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.

2018 FINRA Exam Report: Does Your Investment Portfolio Need a Legal Audit?

The Financial Industry Regulatory Authority (“FINRA”) released its 2018 Examination Findings Report on December 7, 2018.  This examination report recounts specific areas in which FINRA members are not measuring up to industry standards.  So, if your investment advisers just sent to you statements for your investment portfolio and you think perhaps it’s not what you expected, then it may be because they engaged in some of the substandard practices as identified by FINRA in this report. And if you have those concerns, then it may be advisable to have a legal audit of your investment portfolio performed by experienced securities industry attorneys.

Two significant areas that require better accountability in the industry as highlighted by FINRA in its 2018 report are (1) product suitability and (2) abuse of authority.  Product suitability is just what it sounds like.  FINRA observed that investment representatives continue to make unsuitable recommendations to retail investors based on a number of factors, including the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives and perhaps most importantly liquidity needs.  And there are legal standards that apply to these factors. Time and time again, for example, investment advisers put their clients into long-term investments that makes them unavailable for their customer’s short-term needs.  If you think this applies to you, then you should have a legal audit conducted on your investment portfolio.

Abuse of authority is also just what it sounds like, namely customers give registered representatives authority to act on their behalf and these advisers exceed that authority.  This is usually seen in the form of unsuitable or excessive trading, which FINRA observed in its report   as a problem that continues in the industry.  For example, FINRA found “situations where some firms or registered representatives exposed investors to unnecessary risks and firms had not established controls – including those to comply with obligations under FINRA Rule 2510 (Discretionary Accounts) – to mitigate those risks.” Those risks included some registered representatives exercising discretion in their customer accounts without the customer’s prior written authorization, exercising discretion after the authority to do so had expired, and having customer’s sign blank suitability or new account forms.  And, even if you provide authorization for your representative to engage in discretionary trading, you should still have your accounts reviewed at frequent intervals.  Again, if you think this may apply to you, a legal audit conducted on your investment portfolio may uncover abuse of authority by your investment adviser.

If you need a legal audit conducted on your investment portfolio, then you may wish to consult with experienced counsel at Cosgrove Law Group.

Author: Brian St. James

REPRESENTING ELDERS AND ATHLETES

It wouldn’t seem likely that elders and athletes would have much, if anything, in common.  But they do.  They are frequently blessed with substantial semi-liquid assets, and are therefore the targets of fraudulent or reckless investment schemes.

Much has been written about why professional athletes are frequent victims.  And the last professional athlete I represented possessed many of the following common attributes:

·         Young and inexperienced with finances;

·         Rapidly accumulating substantial wealth;

·         Easily identified as a person with substantial wealth subject to potential investment;

·         Highly focused on meeting the demands of a career requiring singular attention, frequent travel, and unplanned relocations.

As a result, the media is littered with accounts of massive investment losses suffered by current and former athletes.  Some of the statistics are shocking.  For example, from 1999-2002 78 NFL players lost over $40 million to fraud.  According to a Sports Illustrated article, approximately 60% of NBA players are “broke” within five years of their retirement from the league.  And in 2014 former Yankee star Jose Pasada sued two financial advisers that allegedly bilked him of $11 million through real estate and hedge-fund investments.

The National Football League Players’ Association took action in 2002 and created a Financial Advisors Program. The Program required advisers to apply and be screened for approval for inclusion in the program.  But it was not sufficiently robust.  For example, just a few years after the program was initiated, an approved financial adviser lured several active players in to a hedge fund.  The players lost almost $20 million and the adviser was convicted of securities fraud and money laundering.  Moreover, some approved advisers use their NFLPA registration as a marketing tool.  One even suggests that their athlete clients can be free of financial distractions while the adviser constructs a “bulletproof” financial retirement plan.  That type of pitch seems to encourage the very characteristics that lead to the financial victimization of athletes.  Laurence Landsman wrote an excellent article that was published in the National Sports Law Institute’s Journal in 2010.  He called for reforms to the NFLPA program.  And the NFLPA made them in 2012.  Now when will the NBA, NHL, and MLB get on board?

There are strong parallels between the methodology and prevalence of financial exploitation of athletes and elders.  Our firm has represented several elder investors over the years.  And all of us are former securities regulators that witnessed the pace and pattern of financial elder abuse.  Elders frequently have a large accumulation of wealth available for investments, and they are prone to over-trust and over-rely on their financial advisers.

