South Park Gnomes' Underpants Scheme Inspires FINRA Arbitration Decision

June 22, 2017

The "South Park" Mountain Gnomes have a plan to steal underpants and make millions of dollars in profits. It is a brilliant plan and carried out with great stealth. All of which reminds Blog publisher Bill Singer, Esq. (not a gnome even if he sort of looks like one, but, at least a Brad Pitt look-alike gnome) of a recent FINRA Arbitration Decision. Unfortunately, that Decision involves allegations of elder abuse, which is no laughing matter. Frankly, it's sort of pathetic that a FINRA arbitration decision would remind Bill of a cartoon but it does . . . and he's guessing that once you read today's blog that you will grudgingly agree.

Case In Point

In the Matter of the FINRA Arbitration Between Ryan Peter Trottier, Executor of the Estate of Mary Anne Trottier, Claimant, vs. Morgan Stanley Smith Barney LLC dba Morgan Stanley and Steven E. Crawford, Respondents (FINRA Arbitration 15-02910, June 9, 2017), Claimant Trottier filed the FINRA Arbitration Statement of Claim in October 2015, and sought general, exemplary, punitive, and statutory damages plus fees, costs, and interest. 

Respondents generally denied the allegations and sought the expungement of the matter from Respondent Crawford's Central Registration and Depository records ("CRD").

Case Summary

Given the unusual nature of the Trottier Decision and my desire to avoid any unwarranted editorial as to FINRA's presentation of this case, I offer this verbatim extract:


Claimant asserted the following causes of action: Breach of Fiduciary Duty; Aiding and Abetting Financial Elder Abuse (Welfare & Institutions Code §15610.30(A)(2)); Negligence; Breach of Contract; and Breach of the Covenant of Good Faith and Fair Dealing. The causes of action relate to alleged elder abuse in Claimant's account and investments in various unspecified securities and annuities.

Unless specifically admitted in the Statement of Answer, Respondents denied the allegations made in the Statement of Claim and asserted various affirmative defenses.
Respondents generally denied the allegations, asserted various affirmative defenses, and requested the expungment of the matter from Respondent Crawford's Central Registration Depository records ("CRD").  

What exactly was Claimant complaining about? What specific acts of misconduct were cited as against Respondent Morgan Stanley and/or Respondent Crawford? Surely, we can all agree that any time we see the allegation of "Elder Abuse," that it raises troubling concerns - and, as such, the mere invocation of such a horrific practice entitles any respondent the right to be confronted with the specifics and a full opportunity to clear his or her name.  

So, you tell me, confining your information about Claimant's case to the above two paragraphs, what happened? You might wonder why I am asking you to make such an inference from such a sparse recitation, one that doesn't do anything beyond its purported design as a "summary." Okay, just keep in mind my question and your response.

The Award

Keeping the importance of the allegations firmly in mind, let's jump ahead to another verbatim quote from another section of the Trottier Decision:


After considering the pleadings, the testimony and evidence presented at the hearing, and post-hearing submissions, the Panel has decided in full and final resolution of the issues submitted for determination as follows:

1. The majority of the Panel has determined that Respondents are jointly and severally liable for and shall pay to Claimant the amount of $396,623.00 in compensatory damages. Said amount was determined by adding damages ($168,000.00), 7% simple interest ($98,623.00), and reasonable attorneys' fees ($130,000.00) pursuant to California Welfare and Institutions Code Section 15657.5. No attorneys' costs were awarded. Arbitrator Priver concurs with the majority determination regarding the amount of attorneys' fees awarded only.

2. The above award of compensatory damages by the majority of the Panel is conditioned upon Claimant assigning to Respondents its rights and interest in the criminal restitution order against non-party Adam Margaros for his elder abuse against Mary Trottier (Orange County Superior Court Case Number 10HF1619). Arbitrator Priver concurs with the majority of the Panel's decision regarding the assignability of the restitution order.

