Newman Trowbridge, Jr. was a customer of Capital One Investment Services, LLC, which is a broker-dealer and a member of the Financial Industry Regulatory Authority ("FINRA"). Rick E. Schenck, Sr. was a Capital One broker assigned to Newman Trowbridge, Jr.'s account.
In 1994, Trowbridge opened an Individual Retirement Account (IRA) at Capital One's predecessor-in-interest through a previous stockbroker. Thereafter, the account was assigned to Schenck, who in industry parlance is said to have "inherited" the account. The named beneficiary of Trowbridge's IRA account was his then-wife.
In 1999, the Trowbridges divorced after a protracted, bitter and acrimonious lawsuit. After the divorce, Trowbridge remarried and changed the beneficiary of several of his accounts (including his law firm's profit sharing plan) to his estate.
SIDE BAR: After the divorce, Trowbridge remarried - so please distinguish between his "ex-wife" and "wife." Moreover, keep in mind that after the divorce, Trowbridge changed the designated beneficiary for several of his accounts and added his estate as the replacement. Critically, among those accounts for which he designated his estate as the new beneficiary was his law firm's profit sharing plan.
Trowbridge was considered an experienced attorney who made his own business decisions and seemed to largely call his own shots. Based upon those facts, it seems likely that he had a plan to restructure his holdings, beneficiaries, and estate. It also appears that he undertook steps towards achieving his desired goals.
After Trowbridge was divorced, after he remarried, and after he had changed beneficiaries on a number of his accounts in favor of his estate, Trowbridge then rolled the balance of the law firm's profit sharing plan into his IRA. This roll-over quadrupled the balance that had been in the IRA account.
Upon his untimely and unexpected death in 2009, Capital One paid the IRA account balance to Trowbridge's ex-wife, who was still named as beneficiary.
SIDE BAR: No, that wasn't my typo. The IRA account's beneficiary when it was established at Capital One was Trowbridge's then-wife, who subsequently became his ex-wife. For whatever reason, Trowbridge never deleted the ex-wife as the named beneficiary in the IRA account. Given all the known facts and circumstances, this seems to be a classic oversight.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2010, the Estate of Newman Trowbridge alleged that among other things, Respondents were guilty of negligence and a breach of fiduciary duty when they failed to advise Trowbridge to designate Lee Trowbridge (apparently, his surviving spouse in contradistinction to his divorced, ex-wife) as the IRA beneficiary in order for his wife Lee to be recognized by Respondent Capital One as the owner or beneficiary of his IRA account.
Claimant sought ;at least $184,321.43 plus interest of ;nearly $9,000 ;in compensatory damages, attorneys' fees of $25,000.00, costs of $16,425.00, and additional damages as may be reasonable and appropriate. In the Matter of the FINRA Arbitration Between Succession of Newman Trowbridge, Jr. through its Executrix, Lee Trowbridge, Claimant, vs. Capital One Investment Services, LLC, and Rick E. Schenck, Sr. Respondents (FINRA Arbitration 10-02435, May 9, 2011).
The Respondents generally denied the allegations and asserted various affirmative defenses.
Claimant contended that Trowbridge's widow (also the estate executrix) presented Respondent Schenck with a court Order requiring that all account holders pay funds over to the estate; however, notwithstanding the Order, Respondents paid the funds to Trowbridge's ex-wife. In pertinent part, the Order states:
It is further Ordered . . . that all banks, . . . or investment companies, . . . firms, [and] corporations . . . having in their possession any monies, stocks . . . or other rights or things of value, for and in the name of the decedent . . . are . . . directed to deliver and transfer [such things] . . . which form a part of the estate of the decedent . . . to the heirs of the decedent . . . (italics added)
The Respondents argued that the IRA passes outside of the estate (similar to a life insurance policy) and, as such, was not covered by the Order.
The FINRA Arbitrators noted that although the Order expressly lists six accounts to be paid over (including Trowbridge's regular investment account with Respondents), the disputed IRA account was not listed in the Order. Moreover, the Panel determined that Respondents' payment of the IRA to the ex-wife did not constitute a breach of the Order or of any duty that might have arisen from from Respondents' knowledge of the Order.
In keeping with the securities industry's Know Your Customer Rule, the Claimant argued that Respondents had a duty to periodically review Trowbridge's accounts. Claimant suggested that such a review should have included a consideration of named beneficiaries in order to ensure that such were consistent with any changed circumstances in Trowbridge's life. As such, if Respondents had discharged the duty that Claimant asserted existed, the inconsistent naming of the ex-wife as the IRA beneficiary would have become apparent to the Respondents and the ex-wife would not have benefited from the dramatic increase in value when Trowbridge rolled the proceeds of his profit sharing plan into the IRA account.
Notwithstanding Claimant's creative theory, the arbitrators found "little support in law for such a general duty as that argued here, and even if such duties might arise in some special circumstances, those circumstances don't exist here."
In underscoring its ruling, the Panel noted that Respondent Schenck testified that he seldom heard from Trowbridge except when the client made his annual IRA contribution, and then Mr. Trowbridge generally would issue specific instructions as to investment of the funds contributed. Moreover, the Panel noted that:
The testimony is that Mr. Trowbridge was an intelligent, experienced, active and astute lawyer; Mr. Trowbridge had little contact with Respondent Schenck, making his own investment decisions and issuing instructions to Respondent Schenck; and, Mr. Trowbridge did not ask for such an undertaking from Respondents and indeed Respondent Schenck was only generally aware "through the grapevine" of events in Mr. Trowbridge's life. Respondents were not Mr. Trowbridge's agents in this regard, nor did Mr. Trowbridge expect that they would act as such, and we cannot fault Respondents for not realizing what Mr. Trowbridge himself did not. ; A copy of the initial IRA beneficiary designation was found in Mr. Trowbridge's papers after his death.
The Panel affirmed its understanding that Trowbridge had no children and fully appreciated from the facts and circumstances of the arbitration that Trowbridge likely had no intention whatsoever of making his ex-wife the beneficiary of his IRA account. However, the Panel placed the blame for such a failed designation of beneficiary squarely upon Trowbridge. The Arbitration Panel was unconvinced that Respondents had breached any cognizable duties to the Claimant.
Consequently, the FINRA Panel dismissed Claimant's case and recommended that the matter be expunged from Respondent Schenck Central Registration Depository ("CRD") records.
SIDE BAR: Compliments to this FINRA Arbitration Panel for a lucid statement of facts and providing a compelling rationale for its decision. Job well done!