, ranging from non-traded REITS, to TIC’s, to structured bank CD’s, to fraudulently represented mutual funds, real estate partnerships, variable annuities, VIX derivatives, short sales and highly speculative equities. Two involved outright theft by the broker, and one involved the recommendation to take a distribution from an IRA without warning of the tax consequences. The final one was the Trottier case discussed above. We found no cases where Elder Abuse was established where the claim was a routine suitability claim involving traditional investments and allocations. In other words, in virtually all of the cases where Elder Abuse was found, there was an aggravating factor.
In settling and mediating these cases where Elder Abuse is claimed, are there any differences from routine customer cases?
There are several. First of all, of course, one must consider the physical and mental condition of the Claimant. If the Claimant is frail and suffering from diminished cognitive ability, both conditions being progressive in nature, the brokerage firm must understand that the customer is going to be sympathetic to the panel, and the customer that the panel sees will probably be more frail and more diminished in capacity than the customer that the broker dealt with some years earlier. While that point can be made at hearing, it only goes so far. In today’s age of easy video and social media, perhaps video of a more “robust” client from happier times can be obtained either in discovery or on the internet, but tying such video to a relevant time frame may prove difficult.
Second, depending on how “diminished” the customer is, it may be necessary to have an Attorney-in-Fact (if there is one) agree to the settlement (assuming the Power of Attorney is broad enough). If there is no Attorney-in-Fact, then it might be necessary to insist that a guardian or conservator be appointed who would have the authority to settle. If you are mediating such a case and it becomes apparent to the mediator that the Claimant lacks the capacity to exercise his right of self-determination (i.e. to make free, informed and uncoerced choices as to process and outcome), the mediator is bound ethically not to mediate the case, unless someone acting under a valid Power of Attorney or a guardian or conservator exercises that right of self-determination for the Claimant. These issues must be discussed well ahead of the scheduled mediation so that a “cure” can be established.
Third, while the brokerage firm may feel that – statistically — there is only a one-third chance of the Claimant succeeding on the Elder Abuse claim, it needs to consider the other claims being asserted and the fact that the overall win rate for cases with Elder Abuse claims included is about the same as for all cases. It also needs to carefully evaluate the “elder abuse” facts, as well as the applicable statutes, because if the Claimant does win the Elder Abuse or Exploitation claim, the threat of significantly higher compensatory damages, and “add-on” awards for punitive damages, attorneys’ fees and costs is very real.
From the Claimant’s perspective, if the case has egregious facts and the facts can be folded into the statutory language, the negotiating position can be strong, but don’t let it go to your head. Remember that the number of Elder Abuse and Exploitation awards where punitive damages and attorneys’ fees have been granted over the last five years is still very small – only 11 such awards, and only 9 that included attorneys’ fees or punitive damages – that’s less than two per year. And don’t forget, the overall win rate is only about 30%.
The Bottom Line.
As always, the bottom line is that cases should settle on their merits, not on some statistical analysis. But hopefully, the parties to such cases will find the statistics and substantive considerations set forth in this article useful in assessing the merits and settlement value of any particular case.
Dana N. Pescosolido is a recently retired securities litigator with 36 years of experience. He now offers his services as a mediator of securities cases, including customer cases, departing broker cases, recruiting and raiding cases and employment cases. His website can be found at www.PescoMediation.com, and he can be reached by email at dnp@pescomediation.com.
