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.

D.C. Circuit Court of Appeals Considers Whether Stanford Fraud Victims are “Customers” under the Securities Investor Protection Act

Despite the famous R. Allen Stanford Ponzi scheme being unraveled in early 2009, the past two weeks have been important for the victims of the fraud who are still trying to recover their financial losses.  On October 7, the Supreme Court heard arguments on whether the Securities Litigation Uniform Standards Act precludes investors from bringing state law claims against third-party entities who allegedly participated in Stanford’s fraudulent scheme.  For further discussion on that topic, click here. 

Yesterday, the SEC argued in front of the D.C. Circuit Court of Appeals seeking to overturn a District Court’s ruling that barred the agency from ordering the Securities Investor Protection Corp. (“SIPC”) to compensate victims of the Stanford Ponzi scheme.  SIPC is a congressionally chartered corporation that oversees liquidation of failed brokerages and may also pay investors’ claims for missing money or securities through an industry-financed fund.    

Since the CD’s at the heart of the Ponzi scheme were marketed to investors by Houston-based Stanford Group Company (“SGC”) – a broker dealer registered with the SEC and SIPC – in 2009, the court appointed receiver of Stanford’s companies asked SIPC to evaluate whether the customers of SGC were entitled to SIPC’s protection.  SIPC declined to file an application for protective decree because it concluded that SGC did not perform a custody function for the customers who purchased CD’s from the Antigua-based Stanford International Bank (“SIB”) which was not a member of SIPC.  However, in 2011, the SEC issued a formal analysis disagreeing with SIPC’s position and filed an application in District Court ordering SIPC to meet its obligations. 

This is the first time the SEC has requested a court to force SIPC to extend its coverage.  During the proceedings in the District Court, the key issue was whether persons who purchased CD’s from SIB were considered customers of SGC within the meaning of the Securities Investor Protection Act.  SIPA defines “customer” as follows:

(A) IN GENERAL

The term ‘customer’ of a debtor means any person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.

(B) INCLUDED PERSONS

The term `customer' includes—

(i) any person who has deposited cash with the debtor for the purpose of purchasing securities;…

SIPCs argued that although many of the victims purchased the foreign CD’s through SGC, the victims ultimately entrusted their money with SIB which was not a member of SIPC.  Furthermore, investors received disclosures explicitly telling them the Antiguan bank was not SIPC-protected or regulated by the U.S. 

The SEC, however, argued that the location of the Stanford bank is irrelevant because Stanford’s entire business organization was operating one massive fraud, and that no actual certificates of deposit truly existed.

The District Court found that since SGC never physically possessed the investors’ funds at the time of the purchases, the investors were not customers of SGC under the literal construction of the statute.  Click here to review the court’s opinion.   

During oral arguments in front of the D.C. Circuit, much of the hearing was consumed by discussion and debate over the legal definition of “customer” and whether the SEC can force SIPC to construe that term to include victims of a collapse that involves both member and non-member companies.  Just like the highest court last week, the Circuit judges gave no clear indication of how they will rule. 

A few former SEC commissioners filed a friend of the court brief urging the Circuit to uphold the lower court’s ruling because an “unwarranted expansion” of the term “customer” has the potential to substantially increase SIPC’s exposure and could threaten its ability to function as Congress intended.

In sum, the rulings of the Supreme Court and the D.C. Circuit Court of Appeals will both have a substantial impact on the victims’ chances to recover their losses.