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I'm Jeff Sonn, an attorney concentrating on securities fraud and consumer class actions. I use this blog to bring attention to regulatory filings involving financial advisors, current events in securities and cases in the financial services industry, and to help investors understand their rights and options for financial recovery. Questions? Contact me online or call anytime at 844-689-5754

Elder Abuse Issues and The Securities Industry

This scholarly article was written by Jeffrey Sonn, Esq., Jennifer P. Farrar, Esq., and Kirk Reasonover, Esq. It contains over 6,000 words and would certainly not be described as a “quick read”.

If you or a loved one has suffered investment losses related to elder financial abuse, we invite you to contact our office to discuss your case, free of charge.

What do President Bush, Reggie Jackson, Dolly Parton and Steven Spielberg have in common? They are all baby boomers that will turn 64 this year — part of a huge trend you might call “the graying of America.”2

A government report shows that fewer than one in five men 65 and older were part of the labor force in 2003. In 1950, nearly half the men that age were still working. The report, “65+ in the United States: 2005,” was commissioned by the National Institute on Aging and compiled by the Census Bureau.

Women are working in much larger numbers earlier in life, but among those 65 and older, their participation in the labor force has remained steady at around 10 percent since 1950.

“Not too long ago, people, particularly men, worked until they were physically unable to work,” said Robert Friedland, director of the Center on an Aging Society at Georgetown University.

“Now, people have a period of time to which they are looking forward.”3 Friedland also noted that $1 million in a retirement account isn’t that much to live on if you expect be around another 20 or 30 years. “If you leave the labor force thinking you have plenty and then realize that you don’t, then you are stuck,” Friedland added.4

As baby boomers and other investors age, elder abuse cases for securities arbitration practitioners will only increase in number. This article is to highlight legislation and other sources of standards of conduct that relate to elder abuse. Clearly, there is evidence that brokerage firms are aware of the issue, and have even issued alerts to management and financial advisors to be on the lookout for customers whose mental faculties are dimishing, or changes in health that may affect their ability to make rational decisions, which sometimes allows brokers or third parties to take advantage of an elderly person suffering from dimished capacity.

This article will discuss some of the existing elder abuse legislation, FINRA notices, and other sources of standards created to combat elder abuse.

A. Federal Legislation – No Private Cause of Action Yet

Although there is no private cause of action for financial abuse or exploitation of an elder under federal law, there are some related features of federal law which warrant brief comment both as background, and fodder for ideas.

The Elder Justice Act, signed into law by President Obama in March 2010 as part of the Patient Protection and Affordable Care Act, is the first federal elder abuse prevention law.5 The Elder Justice Act provides federal resources to “prevent, detect, treat, understand, intervene in and, where appropriate, prosecute elder abuse, neglect and exploitation.”

The Elder Justice Act also establishes the Elder Justice Coordinating Council, which is responsible for coordinating activities related to elder abuse, neglect, and exploitation across the federal government, as well as identifying and proposing solutions to the problems surrounding elder abuse, neglect and financial exploitation.

The Council is a permanent group and meets approximately twice per year, and has invited public comments regarding its proposals for federal action.6

In addition, Section 989A of the Dodd-Frank Act directs the Bureau of Consumer Financial Protection to establish a program to provide grants of up to $500,000 per fiscal year to individual states to investigate and prosecute misleading and fraudulent marketing practices or to develop educational materials and training to reduce misleading and fraudulent marketing of financial products toward seniors. Seniors include anyone age 62 or older.

The grants may be used for staff, technology, equipment, training and educational materials, and to receive these grants, states must adopt rules on the use of designations in the offer or sale of securities, insurance products, or investment advice; on fiduciary or suitability requirements in the sale of securities; and on the sale of annuity products by insurers. Section 989A authorizes $8 million to be appropriated for these purposes for fiscal years 2011 through 2015.

