Are You A Financial Advisor With A Wrongful Termination or Defamation Claim?

           Advisors terminated by their broker-dealer should immediately retain experienced legal counsel.

The broker-dealer has 30 days after termination to file the mandatory U-5.  Legal counsel can help you negotiate fair and accurate language for this critical and potentially public disclosure.  Moreover, how the U-5 is completed above and beyond the narrative “reason for termination” can be pivotal.

          Many advisors fail to appreciate that, for the most part, their broker-dealer can terminate them without cause.  But there are contractual and public policy exceptions to this general rule that must be evaluated.  Cosgrove Law Group has extensive experience working with financial advisors who have been terminated, including not just U-5 issues, but also issues such as promissory notes and other compensation matters.

It’s 10 O’clock – Do You Know Who Your Beneficiaries Are?

           Having a will is an important step in directing what is to happen to your assets when you die. Ensuring all of your accounts have current beneficiary information properly submitted is also key. Financial accounts and insurance policies provide the option to list beneficiaries. Even if you do not have a will (Call us!), you have the opportunity to add beneficiary information to your financial accounts.

            Estate of Finley v. Allen, 2024 WL 2484466 is a good reminder that the step of adding or updating beneficiaries should be made thoughtfully and sooner rather than later.  In Finley, the Appellate court concurred with the trial court in finding for the listed beneficiary despite Ms. Finley sending an email three days before her death requesting the grandson be removed as beneficiary.  According to the Court:

“On January 19, 2022, Ms. Finley designated her grandson, William C. Finley, II, (“William”), as the sole beneficiary of her … retirement plan accounts (collectively referred to as “the accounts”) held by the investment firm Morgan Stanley Smith Barney (“Morgan Stanley”).  The beneficiary designation was accepted by Morgan Stanley after Ms. Finley completed the proper paperwork and it was received by Morgan Stanley per the terms of the TOD agreement.

On May 9, 2022, Ms. Finley emailed her Morgan Stanley financial advisor, Rick Morgan (“Mr. Morgan”), seeking to revoke William’s designation as sole beneficiary, and designating in his place her daughters Ingrid Allen (“Ingrid”) and Ilse Dehner (“Ilse”) as beneficiaries.  Mr. Morgan attempted to contact Ms. Finley to discuss her request, but was unsuccessful.  Ms. Finley died three days -2- later on May 12, 2022, having not submitted the TOD beneficiary designation form to Morgan Stanley.

Ilse was designated as executrix of Ms. Finley’s estate.  She presented a proposed final settlement to the Scott County probate court, in which she designated herself and Ingrid as beneficiaries of Ms. Finley’s Morgan Stanley accounts.  According to her counsel, she did this to carry out her mother’s wishes as evinced in Ms. Finley’s email to Mr. Morgan.

As a result, Ingrid and William filed the instant action … against Ilse, the estate, and Morgan Stanley seeking a declaration of rights.  They asserted in relevant part that Ms. Finley’s apparent attempt to change the beneficiaries on her account was not successful because she did not comply with Morgan Stanley’s requirement that a change of beneficiary form must be properly submitted and received before it is given effect.  Ilse counterclaimed, arguing that Morgan Stanley breached its contract with Ms. Finley by failing to carry out her request to change the beneficiaries.

The matter … [culminated] in the order granting William and Ingrid’s motion for a declaratory judgment.  The court ruled in relevant part that Morgan Stanley had specific requirements to change beneficiaries; that Ms. Finley was aware of those requirements and had complied with them when designating beneficiaries in the past; that her email to Mr. Morgan did not substantially comply with the requirements; and, that the failure to comply resulted in William remaining as beneficiary at the time of Ms. Finley’s death.”

            Despite Ms. Finely’s attempts to change the beneficiary back to her daughters, the courts held that the proper process was not followed and that “although the disposition in her will could constitute evidence of her subjective intentions, the making of the will was not enough to comply with the policy’s procedures.”

