Broken hearts are the stuff of great literature and music. Wives scorned. Husbands betrayed. The inspiration for many a page-turner and heart-rending ballad. On the other hand, failed relationships are also the source of devious plots to get back or get even or get out of town. In a recent FINRA arbitration, an ex-wife apparently cleaned out her husband's IRA account. No easy task when you consider all the pages of new account forms the husband likely signed when he opened his account and thought that Wells Fargo had constructed a veritable fortress around his savings. Problem was, someone had dropped the drawbridge and drained the moat.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2015, Claimant Schroeder Claimant asserted causes of action including breaches of contract and fiduciary duties and negligence in connection with his claim that Respondents had:
allowed his ex-wife to change the address of record of Claimant's IRA account without proper authorization in August of 2001. Claimant alleged that, after that date, he did not receive any monthly statements and this allowed his ex-wife to illegally withdraw $317,077.88 from Claimant's IRA account through forged signatures and falsified documents. Claimant further alleged that Respondents never contacted him in order to verify or question his ex-wife's authority to engage in those transactions, and, accordingly, are responsible for any losses that occurred.
Claimant sought $317,077.88 in compensatory damages plus punitive damages, interest, attorneys' fees, and costs.
In the Matter of the FINRA Arbitration Between Mark A. Schroeder, Claimant, vs. Wells Fargo Advisors, LLC, Wells Fargo Financial Network, LLC, First Clearing, LLC, Sean Douglas Harman, Jeffrey Paul Holloway, Timothy Lee Tadlock, and Holloway and Harman Capital Management, LLC Respondents(FINRA Arbitration 15-00074, June 16, 2016).
Respondents generally denied the allegations in the Statement of Claim and asserted various affirmative defenses. Also, Respondents requested that the Panel recommend the expungement of this arbitration case from Respondents Harman, Holloway, and Tadlock's Central Registration Depository records ("CRD"); and, at the evidentiary hearing, Respondents requested a similar expungement recommendation for unnamed party Kirk D. Ward ("Ward").
Motions to Dismiss
After the parties' presentation of evidence, but prior to the closing arguments, Respondents made an oral motion to dismiss Claimant's claims, to which Claimant objected. Following its deliberation on the motion, the FINRA Arbitration Panel found a lack of evidence that the moving parties were involved in the alleged violations and dismissed Claimant's claims as against all Respondents with the sole exception of Respondent Wells Fargo Advisors, LLC.
The FINRA Arbitration Panel found Respondent Wells Fargo Advisors, LLC liable to and ordered it to pay to Claimant:
$317,077.88 in compensatory damages; and
$106,692.62 in attorneys' fees
Following its conduct of a recorded, in-person expungement hearing at which Claimant Schroeder appeared but raised no objection to the requested expungment, the FINRA Arbitration Panel recommended the expungement of the CRD of Respondents Harman, Holloway, Tadlock, and unnamed party Ward. In addition to noting that there was no settlement agreement among the parties, the Panel found that:
none of the evidence presented, either oral or documentary, indicated any such involvement by Harman, Holloway, Tadlock, and Ward . . .
In offering its rationale for recommending expungement, the Panel explained that:
Numerous questions by the Panel and Respondents' attorney to the Claimant and Claimant's counsel for evidence of involvement and fault by Harman, Holloway, Tadlock, and Ward drew only the response that their names appeared on periodic account statements.
Respondents' expert witness testified that the appearance of Harman, Holloway, Tadlock, and Ward's names on the account statements was required and did not evidence any involvement or duty on the part of Harman, Holloway, Tadlock, and Ward.
Further, when counsel for Claimant was asked to respond to the argument in favor of expungement, he declined to respond, and thus raised no objection to such expungement. This was after the close of evidence by all parties during arguments on the motion to expunge.
Bill Singer's Comment
First and foremost, my sincere compliments to this Panel for providing us with sufficient content and context to make sense of the issues in this arbitration.
Among the more common topics covered over the years by the BrokeAndBroker.com Blog are allegations of wrongdoing by one spouse against the other: sometimes the disputes involve spousal customers and sometimes its a complaint involving a registered representative who is a spouse -- there's more than enough marital unhappiness to cover the Wall Street bases.
