Dementia At Issue In Wells Fargo Arbitration

November 2, 2016

The more I re-read a recent FINRA Arbitration Decision involving Wells Fargo, the angrier I become. The case raises questions about the duty of care that is owed to elderly customers by their brokerage firms and servicing financial professionals. As chillingly suggested in this litigation, the compliance credo of one of FINRA largest member firms seems to be something along the lines of: Don't look for trouble and, if you're lucky, you won't find it. Sadly, the Decision fails to present many underlying facts and is largely devoid of any rationale. In the end, perhaps these failures are not the fault of the arbitrators as much as FINRA's culture of benign neglect, which fails to ensure quality control.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2015, the Claimant Estate asserted
  • breaches of contract and fiduciary duty; 
  • unsuitability; 
  • failure to supervise; 
  • fraud; 
  • negligent misrepresentation; 
  • negligence; 
  • constructive fraud; and 
  • violations of the South Carolina Uniform Securities Act, Missouri Securities Act, and FINRA rules. 
The causes of action related to Claimant's investments in Coca-Cola and Verizon Communications stock. Claimant sought unspecified compensatory damages, punitive damages, attorneys' fees, costs, interest, and a disciplinary referral. In the Matter of the FINRA Arbitration Between Estate of Daniel Drummond, Claimant, vs. Wells Fargo Advisors, LLC and Charles Burgess James, III, Respondents (FINRA Arbitration 15-00235, October 24, 2016).

Respondents Wells Fargo and James generally denied the allegations and asserted various affirmative defenses. Respondents sought the expungement of this matter from Respondent James' Central Registration Depository records ("CRD")


By a 2:1 majority, the FINRA Arbitration Panel found Respondent Wells Fargo liable to and ordered it to pay to Claimant $5,987.75 in disgorged charged fees with 7.5% per annum interest from January 20, 2015 through the date of the award. The FINRA Arbitration Decision explains that:

Respondent Wells Fargo is liable by reason of its failure to provide adequate supervision of the customer's account.

Additionally, the FINRA Arbitration Panel denied the requested expungement of Respondent James' CRD.

Bill Singer's Comment

If the inadequacy of the majority's Decision is not readily apparent to you, it should be after you read the Dissent below and consider some of my research findings. The somewhat modest award of about $6,000 overshadows the more serious issues at stake in this dispute -- particularly those pertaining to what the Decision asserts was Wells Fargo's "failure to provide adequate supervision." To understand the extent to which we are left hanging, see if you can come up with answers to these basic questions:

What did Claimant allege that Respondents had improperly done or not done?

Why did the majority find that Respondent Wells Fargo had failed to adequately supervise the Claimant's account but made no finding of liability whatsoever as to Respondent James?

Since the arbitrators did not find Respondent James liable, why did they decline to recommend expungement?

Given the finding of inadequate supervision, why was there not award of punitive damages?

Given the finding of inadequate supervision, why didn't the Panel refer this matter to FINRA for a regulatory investigation as was requested by Claimant?

Let me make my position here very clear: I am not arguing whether the majority or the dissent got the ultimate decision in this case right. Given the sparsity of facts and rationale in the Decision, I lack sufficient information to form an intelligent opinion. That being said, a very thoughtful Dissent provides an admirable amount of content and context. If nothing else, the Dissent should have compelled (perhaps "shamed"?) the two majority arbitrators into revising their draft and including further facts and rationale, if only in rebuttal.

The Dissent

I commend the full-text Dissent to your consideration and take note of the many issues that are raised in her presentation but absent from the majority's Decision:

Arbitrator Dana Tait Sandlin's Dissenting Opinion, which does not reflect the views of the other arbitrators:

Charles James, III is a lifelong resident of the rural town of Sumter, SC, population 41,000, and home to a large military retirement population. He acted within his knowledge and regional culture to the best of his ability to meet the needs of his clients. He was following his training from Series 7 training, when he chose to allow continual and substantial unsolicited account withdrawals by Mr. and Mrs. Daniel Drummond in the final 2.5 years of Mr. Drummond's life. This training instructs brokers to refuse to allow investors to make investments of cash, if they are detected to have a mental deficit. It does not allow brokers to deny access to an investor's cash/IRA reserves, by an investor or long-term wife, during the final years of their lives. Mr. James testimony is that he was unaware of Mr. Drummond's dementia/Alzheimer's diagnosis in the final years of his life.