            While the standard of review for this matter relied upon Kentucky and New York law only, it is a good reminder to double-check who you have listed as the beneficiary on your financial and insurance accounts. Putting thought into this now and making sure you understand the beneficiary change process at your respective financial and insurance providers may very well save loved ones from contentious legal wrangling and ensure your wishes are properly recorded and followed.

DOES YOUR FINANCIAL ADVISER HAVE PROFESSIONAL LIABILITY INSURANCE?

Believe it or not, your trusted financial adviser is only human. He or she can make a very costly mistake despite his or her best intentions. Perhaps you have taken comfort in the fact that your adviser, whether a registered representative or an investment adviser representative, has a company with whom they are affiliated. Surely the company has insurance, right? Well, I have more bad news for you – that company might not have an errors and omissions policy either, particularly if they are a small outfit.

Our advice is that you ask to receive a copy of your advisor’s policy at the beginning of your relationship. If your advisor does commit a negligent or even fraudulent act – consult with an attorney experienced in such matters. You may wish to confirm that an insurance policy is in place before you proceed with expensive litigation. And if you are an uninsured adviser that made a mistake, you should seek legal counsel immediately. Food for thought.

CAN A FINANCIAL ADVISER BE SUED BY A NON-CLIENT FOR NEGLIGENCE?

The answer to that question is “probably.” At least in Missouri, New York, and Iowa.

            Missouri courts apply a balancing test when determining if a “non-client” intended beneficiary of professional services can sue for negligence despite a lack of privity. The leading case in Missouri, at least as to accountants, is Aluma Kraft Manufacturing Co. V. Elmer, 493 S.W.2d 378(1973). The Aluma court stated: 

“The determination of whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of several factors: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to him; (3) the degree of certainty that the plaintiff suffered injury; and (4) the closeness of the connection between the defendant’s conduct and the injury suffered. Westerhold, supra, 419 S.W.2d at 81. We believe that these policy factors are satisfied with this case.” 

Aluma at 383. The court relied in part upon a New York accountant case, quoting the infamous Justice Cardozo.

The same principles of non-privity professional liability have been applied to attorneys in Missouri. See Donahue v. Shugart, 900 S.W.2d 624 (Mo. 1995). In Donahue the intended beneficiaries of a decedent’s trust that was declared invalid brought a legal malpractice and breach of fiduciary duty claim against the decedent’s attorneys. Id. At 626. Prior to the decedent’s death he directed Stamper, his attorney, to ensure that a specified sum of monies from his trust account be paid to Mary Donahue and Sundy McClung upon his death. Id. at 625. Donahue and McClung were not beneficiaries of Stockton’s trust. Id. Stockton also directed Stamper to prepare a deed to his home transferring a fifty percent interest in the home to Mary Donahue, effective on Stockton’s death. Id. Upon learning that Stockton’s death was imminent, Stamper sought advice from others in his law firm on how to make the checks and deed effective in accordance with Stockton’s wishes. Id.

Stamper attempted to effectuate the transfers, but they were later declared to be invalid by the Missouri Court of Appeals. Donahue, 900 S.W.2d at 625. The Court determined that the plaintiff’s breach of fiduciary duty claim was properly dismissed as being “dependent on the existence of attorney negligence, not on the breach of trust” because the conduct complained of was merely negligence in the performance of legal services. Id. at 630. 

But the Donahue court stated that the “Determination of whether attorney owed legal duty to non-clients so as to be liable to non-clients in legal malpractice action is determined by weighing factors in balancing test, including: existence of specific intent by client that purpose of attorney’s services were to benefit plaintiffs, foreseeability of harm to plaintiffs as result of attorney’s negligence, degree of certainty that plaintiffs will suffer injury from attorney misconduct, closeness of connection between attorney’s conduct and injury, policy of preventing future harm, and burden on profession of recognizing liability under circumstances. Pleadings were sufficient to establish that attorneys owed duty to non-clients who were intended recipients of client’s gifts causa mortis.”

Finally, the Supreme Court of Iowa applied these same basic principles to an insurance agent to allow a non-client to proceed against the agent. There is no reason to believe that the courts would not apply the same public policy to financial advisers and the intended beneficiaries of their services. Food for thought.