An irreverent Wall Street Blog
Veteran Sues USAA Investment Mgmt Over Alleged Mental Disability
September 7, 2017
A military veteran opens an account with a broker-dealer and allegedly informs the firm that he has a disability. Apparently, this veteran customer incurred some losses in his account and alleges that the brokerage firm should have known that his disclosed disability was mental in nature and precluded his ability to competently manage his account. Even after you read the FINRA Arbitration Decision, you're still going to be thinking about the facts and issues in this dispute.
Case In Point
Respondent USAA Investment Management generally denied the allegations and asserted various affirmative defenses.
Decision
The sole FINRA Arbitrator denied Claimant's claims in their entirety. The FINRA Arbitration Decision offers this thoughtful rationale:
Bill Singer's CommentIn the most cogent way, the decision in this arbitration is based entirely on the fact that the Respondent, USAA, did not break a formal rule of FINRA, specifically it was alleged USAA violated the know your client rule, # 2090, and/or the suitability rule, # 2111.USAA did offer other defenses: specifically (1) that a Texas decision expressly found in a fact pattern USAA believes met the facts in this instant case and this Texas decision directly supports USAA's innocence in the instant controversy, and (2) USAA argued that the Brokerage Account Agreement, expressly contains a provision that holds USAA harmless as to allegations made by the client, Claimant. For the following reasons, the Arbitrator finds these two arguments by USAA to be of questionable persuasion. The Texas case, Jones v. Fletcher, 975 S.W. 2d 539 (1998) often refers to a "client's competency" and then also refers to the age of the client as the Fletcher case dealt with a very elderly person. This Texas case is certainly of some interest in deciding this arbitration, but Texas is not the only law that should be considered. Even though the USAA Client Agreement, demands Texas law be applied, this Client Agreement could easily be attacked as a contract of adhesion given how it was imposed on the Claimant as explained by USAA's witness's testimony during the hearing.For the same diminished importance of the USAA Client Agreement on a basis of a contract of adhesion, the Arbitrator finds the sweeping indemnification and other claims of non-responsibility too broad to warrant a basis for denying the Claimant any redress for the same rationale many states have anti-indemnification statutes. Again, the sole reason for finding for the Respondent is that USAA did not violate the know your client rule and did not violate the suitability rule. Specifically, FINRA Rule 2111, suitability, refers to 'a recommended transaction', and in this controversy, there were no recommendations made by USAA. Also, given the limited role USAA played because of the limited demands on USAA by the Claimant when he opened his USAA account, USAA did adequately know its client and therefore met the limited demands set out in FINRA Rule 2090. Taking all of the parties' versions of the facts testified to, including information presented in each parties' Post-Hearing Briefs, there simply is no way for the Arbitrator to reasonably extrapolate the fact believed by the Arbitrator that the Claimant told USAA that he had a disability into what the Claimant desires, that USAA should have reasoned its client had a mental defect. Thus, USAA did not violate either FINRA Rule 2090 or 2111.To provide some specifics to this decision based on the testimony at the hearing, the Claimant said clearly and repeatedly that he verbally informed USAA from the beginning that he had a disability in explaining his leaving the investment industry. However, the Claimant was also very clear and remembered vividly that he did not tell USAA from the beginning that he suffered from a mental disability. It seems very convincing to the Arbitrator that as USAA deals with mostly Armed Forces veterans, and here Claimant testified to his lengthy service in the Armed Forces, USAA could have reasonably concluded that the Claimant suffered from a physical disability rather than a mental disability. Therefore, for someone in the USAA organization hearing a client has a disability does not mean the absolute, very first assumption is that the disability is PTSD or some other mental infirmity. Accordingly, it seems logical to conclude that USAA reasonably knew its client given these facts in this arbitration.Finally, if the Claimant is taken at his word solely, and it is assumed [solely for this discussion and not a finding of the Arbitrator] that USAA had a duty to further investigate what exact disability Claimant had, it is further noted that Claimant had this disability during the successful trading events he had with USAA from July 2015 to July 2016 as well as during the unsuccessful trades. If, as the Claimant alleges, USAA should reverse the losses from the bad/losing trades, then logic would dictate that the winning/successful trades were also done under the same disability and these gains should be reversed and the gains offset the losses. This calculation was not offered by either party and is only identified here by the Arbitrator as a matter of logic and not as any grounds for this decision. To state for the third and final time in this short explanation of the Arbitrator's decision, the Respondent is found to owe the Claimant nothing in damages of any kind and the hearing costs are divided equally between the parties and each owes their own representation costs because USAA did not violate either the know your client rule or the suitability rule or any other rule.