3. The majority of the Panel has determined to deny Respondents' expungement request for Respondent Crawford. Arbitrator Priver dissents with respect to expungement.

4. Any and all claims for relief not specifically addressed herein, including exemplary and punitive damages, are denied.

The Majority Decision's Underpants Scheme

No, it's not you. And it's not me. It is, however, FINRA. 

FINRA has published an Arbitration Decision that goes from from Phase 1; Claimant's allegations and Respondents' defenses; to Phase 3: the Majority Decision; but without Phase 2: the underlying facts and the majority's rationale. 

The All-Public-Arbitrators Panel issued a 2:1 Majority Decision, which found Respondents liable for just shy of $400,000 in compensatory damages. The award is conditioned upon Claimant assigning the rights and interest in some criminal restitution order against Adam Margaros.

Who is Adam Margaros? No, his name does not appear in the "Case Summary." No, the Majority Decision does not offer anything about him beyond the assignment reference in the "Award."

Also, the Majority Decision denied Respondent Crawford's request for an expungement but it appears that the dissenting arbitrator favored granting that request. Why did the Majority deny the request? Again, there's nothing in the two verbatim extracts above that offers any rationale. Frankly, a FINRA Arbitration Decision is not supposed to be the same as the Mountain Gnome's underpants scheme on "South Park!"

Hamstrung Appeal

Imagine that the Claimant in this case were expecting a $1 million Award. Clearly, Claimant would be unhappy with the Award, which is less than half of that amount. Perhaps the Claimant would want to file in court a Motion to Vacate the FINRA Arbitration Decision in an effort to force a re-trial or reconsideration of the Award

What language in the Majority Decision is to be quoted in furtherance of such an appeal? 

What facts did the arbitrators get wrong? 

What legal findings were not appropriate? 

What portion of the arbitrators' rationale was flawed? 

You don't get to speculate on appeal; you're supposed to be presenting facts to a court.

Imagine, on the other hand, that the Respondents in this case were expecting a dismissal of all the claims and the recommendation of an expungement for Crawford. Clearly, they would be unhappy with the Award and the rejection of the expungement request. Perhaps the Respondents would want to file in court a Motion to Vacate the FINRA Arbitration Decision in an effort to force a re-trial or reconsideration of the Award. 

What language in the Majority Decision is to be quoted in furtherance of such an appeal? 

What facts did the arbitrators get wrong? 

What legal findings were not appropriate? 

What portion of the arbitrators' rationale was flawed? 

Again, you don't get to speculate on appeal; you're supposed to be presenting facts to a court. 

Odd, isn't it, how the exact same appellate issues come into play for either a public customer or industry parties. Having a record on appeal that provides adequate content and context is not something that favors the public customers or the industry. It is simply the manifestation of due process - it is the minimal explanation necessary in order to convey to the parties the basis upon which the findings and awards were made. From that foundation, parties may then proceed to court in order to confirm or vacate the FINRA arbitrations. In the absence of sufficient content and context so as to establish that foundation, the appeal of any party is hamstrung. 

Majority Decision versus Dissenting Opinion

When there is a dissenting arbitrator, that individual does not always write a Dissenting Opinion but may simply note the disagreement. If a Dissenting Opinion is published, that language does not technically constitute the Majority Decision but is, in contradistinction, a Dissenting Opinion. Simply because a dissenting arbitrator says that in her opinion X and Y are facts, doesn't mean that the other two FINRA arbitrators agreed or disagreed in whole or part. When a FINRA Arbitration Decision is rendered by a majority of arbitrators, it is the Majority Decision that gets appealed from. It is the Majority Decision that is the basis for a Motion to Confirm or a Motion to Vacate.  

Arbitrator Priver's Dissenting Opinion

In contrast to what I view as the outrageous lack of content and context in the Majority Decision, we have a thoughtful, expansive, and compelling Dissenting Opinion. I reprint it in full for your consideration:

Arbitrator Mark Priver concurs with the majority decision regarding the amount of attorneys' fees awarded and the assignability of the restitution order, and issues the following dissent with regard to the majority's finding of liability and expungement:

While I am sympathetic to the plight of the estate of the account holder in this case, I respectfully disagree with the fundamental outcome of this case because I do not believe it is consistent with the law, policy or the facts proven at the hearing.