While the Dodd-Frank Act does not create a private case of action, a practitioner may be able to uncover new sources of state rule-making with respect to elderly investors by tracing grants provided pursuant to Section 989A of the Dodd-Frank Act.

Further, firms can report suspected financial abuse or exploitation of an elderly person to state or local government without fear of running afoul of the federal Right to Financial Privacy Act of 1978. Pursuant to 31 U.S.C. § 5318(g)(3), any financial institution that makes a disclosure of any possible violation of law or regulations or a disclosure pursuant to the statute, and any director, officer, employee, or agent of such institution, will not be liable to any person under any law or regulation of the United States, for such disclosure or for any failure to notify the person involved in the transaction or any other person of such disclosure.

B. FINRA Response

FINRA recognizes the graying of investors, and asserts that one of its “priorities is the protection of senior investors, as well as Baby Boomers who are at or approaching retirement.”7

Although no special FINRA rules apply to senior investors, in Regulatory Notice to Members 0743, Senior Investors (“NTM 07-43″), FINRA reminds firms of their obligations to senior investors and highlights industry practices to serve senior investors.8

Significantly, NTM 07-43 discusses suitability, and reminds members that even thought NASD Rule 2310 makes no reference to age or life state, “firms cannot adequately assess the suitability of a product or transaction for a particular customer without making reasonable efforts to obtain information about the customer’s age, life stage and liquidity needs.”9 NTM 07-43 recommends that firms advising senior investors consider the following questions:

In its study of FINRA enforcement actions between 2009 and 2012, Sutherland, Asbill & Brennan, LLP, concluded that nearly 18% of all FINRA sanctions since 2006 have stemmed from cases involving suitability allegations.10 David Lerner Associates, Inc., for example, was fined $2.3 million for its unsuitable sales of a non-traded REIT to thousands of elderly investors.

FINRA also ordered the firm to pay $12 million of restitution to investors, and Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said the firm “targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT Ten to thousands of customers.”11

NTM 07-43 also contains a discussion of how to address diminished mental capacity and financial abuse of senior customers by their family members or caregivers. While avoiding a mandatory scheme for all firms, FINRA encourages firms to consider implementing the following:

In addition, NTM 07-43 addresses communications with the senior investing publish, including the use of senior designations and credentials and high pressure sales seminars directed towards seniors, such as “Free Lunch” seminars. NTM 07-43 also reminds firms that they have the duty to understand products recommended by their brokers, and to provide a balanced presentation of products to customers, which includes not only benefits, but also risks and costs.

The use of senior designations and credentials is the primary focus of Regulatory Notice to Members 11-52, Senior Designations (“NTM 11-52″). To frame the issue, FINRA surveyed firms in January 2011 regarding the use and oversight of designations which imply expertise, certification, training or specialty in advising senior investors. FINRA found that 68% of the firms surveyed used senior designations, and NTM 11-52 includes analysis of the results as well as a citation to the full survey results.

NTM 11-52 also discusses “measures that may assist firms in complying with their supervisory obligations,” such as implementing standards for the use and approval of senior designations; reviewing advertising, sales literature, correspondence and emails; requiring training; and requiring annual attestations.

Further, NTM 11-52 identifies how securities rules and regulations may apply to senior designations. For example, NASD Rule 3010 requires firms to establish and maintain a system to supervise the activities of each registered person that is reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. Also, use of misleading or false designations may violate FINRA Rule 2010, NASD Rule 2210, NYSE Rule 472, and possibly the anti-fraud provisions of the federal securities laws and FINRA rules.

The Regulatory Notices enable the practitioner to take the same rules applicable to all investors, and craft a Statement of Claim which highlights how those rules specifically apply to senior investors. In addition, the Regulatory Notices facilitate the practitioner’s ability to prepare discovery requests regarding a firm’s supervisory system, training, and compliance relative to senior investors. The Regulatory Notices further demonstrate to the FINRA arbitrators (or other factfinders) the duties owed by firms to senior investors.

In addition to Regulatory Notices, FINRA joined with other regulators in 2008 and 2010 to issue findings and guidance on firms’ practices relative to senior investors.12 In September 2008, FINRA, the SEC, and NASAA issued findings in a report, “Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors” (“2008 Report”).13

The 2008 Report summarizes practices used by financial services firms and securities professionals in serving senior investors in the following areas:

The 2008 Report to focused on “specific, concrete steps that firms are taking to identify and respond to issues that are common in working with senior investors,” with the hope that by sharing such information, firms would “continue to identify and implement additional practices to help ensure that the financial services industry continues to consider the particular needs of senior investors.”

In August 2010, FINRA, the SEC, and NASAA issued an addendum to the 2008 Report in which summarizes additional practices used by financial services firms and securities professionals in serving senior investors in the following areas:14

To prepare the 2010 Addendum, the three entities requested that firms who participated int fact finding for the 2008 Report share any additional practices they might have implemented since the 2008 Report. In addition, SEC staff original researched additional practices identified in various industry publications.

Like the Regulatory Notices, the 2008 Report and 2010 Addendum enable the practitioner to prepare specific discovery requests regarding senior investors. The 2008 Report and 2010 also help the practitioner establish that discovery in a case should not be limited solely to a particular claimant, but rather must encompass the firm’s efforts regarding supervision, training and compliance related to senior investors in toto.

C. State Legislation

All 50 states have some form of legislation requiring Adult Protective Services (“APS”), and most states require mandatory reporting to APS by certain parties. At a minimum, an APS statute provides “last resort” protection to seriously impaired adults, including seniors, who have no family or friends to protect them.

In some cases, an APS statute (theoretically) also provides a private cause of action for financial abuse or exploitation of an elder. Where the statute does not, however, it may nonetheless serve as an additional basis to argue that a firm cannot sit on its hands in a case of suspected abuse or exploitation.

While a thorough analysis of litigation in all 50 states cannot be addressed in this article, several states play prominently in protecting senior investors from financial abuse and exploitation through legislative schemes which facilitate the filing of claims and provide for enhanced remedies or non-compensatory damages, such states include Arizona, California, and Florida.15

1. Arizona

It is estimated that by 2020 one in four Arizonans will be over age 60.16 Thus, it is fitting that Arizona has some of the toughest criminal and civil elder abuse laws in the country. See Denton v. Superior Court, 945 P.2d 1283, 1286 (1997) (“The legislature’s intent and the policy behind the elder abuse statute are clear. Arizona has a substantial population of elderly people, and the legislature was concerned about elder abuse.”). In fact, Arizona provides for both criminal and civil liability for elder abuse, including enhanced remedies.

Arizona’s Adult Protective Services Act, Arizona Revised Statutes (“A.R.S.”) Section 46–451 et seq. protects vulnerable adults. A.R.S. § 46-454 sets forth an individual’s duty to report any abuse, neglect and exploitation of a vulnerable or incapacitated adult. A.R.S. § 46-453 provides criminal or civil immunity for any person making a complaint or report in light of elderly financial abuse, unless the individual reporting acted with malice or intent to abuse, exploit or neglect the vulnerable victim in question.

For securities practitioners, A.R.S. § 46-456 is particularly interesting, because it requires that “[a] person who is in a position of trust and confidence to a vulnerable adult shall use the vulnerable adult’s assets solely for the benefit of the vulnerable adult and not for the benefit of the person who is in the position of trust and confidence to the vulnerable adult or the person’s relatives.” A.R.S. § 46-456(A) (emphasis added).17, 18

“Incapacity” is defined as “an impairment by reason of mental illness, mental deficiency, mental disorder, physical illness or disability, advanced age, … or other cause to the extent that the person lacks sufficient understanding or capacity to make or communicate informed decisions concerning his person.” A.R.S. § 46-451(A)(5). A “vulnerable adult” is “an individual who is eighteen years of age or older who is unable to protect himself from abuse, neglect or exploitation by others because of a physical or mental impairment.” A.R.S. § 46-451(A)(10).

Although the term “impairment” is not defined by statute, the superior court has defined “impairment” as “any injury, deterioration or lessening of physical or mental abilities, if the injury, deterioration or lessening of ability affects an adult’s ability to care for himself or herself.” See Davis v. Zlatos, 123 P.3d 1156, 1162 (App.2005) (impairment is “something that causes a decrease in strength, value, amount, or quality” or an “injury, deterioration, or lessening”) (citations omitted).

But see Anguis v. Navarro, Case No. 1 CA-CV 07-0208, 2008 WL 4133388 (Ariz.App. Div. 1, Jan 17, 2008) (holding “advanced age alone does not constitute incapacity under the statute; rather, the advanced age must cause impairment”). However, “[a] vulnerable adult may still have the capacity to make financial decisions, deed property and transfer cash.” Davis, 123 P.3d at 1164. “Exploitation” is defined as “the illegal or improper use of a vulnerable adult or his resources for another’s profit or advantage.” A.R.S. § 46-451(A)(4).

Arizona courts hold that once a person is found to occupy a “position of trust or confidence” with regard to “an incapacitated or vulnerable adult” under A.R.S. § 46-456, the person in the position of trust and confidence is required to act for the benefit of the vulnerable adult to the same extent as a trustee under Arizona law. See In re Estate of Newman, 196 P.3d 863, 872-73 (Ariz.App.Div. 1 2008); Davis, 123 P.3d at 1161.

A person is in such a position if he has assumed a duty to provide care to the vulnerable adult, is a joint tenant or tenant in common with the vulnerable adult, has a fiduciary relationship with the vulnerable adult including a defacto guardian or defacto conservator relationship, or is in a confidential relationship with the vulnerable adult. A.R.S. § 46456(I)(4)(a-d). The standard of proof in civil actions brought pursuant to A.R.S. § 46-456 is the preponderance of the evidence. See A.R.S. § 46-456(F) (incorporating A.R.S. § 46-455(L)).

Significantly, the APSA provides for actual damages plus reasonable attorneys’ fees and costs, as well as empowers the court to “award additional damages for an amount up to two times the amount of the actual damages.” See A.R.S. § 46-456(B). In addition, consent is not a bar to recovery. See Davis, 123 P.3d at 1163 ( “[e]xploitation may occur with the full participation of the victim, but it is no less exploitation”).

Published court cases regarding A.R.S. § 46-456 currently appear to be limited to wrangling by heirs over assets, including caretakers to whom elders have granted property. Further, while securities claimants have sought relief pursuant to A.R.S. § 46-456, there has not yet been a favorable award. See, e.g.,Ruth H. Kosco v. Morgan Stanley Smith Barney John Marc Hebert, FINRA Case No. 10-04646, 2011 WL 4449012 (Sept. 12, 2011) (asserting elder abuse and requesting treble and double damages and punitive damages pursuant to A.R.S. § 46-456(B)); Geraldine K. Mast as Trustee of the Burdette P. Mast Trust, the Geraldine K. Mast, Trust and the Burdette P. Mast Charitable Remainder Trust Kathryn E. Wansor, Successor Trustee of the Geraldine K. Mast Trust Sally Mast Brady, Successor Trustee of the Burdette P. Mast Trust v. LPL fka Linsco Private Ledger Group Vfinance Investments, Inc. Eric A. Solis Torrey Pines Securities, Inc., FINRA Case No. 06-04460, 2009 WL 1361682 (May 26, 2009) (alleging elder abuse and seeking damages pursuant to A.R.S. §46-456). For the securities practitioner, presumably the challenge to establishing of elder abuse pursuant to Arizona’s statute lies in proving “physical or mental impairment,” as opposed to just advanced age of the investor.

2. California

In California, there are two primary avenues for seeking damages for financial abuse of an elder.19 First, California’s Elder Abuse and Dependent Adult Civil Protection Act (“Elder Abuse Act”) provides a private right of action for “financial abuse”20 of either an elder and dependent adult residing in California. See CA WELF. & INST. CODE § 15610-15610.65. An “elder” is defined as “any person residing in this state, 65 years of age or older.” CA Welf. & Inst. Code § 15610.27.

Thus, the Elder Abuse Act attaches no capacity requirement to an elder. In contrast, a “dependent adult” is defined as “any person between the ages of 18 and 64 years who resides in [California] and who has physical or mental limitations that restrict his or her ability to carry out normal activities or to protect his or her rights, including, but not limited to, persons who have physical or developmental disabilities, or whose physical or mental abilities have diminished because of age.” CA Welf. & Inst. Code § 15610.23.

Thus, a practitioner alleging financial abuse on behalf of an investor 64 years of age or less must establish some sort of diminished capacity. Financial abuse occurs when a person or entity:

Further, “wrongful use” occurs when assets are taken and “the person or entity knew or should have known that the conduct was likely to be harmful to the elder or dependent adult.” CA Welf. & Inst. Code § 15610.30 (b) and c).

Liability for financial abuse may be proved by a preponderance of the evidence, and “in addition to compensatory damages and all other remedies otherwise provided by law, the court shall award to the plaintiff reasonable attorney’s fees and costs.” CA Welf. & Inst. Code § 15657.5(a) (emphasis added).

If, however, it also is proven by clear and convincing evidence that the defendant has been guilty of recklessness, oppression, fraud, or malice in the commission of the financial abuse, then the limitations on damages that might otherwise exist do not apply. CA Welf. & Inst. Code § 15657.5(b).

California’s second avenue of protection for senior investors lies in Civil Code Section 3345, which authorizes the award of an enhanced remedy—upto three times greater than the amount of a fine, civil penalty “or any other remedy the purpose or effect of which is to punish or deter” that would otherwise be awarded—in actions by or on behalf of senior citizens or disabled persons seeking to “redress unfair or deceptive acts or practices or unfair methods of competition.”

Section 3345 defines “senior citizen” as “anyone 65 years of age or older,” and defines “disabled person as “a person who has a physical or mental impairment that substantially limits one or more of major life activities.”21 In contrast to Arizona’s statute, there is no capacity requirement for a “senior citizen” claimant.

FINRA arbitration panels have found firms and brokers liable under California’s Elder Abuse Act, and awarded enhanced remedies, including punitive damages, treble damages, and attorneys’ fees. See David Wolfson Living Trust Uad 4/2/90 v. Stockcross Financial Services, Inc., Thomas B. Cooper Peter L. Boom, FINRA Case No. 09-01512, 2009 WL 5171923 (Dec. 21, 2009) (arbitration panel’s award found, among other things, that: “Respondents are jointly and severally liable to and shall pay Claimant treble damages in the sum of $959,394.00 pursuant to Financial Elderly Abuse Act: California Welfare & Institutions Code § 15600, et seq.”); Jeannette Johnson v. Linsco/private Ledger Corp., Jesse Gomez Jr., FINRA Case No. 07-03481, 2009 WL 818793 (March 17, 2009) (arbitrator found that “Respondent Gomez is guilty of Financial Elder Abuse under California Welfare & Institutions Code Section 15657.5,” and awarded compensatory damages of $6,335, punitive damages of $49,999, and attorney’s fees of $6,650 pursuant to Section 15657.5).

