In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claimfiled in February 2010, Claimant Sunrise Trust asserted that Respondents McElroy and Morgan Stanley had been negligent and had breached their fiduciary duty when they failed to properly monitor the trust's investments in various securities. Claimant sought at least $125,000 in compensatory damages, punitive damages, interest, costs, and expenses. At the close of the hearing. Claimant changed the total amount of compensatory damages requested to the difference between Claimant's "total loss" and the amount awarded in a criminal case involving a former trustee of Claimant. In the Matter of the FINRA Arbitration Between The Sunrise Trust, Claimant, vs. Timothy Frank McElroy and Morgan Stanley & Co. Incorporated, Respondents (FINRA Arbitration 10-00638, March 12, 2012).
Respondents generally denied the allegations and asserted various affirmative defenses. Respondent McElroy requested an expungement of the arbitration from his Central Registration and Depository record ("CRD").
At the hearing, Claimant's representative, Susan King, "accused those present of causing major stress to her health." After she presented her closing statement but before Respondents presented their closing, King left the hearing.
Revolving Door of Lawyers
Initially, Claimant Sunrise Trust was represented by David Liebrader, Esq., who withdrew as counsel around December 13, 2010. Counsel Liebrader was replaced by Roger P. Croteau. Esq., who withdrew around March 31, 2011. Counsel Croteau was replaced by Joseph S. Fogel, Esq., who withdrew around February 20, 2012. . Thereafter, Claimant was represented by Ms. King.
This FINRA Arbitration Panel has provided us with a concise and, frankly, intriguing, rationale for its Decision, so I will step back and let the arbitrators speak in their own words:
1. Susan King, the Grantor, hired and appointed Allen Spaulding to be the Trustee of the Trust. Ms. King gave Mr. Spaulding full authority to administer and invest the assets of the Trust.
2. In October 2005, Mr. Spaulding opened an account with Morgan Stanley & Co. Incorporated in the name of The Sunrise Trust. He was the sole account holder. Mr. Spaulding misappropriated money from the Trust. Found guilty, Mr. Spaulding was sentenced to prison and ordered to repay the Trust.
3. Claimant attempted to prove that Respondents had a legal duty to monitor Mr. Spaulding. The Panel found that Mr. Spaulding, the account holder, had a fiduciary duty to the Trust and Ms. King, not the Respondents.
4. Claimant's claims against Respondents are dismissed as they owed no legal duty to Claimant to monitor Mr. Spaulding's failure to administer the Trust assets.
5. Claimant failed to state claims upon which relief could be granted.
Given the findings noted above, the FINRA Arbitration Panel dismissed with prejudice Claimant's claims. The Panel recommended the expungement of Respondent McElroy's CRD, which the arbitrators justified as follows:
The Claimant had set up the Trust outside Morgan Stanley & Co. Incorporated and gave the Trustee responsibility to Mr. Allen Spaulding. In October 2005, Mr. Spaulding opened an account with Morgan Stanley & Co. Incorporated in the name of The Sunrise Trust. He and he alone, was the sole authorized account holder.
Over time Mr. Spaulding looted the Trust and was tried, found guilty of theft, and sentenced to prison. Mr. Spaulding was ordered to repay Ms. King some $82,000.00.
Not sure she could collect from Mr. Spaulding. Ms. King came after the Respondents for the full amount of her losses, saying Morgan Stanley & Co. Incorporated and Timothy Frank McElroy had a fiduciary duty to protect her assets by monitoring what she referred to as "her account." Ms. King asked for her total losses in the Trust from Morgan Stanley & Co. Incorporated and Timothy Frank McElroy.
The fiduciary duty belonged to Trustee Spaulding and not the Respondents.
Bill Singer's Comment
Here's one FINRA Arbitration Panel that earned its keep. A thorough presentation of the facts. A superb statement of rationale. As much as I'd like to make some clever remark or add some brilliant insight, these arbitrators have taken the pen from my hand. This is a rare Decision that stands on its own. Great job!