For further reference, see: Edward D. Jones & Company and Delmar "Bo" McKinney, Petitioners, v. Pat Fletcher, Independent Executrix of the Estate of Beatrice Clark Cairns, Deceased, Respondent (Opinion; Supreme Court of Texas; No. 95-1344; 975 S.W.2d 539 / May 8, 1998), which states in its Syllabus:
The principal question in this case is whether a stockbroker has a legal duty to ascertain an elderly person's mental capacity before assisting her in transferring stock. Because the law already affords protection to incompetents through guardianships and by making their agreements voidable, we decline to create a duty to refrain from dealing with an elderly person without first determining the person's mental competence. Consequently, we reverse the judgment of the court of appeals, ___ S.W.2d ___ (per curiam), and render judgment for defendants.
I want to compliment the sole FINRA Arbitrator for providing us with a very thoughtful and insightful rationale. Frankly, the core issue of whether a broker-dealer is aware of or on notice of a customer's alleged mental disability is an important topic for discussion within the FINRA community. Not only do questions of competency arise with the growing population of aging Baby Boomers but as demonstrated in this case, the concern arises with other groups.
In walking a treacherous tightrope, the FINRA Arbitrator examines the fulcrum where a stockbroker is not and is on "notice" that a customer may have a so-called mental disability. That tipping point is a troubling one because associated persons employed at FINRA member firms are not medical or psychiatric professionals. Similarly, Wall Street must be careful that it is not refusing to open accounts or accept orders from folks who are legally competent to manage their financial affairs. Not all mental disabilities rise to the level of incompetency to handle one's financial affairs. Similarly, not all mental disabilities may be apparent, especially to laypersons. Regardless of where you come down on that spectrum of concern, this case should be applauded for shedding light on a very important societal issue.
The FINRA Arbitrator made the fair point of distinguishing the FINRA Arbitration from the Jones v. Fletcher lawsuit based, in part, upon the lack of "elderly" status in the former. Moreover, as to the application of Texas law urged by USAA and the basis for referencing Jones v. Fletcher, the Arbitrator raised the dramatic question as to whether the Client Agreement imposing the application of Texas law was a contract of adhesion. In understanding the facts at issue in the arbitration and the legal bases on which the case is premised, we are first confronted with one of the most jaw-dropping assertions that I have ever seen in any FINRA customer arbitration Decision:
[E]ven though the USAA Client Agreement, demands Texas law be applied, this Client Agreement could easily be attacked as a contract of adhesion given how it was imposed on the Claimant as explained by USAA's witness's testimony during the hearing.
As to the application of Texas law urged by USAA and the basis for referencing Jones v. Fletcher, the Arbitrator muses as to whether the Client Agreement imposing the application of Texas law was a "contract of adhesion given how it was imposed on the Claimant." Unfortunately, the Arbitrator doesn't specify the circumstances by which the Client Agreement was "imposed" upon Claimant. As a result, I'm wondering why the Client Agreement wasn't deemed an unenforceable "contract of adhesion." Keep in mind that the Arbitrator stated that the Client Agreement "could easily be attacked." Given the ease of attack noted, why didn't the Arbitrator conclude that the agreement was unenforceable? Accordingly, why would FINRA even have jurisdiction of this dispute if the mandatory arbitration clause was embedded in a contract of adhesion? I am not suggesting that the Arbitrator got anything wrong but am merely troubled by the sense that we are left to flounder.
Among another of the more jaw-dropping findings that I have ever seen in any FINRA customer arbitration Decision:
[T]aking all of the parties' versions of the facts testified to, including information presented in each parties' Post-Hearing Briefs, there simply is no way for the Arbitrator to reasonably extrapolate the fact believed by the Arbitrator that the Claimant told USAA that he had a disability into what the Claimant desires, that USAA should have reasoned its client had a mental defect. Thus, USAA did not violate either FINRA Rule 2090 or 2111. . .
[C]laimant said clearly and repeatedly that he verbally informed USAA from the beginning that he had a disability in explaining his leaving the investment industry. However, the Claimant was also very clear and remembered vividly that he did not tell USAA from the beginning that he suffered from a mental disability. It seems very convincing to the Arbitrator that as USAA deals with mostly Armed Forces veterans, and here Claimant testified to his lengthy service in the Armed Forces, USAA could have reasonably concluded that the Claimant suffered from a physical disability rather than a mental disability. Therefore, for someone in the USAA organization hearing a client has a disability does not mean the absolute, very first assumption is that the disability is PTSD or some other mental infirmity. Accordingly, it seems logical to conclude that USAA reasonably knew its client given these facts in this arbitration.
As I parse through that language, I start from the perspective that the sole FINRA Arbitrator apparently believed that the Claimant did, in fact, tell USAA that he had a "disability." Beyond that point, we seem to proceed along a path on which Claimant argues that the brokerage firm was on reasonable notice that the defect was "mental" in nature. Respondent apparently contested that conclusion and may have argued that it thought the disability was "physical." The Arbitrator believed that Claimant had a defect but the Arbitrator was not persuaded by the evidence presented at the hearings that said defect was of a "mental" character. Okay, fine -- but maybe the Arbitrator could have told us just what kind of defect he thought Claimant had or what he found that USAA believed.