In 2012 Stephen Dunn published in Forbes a list of do’s and don’ts for professional athletes.  They are, however, equally applicable to our elders.  Just a few of them are:

·         An adviser’s trustworthiness is paramount;

·         Invest with advisers associated with a well-established firm;

·         Don’t pretend you are a business mogul.  Kurt Schilling’s saga may be a good tale of caution, and;

·         Avoid complex investment schemes.

And I have one final self-serving but sound piece of advice:  retain an attorney that is independent of your financial adviser and who is also sophisticated in investment matters.  That attorney should be called upon to interface with your adviser and help you evaluate the wisdom and risk of your adviser’s proposals, background, etc.  Food for thought.

1.  https://www.sec.gov/news/pressrelease/2016-83.html
2.  ESPN's "Broke" : https://www.youtube.com/watch?v=Elfw0ESih-A

Court of Appeals Takes Away Realty Company's Victory

Five years after the collapse and bankruptcy of DBSI, Inc., the Maryland Court of Appeals reversed a trial court's dispositive ruling in favor of a realty company that exposed its client to a TIC¹ investment. The Plaintiff was a retired school teacher that reinvested $4 million in proceeds from the sale of various rental properties. In doing so, he sought to take advantage of Section 1031 of the Internal Revenue Code regarding “like-kind exchange property.”

Judge McDonald's opening line to his opinion dispels any suspicions that he ruled in favor of the Plaintiff/Cross-Appellant based on sympathy:

It is sometimes the case that an individual bent on avoiding taxes exchanges the certainty of the tax liability for a risky, and perhaps fraudulent, investment that proves more costly in the long run. The instant litigation arises out of such a situation.

2013 WL 6182531 (MD.2013) at 1.

Despite this mild contempt for the transaction at issue, the Court proceeded to evaluate the characteristics of the transaction in determining that it qualified as an investment contract under the Howe test. As such, it qualified as a security under the ambit of the Maryland Securities Act (pp. 5-9).

But it was not all good news for the investor. The Court concluded that the common law statute of limitations did not supersede the limitations provision set forth in the Act. As such, the investor's claims for violations of the Act's unregistered securities and unregistered broker-dealer provisions were time-barred. But all was not lost. The Court concluded that the investor's claim for fraud in the offer or sale of a security was tolled by a fraudulent concealment statute extraneous to the Securities Act. Moreover, it concluded that whether or not there was, in fact, fraudulent concealment sufficient to toll the statute of limitations was dependent upon a “fact-intensive injury” preclusive of summary judgment².

Finally, the Court concluded that Mr. Mathew's claim for a violation of the Securities Act's unregistered investment adviser provision, as well as his common law tort and contract claims, were also subject to preservation by the fraudulent concealment statute. (CJ Section 5-203). Whether or not these claims were actually preserved (tolled) would be up to a jury.

This case provides an example of why:

1. Investors should seek legal counsel as soon as they suspect something is amiss with one of their investments, and
2. Where appropriate, the court petition or arbitration statement of claim should include both statutory and common law claims.

______________________________________________________________

1TIC is an acronym for “Tenants in Common Interests.” I previously served as an expert witness in a DBSI TIC suitability arbitration.

2“Whether a plaintiff's failure to discover a cause of action was attributable to fraudulent concealment by the defendant is ordinarily a question of fact to be determined by the jury.” Matthews v. Cassidy Turley Maryland, Inc., 2013 WL 6182531 (MD.2013) at 14.

SECURITIES REGULATORS DISCUSS ENFORCEMENT STATS AND TRENDS

State securities regulators' enforcement efforts were robust in 2010, according to a panel of regulators at NASAA's annual conference last week. Cosgrove Law, LLC provides both civil and criminal representation in the securities and white-collar arena, so it was interested to learn that there was a substantial increase in criminal prosecutions filed by securities regulators in 2010. For “non-fraud” cases, the regulators scored themselves a 32% increase in “failure to supervise” actions, but filed fewer “suitability” actions.

Other interesting statistics: almost half of the state regulators' enforcement actions were brought against non-registered persons in 2010. As for registered individuals, 12% of those actions were brought against investment adviser representatives (IAR's) and 23% were filed against broker-dealer agents. 5% were brought against registered solicitors, and the balance fell upon insurance industry members. The regulators continued to express ire over insurance industry members dually licensed as investment advisers with what they perceive to be an excess concentration or focus upon annuity sales.

Notably, today's Wall Street Journal has an interesting Adviser Alert that shares an important observation: investment advisers are “among regulators' best tipsters.” In our experience, reputable advisers are also likely to recommend legal counsel to new clients whom they observe to have been victimized by their prior broker or adviser or insurance agent. Food for thought.