In brief, the 72 year old account holder, Mary Trottier ("Mary"), died in 2014. This claim was brought by her estate on behalf of her sole designated heir, her grandson, Ryan Trottier ("Ryan") after Mary disinherited her only child, Steven Trottier ("Steven"), approximately 3 months before she died in August.  

The events giving rising to this claim occurred in 2009 and 2010 when Mary was victimized by a third party, Adam Margaros ("Margaros"), who preyed on her paranoid delusions by inducing her to spend approximately $300,000.00 on a home security system. Margaros was convicted, by plea, of Elder Abuse and Fraud in 2011. He was ordered to pay $300,000.00 in restitution and failing that was required to, and ultimately did, serve 3 years in state prison after repaying only $90,000.00.

Crawford was Mary's financial advisor at MSSB beginning in the middle of 2009. Mary's account was a straight custodial account, and held cash, securities, and annuities worth roughly $400,000.00. The evidence was uncontradicted that Mary managed her own finances, notwithstanding her delusions and later diagnosed cognitive impairments.  

Beginning in December 2009 Mary determined she needed a complex security system because of delusional beliefs she had about her neighbors. Margaros exploited those delusions selling her components of that system over a period of about 4 months that cost her roughly $300,000.00.  

The evidence established that Mary paid for that system with checks written on her MSSB account. In addition, Mary directed her financial advisor to liquidate securities and annuities in her account in order to have the cash necessary to pay Margaros.

The key issues in this case are (1) whether and to what extent Respondents owed a duty to Mary to protect her from Margaros' criminal conduct; (2) whether and to what extent Respondents breached that duty; and (3) whether and to what extent that asserted breach caused the harm Mary's estate ultimately suffered.  

Without detailing all of Claimant's theories, (but see infra at pgs. 4-5), the essence of the claim is that Respondents were obligated to protect Mary from Margaros. In substance, Claimant asks us to find that Respondents were in loco parentis to Mary. Claimant premises this request largely on a training given by MSSB on working with senior clients, and more specifically what to do in cases of suspected elder abuse. However, this training was not part of any regulation or firm policy. Rather, this training came about as a result of FINRA Regulatory Notice 07-43, published in September 2007 under the category of "Guidance." This Notice specifically provided that: "we (FINRA) are not suggesting that firms are required to take these steps . . . ." Instead, FINRA characterized its "guidance" as "matter of sound business practice and as a way of serving their senior customers . . . ." (Resp Ex. 17 at pg. 7)(Emphasis added).  

MSSB's training model implemented in 2008 appeared to adopt, nearly verbatim, the "guidance" suggested by FINRA above. In what appears to be a classic example of "no good deed goes unpunished," Claimant seeks to have Respondents held responsible as aiders and abettors of Margaros' crime of elder abuse and fraud and asks us to not only award compensatory, but also treble, damages and attorneys' fees under the Welfare and Institutions Code.  

There was no credible evidence that this "guidance" was an industry standard in general, or in particular. Thus I find it questionable that there was any legal duty on Respondents' part to do any more than they actually did, as I will talk about later.

In fact, in what appears to be a negation of any affirmative duty to protect customers from suspected elder abuse, at least at the time and in the context of the precise events giving rise to the claims here, FINRA published Regulatory Notice 15-37 proposing certain amendments to Rules 4512 and 2165. Under those amendments, a broker/dealer will have the power to, among other things, prevent funds or securities from being disbursed from a customer account where there is a reasonable suspicion of elder abuse. Indeed, this is exactly one of the things Claimant urged that Respondents should have done in this case, even though the evidence was uncontradicted that Respondents had no such authority, and were required to follow the instructions of their account holder. This conclusion is further buttressed by the fact that these amendments are not scheduled to take effect until February 2018, (Resp. Ex. 18), presumably to allow the industry time to develop appropriate policies, procedures and protocols.  