However, there was not one piece of evidence of supervision of the case files of Mr. James, III, by any supervisor of Wells Fargo. There was no testimony re: management supervision; no supervisor appeared at the hearing; and no supervisory notes were presented for over a 10 year case file history. This is a serious concern. While FINRA Regulatory Notice 15-37, Financial Exploitation of Seniors and Other Vulnerable Adults, went into effect after its comment period in November 2015, and was not in effect during Mr. Drummond's lifetime, there is still a strong presumption that cases involving older adults (and, indeed, all investors, regardless of age and medical history) need stockbroker management supervision. Management supervision has long been in effect and an internal mechanism in all brokerage houses. It is the way in which errors are caught and contained early in a file's history. No such supervision appears to be present in this case from the testimony and evidence presented.

I believe that had such supervision been in place and working properly, with supervisory comments in the case file on a regular basis, that Mr. Drummond's medical deficits might have been detected. It is a concern (although no law was broken) that no one in the firm laid eyes on Mr. Drummond in person for a 2 1/2 year period. I would suggest that all brokers would be prudent (and perhaps should be required by a new rule) to have a once a year meeting with all of their clients in person (or at least via Skype if living in different cities) especially with seniors, who might very well be exploited by any close family member. This could help in detecting health issues that are declining in nature and could require closer scrutiny through the supervisory process. It is a concern that Mr. James, III stated that he has another 324 clients and that many of those cases are retired military veterans, in their senior years. Others may have medical issues that may affect their financial judgements that are going undetected.

Investors hire Wells Fargo to help 'manage' their accounts, and they pay fees for that 'management'. If they did not want some management help, they could open an account with an online broker and make their own trades. Part of that management help includes face-to-face meetings and supervision of case files. Wells Fargo was negligent in its duty on this account.

As for the missing $525,000.00 (approximate) from the Drummond IRA accounts and Coca Cola Stock sales: this money was placed into the sole bank account of Daniel Drummond. The Bank account was under the entity of Wells Fargo Bank and they are not a party to this proceeding. Mrs. Drummond was a 20 year spouse of Mr. Drummond. She was the sole beneficiary on the IRA. She was a joint account holder on the account used to sell the stock. She cared for Mr. Drummond in the final years of his life and she took on all of the expenses for such care. No one from the family appeared on a regular daily, weekly, or monthly basis to provide familial support and care to Mr. Drummond, even though everyone knew his medical condition and knew that he was dying. While family dysfunction may be to blame for this in part, it is still a duty of a son to appear for his father in the final moments (if not months or years) of his life. Mrs. Drummond used the funds for Mr. Drummond's needs and, quite possibly, her own needs. Absent finding Mrs. Drummond (she did not appear before this panel) and finding what else, if anything she used the proceeds for, I cannot attach a finding of legal fraud, nor award damages in this matter.

A client with dementia/Alzheimer's? A missing $525,000?? Why was there no mention of those facts in the majority's Decision?

Kudos to arbitrator Sandlin for this observation in her Dissent :

[N]o one in the firm laid eyes on Mr. Drummond in person for a 2 1/2 year period. I would suggest that all brokers would be prudent (and perhaps should be required by a new rule) to have a once a year meeting with all of their clients in person (or at least via Skype if living in different cities) especially with seniors, who might very well be exploited by any close family member.


According to online FINRA BrokerCheck  records as of November 2, 2016, Respondent Wells Fargo characterized the allegations in the customer's complaint and arbitration as follows:


I can't even begin to fathom why the majority's Decision failed to characterize the pending claim as one in which the key accusation was that the registered representative allowed the decedent's wife to make unauthorized withdrawals. That allegation isn't even noted in the majority's recitation of facts. Beyond merely listing the causes of action, the Decision's only explanation about the dispute was that it involved Coca-Cola and Verizon stock.

State Court

Prior to becoming a FINRA Arbitration, this dispute was originally filed in as such: Daniel Christopher Drummond, as Personal Representative of the Estate of Daniel D. Drummond, Plaintiff, v. Wells Fargo Advisors, LLC and Charles Burgess James, III, Defendants (Order Granting Defendants' Motion to Compel Arbitration and Stay Action; South Carolina Court of Common Pleas, Third Judicial Circuit, 2013-CP-43-1888,  December 1, 2014). In its Order, the Court concluded that Plaintiff-Decedent Drummond's "IRA Custodial Agreement" executed on May 1, 2006 was enforceable and required that the dispute be remanded to FINRA Arbitration. As noted in the Order:

The issue of the decedent's competency was raised at the March 18, 2014 hearing in reference to his ability to enter into and be bound by the arbitration agreement provision contained in the "Client Agreement" executed by Plaintiff-Decedent Daniel D. Drummond on November 24, 2009. While evidence was presented that calls into question the Plaintiff-Decedent Daniel D. Drummond's ability to enter into a binding contract in 2009, the Court finds that the 2006 agreement between the parties is binding and at that time his competency was not in question. As a successor-in-interest to the 2006 agreement, the defendants are entitled to enforce the arbitration provision therein, therefore rendering the question of the enforceability of the 2009 agreement moot.