One aspect of Schroeder that puzzles me is the disclosure of some information not provided in the FINRA Arbitration Decision but does appear in an entry by Wells Fargo on FINRA's online BrokerCheck as of June 23, 2016:
PLAINTIFF ALLEGES FA MADE MISREPRESENTATIONS BETWEEN AUGUST 2001 AND FEBRUARY 2010. ARBITRATION CLAIMANT ALLEGES THAT BETWEEN AUGUST 2001 AND JULY 2010 HIS NOW EX-WIFE WAS ALLOWED TO WITHDRAW MONEY FROM HIS IRA WITHOUT HIS KNOWLEDGE OR CONSENT
The FINRA Arbitration Decision also asserted that the ex-wife's improper withdrawals began after August 2001 but it is only in BrokerCheck that we learn the end date of that fraud was purportedly July 2010. Nine years of unauthorized withdrawals from an IRA account is one hell of a long time, particularly when the defrauded account-holder asserts that the withdrawals were done "without his knowledge or consent," and all the more so because three independent arbitrators seem to have agreed with that assertion.
Consequently, I truly would have appreciated some presentation of the mechanics by which the wife managed to escape detection and why the arbitrators did not deem the nine-year lapse as raising questions about whether Claimant Schroeder "should have known" or "should have inquired." To be clear, to be very clear, it seems beyond dispute to me that the three arbitrators absolutely accepted Claimant's version of the events and that, in fact, his ex-wife engaged in surreptitious and fraudulent conduct that concealed her withdrawals from his detection. My issue is that we don't learn as to how she actually pulled off that feat over such a long period of time.
The FINRA arbitrators largely accepted Claimant Schroeder's version of events because they awarded him every penny of damages that he sought plus attorneys' fees. The cascade of woe alleged by Claimant appears to have started when someone allowed his ex-wife to improperly change the address of record for his IRA account. It's not clear whether Claimant's wife was a current or ex at the time that she had the address changed but, frankly, that status would not have mattered all that much in most cases. Wherever the miscue is best placed -- with the servicing stockbroker or an assistant or someone in the back-office -- the simple fact is that absent a valid written authorization from the IRA account holder, you don't go into the brokerage firm's database and alter the address of record. Few issues can cause more damage than changing a customer's address.
Claimant alleged that once his address had been changed, he didn't receive any monthly statements. In and of itself, the lack of the receipt of snail mail doesn't always pose a major problem because many accounts today are "paperless" and statements are digitally transmitted; on top of that, many customers routinely log on to their brokerage accounts and view or download various statements and documents. Notwithstanding our digital world, in the case of Claimant Schroeder's account, the failure of Wells Fargo to send monthly statements via postal mail to his address of record seems to have laid the groundwork for his ex-wife to forge his signature and submit "falsified documents." Also, keep in mind that back in 2001 when the fraud began, many folks were more dependent upon snail mail than today.
If Claimant had, in fact, gotten his account statements via snail mail, he might have noticed unauthorized activity in his IRA account and could have been alerted to his ex-wife's forgery and theft. On the other hand, that "if" didn't occur and Wells Fargo lost the ability to argue that Claimant was on notice of his ex-wife's misconduct because the firm could not produce proof that it had mailed the alerting statements to the husband's address of record because, to make matters even worse, it was the firm itself that allowed the diversion of its client's mail in response to the improper directions emanating from the wife. Talk about one helluva a compliance and litigation headache!
One last quibble, the nature of the falsified documents used by the ex-wife is not set forth in the FINRA Arbitration Decision. In other cases that I am familiar with, they often include authorizations to buy and/or sell, to liquidate an account, to wire proceeds to a designated third-party, and so on. It would have been educative and prophylactic for industry compliance staff and besieged spouses to have learned the mechanics of this fraud and forgery.
In recent months the press had reported about the unsavory side of FINRA expungements. There is merit in many of those complaints but there is also some Street-savvy lacking in some articles to the extent that reporters feel that the entire expungement process is bogus and simply a way for the industry to wrongly sanitize records. As demonstrated in Schroeder, there are cases where folks have had their records and reputations dinged for less than compelling and often unfair reasons. I compliment the arbitrators for doing what appears to have been the right thing for the unfairly named and the unnamed parties.
READ these BrokeAndBroker.com Blog articles involving spouses: