Reader Faces FINRA Arbitration From Heirs for Risk-averse Investing, Asks How To Choose Right Lawyer
Mention a Midwestern farming community and idyllic images of tractors, barns and two-story houses surrounded by endless fields come to mind. Despite the romantic notions of farming, those communities face troubles, such as this year’s extreme drought, and trouble sometimes arrives in an unexpected form.
Today we bring you a question from a reader that originates in just such a farming town. The reader says a couple in the farming supply business always instructed their advisor to invest conservatively. Then, says the reader, the couple passed away and left their investments to their adult children. Those heirs filed for FINRA arbitration against the advisor because the low-risk investments didn’t grow enough to suit them.
After describing the situation, the advisor asks for guidance in choosing the right attorney.
We asked Scott Matasar of Matasar Jacobs, an expert in financial advisory law, to answer the reader’s question. Matasar’s practice areas include securities litigation defense, securities enforcement defense, recruiting and transition of financial advisors, and internal investigations.
Without further ado, the reader’s question is here:
Recently two of my clients passed away within a year of each other – a married couple from a small Midwestern town about 70 miles from the large town where my solo practice is located. The couple built their farm supply business from the ground up, putting three children through college.
Those three children – none of whom are my clients and all of whom live in large cities in other states – have now filed for FINRA arbitration against me through the estate of the wife, who passed away this summer.
The couple worked through tough times in the farming industry that shaped their conservative views on investing – they prioritized return of their capital over return on their capital. I tried many times to convince them otherwise, but documentation standards weren’t as high back then, so much of this advice wasn’t documented.
I have no doubt I abided by their wishes to the end, and despite the low-risk nature of their investments, they left a large inheritance to their children.
After their passing, their children “calculated” how much my clients “should” have made since they started with me in 1988 and, needless to say, if you apply market standard, age-appropriate levels of risk, you can easily fabricate projections of how wealthy they “should have been.” The children claim that amounts to over $2 million extra.
I asked my IBD for some attorney referrals and they kindly obliged. If I lose this case, I’ll lose everything I’ve worked for all these years, so I’m frozen with fear that I will pick the wrong one. Can you tell me how to choose the right attorney?
Matasar: First, I want to express my sympathy that you’ve found yourself in this frustrating and difficult situation. I can only imagine how upsetting it feels to face potentially ruinous litigation costs and this threat to your career, after having spent years doing exactly what your actual clients wanted.
But do not despair – things are not nearly as bleak as they seem, and it appears from your fact pattern that you have some good defense arguments.
First, the children cannot collect damages under a model of what they think the accounts should have earned if the accounts were invested “properly” for the past 30 or more years. FINRA’s Eligibility Rule cuts off all claims that are older than six years.
Even if the children had a basis to sue – and I don’t think they do – their claim must be capped based on the difference between how the accounts performed and how they think they should have performed for that period. But more importantly, it’s very likely the arbitrators will determine that you are not liable because the kids were not your clients.
Your suitability analysis and the advice you gave the parents is informed by a career of working with them – what they told you about their risk tolerance and objectives. The consistency of the way in which the portfolio was invested over time is proof in itself that the parents – your actual clients – were aware of and agreed with the strategy you implemented with them.
But this doesn’t solve your immediate problem – how to find the “right” lawyer to represent you. I recommend a two-step screening process. First, you need to find candidates with the necessary expertise. Then, you must determine which lawyer offers the best personality fit. I’ll address each in turn.
For starters, don’t fret over the idea that there is some perfect lawyer out there for your case. There are sure to be several qualified lawyers in your city – or the largest city in your state. The leads your IBD gave you are an excellent place to start.
Review their biographies on their firm websites: Is financial services litigation and regulatory work a focus of their practice, or one of numerous advertised areas of practice? Then interview each of them, listening equally to what they say and how they say it.
Ask how focused their practice really is on financial services litigation. How many FINRA arbitrations have they completed? How many went to the hearing (as opposed to settling)? However, asking how many suitability cases they’ve defended may not be a good indicator – given how well the markets have performed over the last decade, very few investor cases have been filed unless the fact pattern involved sales practice violations or outright fraud.
Getting a clear picture of whether the lawyer regularly handles matters in your industry, or just dabbles, is a key component to the hiring process.
Once you’ve found several qualified candidates, it’s time to move on to the second factor: fit. Even under the best of circumstances, dealing with this litigation is going to be one of the more stressful events of your career.
When examining the finalists, consider this: Did they communicate clearly? Did they answer your questions, or did they get annoyed? Does the way in which they spoke give you confidence? Also consider the old saying: 90% of communication is non-verbal.
Even when they’re qualified, not every lawyer you interview will be the right fit for you and your personality. Listen to your instincts about how you felt after each call and select the one with which you felt the most comfort and confidence. You’ll work together frequently over the coming months, and you don’t want to second-guess your choice.
James Miller, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com