In addition, in Martha C. Campbell V. Kevin A. Williams North Global Securities, Inc., North Wealth Management Co., Asset Management Strategies, LLC, Steven Lee Thornton, Daniel Guillen, FINRA Case No. 09-05650, 2010 WL 3826066 (Sept. 17, 2010), Claimants alleged, among other things, “Financial Abuse of a Dependent Adult,” and requested treble damages plus exemplary and punitive damages. The arbitration panel denied the request for treble damages, but awarded as follows:

    1. The Panel finds that all investments of Claimant’s IRA were unsuitable in view of Claimant’s age, lack of financial knowledge, and financial needs. With regard to the Land Entitlement and Opportunities Fund, LLC, the Panel finds that fraud, gross misconduct, breach of fiduciary duty, and/or gross negligence were committed by Respondents by way of:

(a) Taking undue advantage of an older, retired, financially unsophisticated, and financially-limited client for Respondents’ own financial interests;

(b) Placing Respondents’ own needs and interests above Claimant’s needs and interests, thereby violating Respondents’ fiduciary duty to Claimant; and

c) Misusing Claimant’s IRA savings through, among other things, deceit and misleading and reckless behavior. Respondents Williams, North Global, North Wealth Management, and Asset Management are Jointly and severally liable for and shall pay to Claimant compensatory damages in the sum of $397,034.00 subject to Claimant giving up all rights to the Land Entitlement and Opportunities Fund, LLC.

  2. Respondents Williams, North Global, North Wealth Management, and Asset Management are Jointly and severally liable for and shad pay to Claimant punitive damages in the sum of $75,000.00 pursuant to Hobbs v. Bateman Eichler, Hill Richards, Inc., 164 Cal. App. 3d 174 (Ct. App. 1985)…

Further, arbitration panels have awarded punitive damages based upon California Civil Code Section 3345. See, e.g., Kent E. Wilson, and Michael D. Wilson, fbo Utd 1/2/01 v. Wedbush Morgan Securities Inc. and Frank W. Klescewski, FINRA Case No. 04-06226, 2006 WL 1457954 (May 10, 2006) (Claimants alleged, among other things, “elder abuse,” and requested “unspecified punitive damages, treble damages pursuant to California Civil Code Section 3345”; arbitration panel awarded $60,000 compensatory damages, and $120,000 punitive damages “based on recklessness,” without specifying the authority for the punitive damages award);

Gertrude E. Green, the Trudi & John Green Trust Did 6/5/9 V. Rural Securities, Inc., Barron Chase Securities, Inc., FAS Wealth Management Services, Inc., Investors Street, Inc., and Moises Ramos, Jr., FINRA Case No. 02-0524, 2004 WL 1146377 (May 5, 2004) (arbitration panel found “Respondents Rural Securities, Inc. and Moises Ramos, Jr. are jointly and severally liable to and shall pay Claimants punitive damages in the amount of $1,200,000.00 pursuant to California Civil Code Section 3345″); Portia Arutunian and Diane Torres v. U.S. Pacific Financial Services, Inc., Wayne Jon Miller, Roger Y. Fan, John Chun Hu, and Chunpong Lau, FINRA Case No. 00-02492, 2001 WL 1635886 (Nov. 13, 2001) (arbitration panel “makes a specific finding of fraud, and pursuant to California Civil Code Section 3345 on elder abuse, Respondents Roger Y. Fan, Wayne Jon Miller, John Chun Hu, and Chunpong Lau are liable to and shall pay Claimant Diane Torres $181,100.00 in punitive damages”).

3. Florida

Florida has several options for securities practitioners advancing claims on behalf of elders. First, Florida’s APS statute, Chapter 415, provides a private right of action for “[a] vulnerable adult who has been abused, neglected, or exploited as specified in this chapter has a cause of action against any perpetrator and may recover actual and punitive damages for such abuse, neglect, or exploitation.” Fla. Stat. § 451.1111.

A “vulnerable adult” is “a person 18 years of age or older whose ability to perform the normal activities of daily living or to provide for his or her own care or protection is impaired due to a mental, emotional, sensory, long-term physical, or developmental disability or dysfunction, or brain damage, or the infirmities of aging.” Fla. Stat. § 415.102(27).