Turning now to what the evidence did show, the record was clear that beginning on or about January 21, 2010, after Mary had spent over $60,000.00 for this so-called security system (Clmt. Ex. 7), she met with Crawford to direct him to sell a portion of a mutual fund in her account to raise more cash to pay Margaros. Crawford advised her not to sell her mutual fund shares and explained the potential cost(s) of doing so. Crawford testified that Mary told him she needed the cash for a "financial emergency" which is what he reported to his Complex Risk Office when this trade apparently generated an "exception report." The evidence is somewhat unclear whether Crawford knew that Mary was spending all this money on a security system at this time, but he did testify that at a February 2, 2010 meeting with Mary he did definitely learn that these expenditures were for a security system. He testified he told her he thought she was being taken and advised her to get a relative involved and/or go to the police. She did neither and rejected the former because she had become estranged from her only son Steven for reasons that were never made clear. (Ryan, at this time, was 13 years old).  

According to MSSB's training module, based on the FINRA guidance, a potential "red flag" of financial exploitation of a senior that is relevant here, is a "[s]udden, atypical, or unexplained withdrawals or other changes in financial situation." (Clmt. Ex. 9, pg. 22). Clearly there were sudden and atypical withdrawals here. In fact, prior to Margaros' execution of his criminal scheme Mary regularly withdrew only $475.00 per month from her account.  

The relevant guidance offered by the training module in this event was that the financial adviser, here Crawford, should raise his suspicions with the "Branch Management Team or Field Services Unit of the Legal Department." Ibid. at 24. However, privacy and confidentiality rules prohibit the financial advisor from disclosing client information to 3rd parties, including family, without the client's express consent.  

Here, Crawford previously told Mary to get her son involved or go to the police. She ignored his advice-perhaps because of her delusions or her later diagnosed cognitive impairment. However, proving that she was capable of managing her own affairs, Mary ultimately went to the police on her own on July 20, 2010 (Clmt. Ex. 10). She did this when Margaros demanded she pay another $54,000.00 for the security system she then believed was not working as she expected. Her action is what precipitated the criminal prosecution. However, the formal police investigation did not start until nearly 2 weeks later on August 4, 2010.  

This is the point at which Claimant's evidence fails to prove that even if Respondents breached some duty owed to Mary, that breach actually caused her to suffer any compensable loss. Thus, if there was a duty according to the training module for Crawford to report the suspicious activity involving Mary's account to the Branch Management Team or the Field Services Unit of the Legal Department, there was no evidence whatsoever as to what either of these reporting units could or would do and, just as importantly, how long it might take them to go about doing it. Beyond that, even assuming that management or the legal department might contact a local police or social services agency, nor is there any evidence how the police or social services agency would react to a report from a financial institution who is constrained by confidentiality and privacy rules. Would they refer the institution back to the family? Tell the reporter to have the client come in herself? Tell the reporter this was a civil matter to be handled outside the criminal or social services realm? Beyond this, how long would it take for the agency taking the report to act? Furthermore, given Mary's apparent delusions, would she have resisted the intervention? If so, Claimant's expert testified that it would have been unlikely that Mary could have been subjected to a conservatorship if she resisted.  

It is sheer speculation to conclude that any report Crawford may have made to management or legal would have stopped Margaros from bilking Mary out of nearly $300,000.00 given that she had him paid almost $295,000.00 by April 6, barely 60 days after Crawford told Mary he believed she was being taken and should get her family involved or go to the police.  

