Lawrence, Kamin, Saunders & Uhlenhop

Lawrence Kamin Secures Verdict, Rare Costs Award for Brokerage Firm
Meticulous Reconstruction Secures Defense Verdict Despite Critical Internal Memorandum

Principal Attorneys
Charles Risch
John Monical
Paul M. Weltlich

Situation
An international consumer products company’s stock increased more than 20-fold during the 1980s and 1990s; the value of many long-time employees’ retirement accounts holding the stock exceeded $1 million. Thinking they had reached their “magic number,” many employees chose to retire early, often before reaching age 55. A registered representative offered to prepare detailed financial plans, at no charge, demonstrating how they could finance their retirements. Many of the individuals ultimately opened accounts through this registered representative.

Following the down markets of 2000-2003, a group of these customers filed a consolidated statement of claim in arbitration against the registered representative’s brokerage firm, alleging that the registered representative’s financial plans were overly optimistic, misleading the claimants into retiring early and that the registered representative and brokerage had invested in unsuitable, speculative securities. Claimants sought in excess of $6.0 million in compensatory damages and an unspecified amount of punitive damages.

Challenge

The brokerage firm’s records held an internal memorandum that included negative comments about the representative’s customized financial plans written before the claimants had become customers. Since the firm’s files contained no memorandum specifically responding to or detailing any follow-up to the criticisms, we anticipated that claimants would heavily rely on the internal memo to claim that the firm knew that the financial plans were improper from the outset.

Our case investigation determined that the registered representative’s financial advice was sound, as all of the claimants’ accounts were diversified and had out-performed the market as a whole. Indeed, at the hearing, claimants’ counsel virtually abandoned his suitability claims, shifting to a theory that the brokerage and representative fraudulently induced the clients to retire through the use of the financial plans criticized in the memo.

Thus, the case boiled down to one key question – what had the firm done in response to the criticisms of the internal memo?

Solution
Developing a defense of the financial plans initially seemed daunting in the absence of documents explicitly setting forth rebuttal or other follow up to the memo’s criticisms. By the time the case was filed, neither the memo’s author nor his immediate supervisor were still employed by the firm; other employees of the brokerage firm could not specifically recall what steps the firm had taken to address the memo.

We initiated a broad reconstruction effort – reviewing every remotely related document we could find. We created a timeline from fax cover sheets, phone message slips and fragmentary handwritten notes and compared that timeline with every subtle change in format and language that appeared in each example of the financial plans used by the registered representative. We identified, and could demonstrate, how issues raised in the memo had resulted in communications that resulted in tangible changes to the financial plans. Armed with this timeline and the supporting documents, we re-interviewed the witnesses, who were then able to piece together memories of meetings and discussions between the Representative and his branch manager, the branch manager and his supervisors, and the branch manager and headquarters compliance personnel. With this testimony, we were able to prove that, in response to the memo, the firm’s management suspended the Representative’s use of the financial plans until they were reviewed, and required changes to the form and language of the plans. Only after these changes were made was continued use the financial plans approved by the firm.

Some criticisms leveled in the memo did not result in changes to the financial plans. We were able to demonstrate that these unaddressed criticisms were unfounded. The memo, for example, called the representative’s financial projections “crystal ball gazing.” We proved that the projections tracked the results of commonly available tools for retirement planning, including the retirement planning calculator available for individual use on the official NASD Web site. Furthermore, we were able to produce evidence that the financial plan recommended by the representative provided the firm and broker lower levels of compensation than plans promoted by the claimants in retrospect. Taken as a whole, we were able to conclusively discredit the idea that the firm failed to appropriately address all the relevant issues raised by the memo.

Outcome
After seventeen days of hearing—12 days for Claimants’ case, 4 for our case, and a day for closing arguments—an NASD panel of three arbitrators denied all claims against the brokerage firm. In a rare award, the panel also held the Claimants jointly and severally liable for the $43,200 in forum fees that remained due to the NASD.

Lessons Applied
Any potential evidence, no matter how inconsequential at first glance, may be an essential piece of the case. Handwritten notes, fax cover sheets, and phone message slips, when connected to changes appearing in the financial plans, proved that our client had fully addressed the memo. With them, we defused a document that otherwise would have undercut the defense.