There is one significant legal issue that needs to be addressed to further explain my disagreement with the Award. In particular, Claimant principally contends Respondents are liable to his grandmother's estate under the Elder Abuse Statute, specifically for "assisting" Margaros in his scheme to defraud Mary. Claimant asserted in closing that Respondents can be liable under Welfare & Inst. Code Section 15610.30(b). He relies principally on CACI 3100 to support this claim but this jury instruction does not address the potential liability of an alleged assister.1 Rather, this instruction is tailored to subsection (b) which only defines the circumstances under which the person or entity taking the elder's property can be found to have acted wrongfully. There was no evidence here that Respondents took, wrongfully or otherwise, any of Mary's property. Thus:

b) A person or entity shall be deemed to have taken . . . property for a wrongful use if . . . the person or entity takes . . . the property and the person or entity knew or should have known that this conduct is likely to be harmful to the elder . . . . (Emphasis Supplied)  

This subsection does nothing to explain the potential liability of one who "assists" the person or entity engaged in Elder Abuse, and there was no evidence here that Respondents took, wrongfully or otherwise, any of Mary's property.

Rather, the liability of an assister derives under subsection (a)(2) as follows:

"Financial abuse" of an elder occurs . . . when a person or entity does . . . the following:   
(2) Assists in taking, secreting, appropriating, obtaining or retaining . . . property of an elder . . . adult for a wrongful use or with intent to defraud or both.  

Subsection (b), and the corresponding CACI Instruction, relied upon by Claimant to prove Respondents "assisted" Margaros, does not in fact assist them. If it did, "assister" liability based loosely on what a person or entity "should have known" would be unusually broad exposing any person or entity, including friends, relatives, public agencies and even law enforcement, to liability under the Elder Abuse Statute, apart from any immunity otherwise granted by the law.  

No case law appears to define the scope of liability of an alleged "assister," and the only case that is close is Das v. Bank of America, 186 Cal.App.4th 727. In that case, the Court of Appeal held that the liability of an "assister" is dependent on proof that the wrongdoer aided and abetted the commission of an intentional tort. In the case of a financial institution that provides "ordinary services" that effectuate financial abuse by a third party, the institution can only be held liable as an assister if the aggrieved party proves that the financial institution actually knew of the third party's wrongful conduct. Id. at 744-45.  

Respondents here did nothing more than provide ordinary financial services to Mary-specifically taking her orders to buy and sell securities and providing check writing facilities. The evidence did not in any way prove that Respondents actually knew of Margaros' wrongful conduct. At most, they had reason to believe that Mary was being "taken advantage of" but not sufficient to show that Respondents were  capable of doing anything about it, as explained above. Imposing liability on Respondents in this case, including treble damages and attorneys' fees would be tantamount to making them a guarantor of Mary's financial well-being from the wiles of criminal actors. This outcome would be neither fair nor equitable in the circumstances.  

For these reasons, I dissent.  

FOOTNOTE 1  The explanatory paragraph following paragraph 5 in CACI 3100 does not express that a plaintiff can prove the liability of an "assister" by showing that person knew or should have known that the actor's conduct (here Margaros) was likely to be harmful to the plaintiff. In fact, the word is "assist" is not used anywhere in this paragraph. However, Claimant's version of this explanatory paragraph provided to the panel in closing does

Bill Singer's Comment  

As a lawyer who represents both industry and public-customer clients, I came away from Trottier with an immense appreciation for the dedication with which Arbitrator Priver handled his role. His Dissenting Opinion is compelling -- and all the more so because it is essentially an echo that emanated from silence. 

I also came away from the Decision with anger and frustration that FINRA would not have requested that the majority draft a more expansive exposition of their findings and rationale so as to appropriately respond to the Dissent.  Pointedly, I am not blaming the two arbitrators in the majority for a lackluster effort; I am, however, pointing the finger at FINRA for a horrific sense of what is required in a decision addressing serious allegations of elder fraud, particularly given the dramatic nature of the Dissenting Opinion. If, in fact, the majority wished to adopt the fact pattern set forth in the Dissenting Opinion, then the Majority Decision should have so stated or, preferably, offered its own findings of fact and rationale.

READ the Full-Text FINRA Arbitration Decision