“Exploitation” is defined as obtaining or using, or endeavoring to obtain or use the vulnerable adult’s funds, assets or property for the benefit of someone other than the vulnerable adult by: 1) a person “who stands in a position of trust and confidence with a vulnerable adult,” or 2) by a person who “knows or should know that the vulnerable adult lacks the capacity to consent. Fla. Stat. § 415.102(8)(a), (b). Exploitation specifically includes breach of fiduciary relationships. Fla. Stat.§ 415.102(8)(b).

A claim may be brought either by the vulnerable adult or someone acting on his/her behalf. Fla. Stat. § 451.1111. Thus, establishing a guardianship is not a prerequisite to bringing a securities claim pursuant to this Florida Statute. Damages available pursuant to Fla. Stat. § 415.1111 include actual and punitive damages, as well as reasonable attorneys’ fees and costs.

Second, Florida provides a cause of action for civil theft where a person proves by clear and convincing evidence that he or she has been injured in violation of Fla. Stat. §§ 812.012-812.037 or § 825.103(1). See Fla. Stat. § 772.11. Pursuant to the civil theft statute, a claimant may recover threefold the actual damages plus reasonable attorneys’ fees and costs. See Fla. Stat. § 772.11(1).

Punitive damages, however, are not permitted, and a defendant “is entitled to recover reasonable attorney’s fees and court costs . . . upon a finding that the claimant raised a claim that was without substantial fact or legal support.” Id. Further, prior to making a civil theft claim, a claimant must make a written demand written demand for $200 or the treble damage amount of the person liable for damages. Id.

If the recipient acquiesces to claimant’s demand within 30 days, then a written release must be provided to the recipient. Clearly, the two-way attorneys’ fee provision may deter some claimants, but where an elderly investor has been the victim of theft, yet cannot meet the definition of “vulnerable adult” required to recover under Fla. Stat. § 415.1111, a civil theft claim may be ideal.

Third, in April 2010 the Florida legislature passed the “Safeguard Our Seniors Act,” which modified a number of provisions of Florida insurance law relating to the sale of annuity products, and became effective in January 2011. In essence, the legislature strengthened senior investor fraud laws by requiring either the insurance agent or insurer to obtain minimum information regarding the suitability of a recommendation, including personal information, tax status, investment objectives, source of funds for the purchase, income, intended use of the annuity, assets, liquid net worth and liquidity needs, financial situation and needs, risk tolerance. See Fla. Stat. § 627.4554.

FINRA arbitration panels have found firms and brokers liable under Fla. Stat. § 451.1111 and Fla. Stat. § 772.11, and awarded enhanced remedies, including punitive damages, treble damages, and attorneys’ fees. See McMillan v. Newbridge Securities Corp., FINRA Case No. 120880, 2013 WL 3365271 (June 24, 2013) (arbitration panel found the broker, Deviney, “liable on the claims of violation of the Florida Securities and Investor Protection Act, exploitation of elderly persons, civil theft and conversion and shall pay to Claimants Andrea McMillan and the Estate of Joan McMillan . . . damages pursuant to Fla. Stat. § 772.11″);

Wechsler v. Jodi Isdith, Mitchell Holeve, and Raymond James Financial Services, Inc., FINRA Case No. 10-04291, 2012 WL 4847056 (Oct. 2, 2012) (arbitration panel found “Respondents are liable on the claim of exploitation of an elderly person in violation of Florida Statute 825.103″);

Joe Forrest, by Cheryl Yates (Power of Attorney) v. Respondent Raymond James & Associates, Inc., Paul David Arnold v. Third Party Respondent Cheryl Yates, FINRA Case No. 11-03503, 2012 WL 3776905 (Aug. 21, 2012) (arbitration panel found “[o]n Count 5 (exploitation of an elderly person, Florida Statutes, Sections 825.103(1) and 772.11), Respondent Arnold is liable for $739,320.00 (representing three times the compensatory damages amount of $246,440.00) plus pre-judgment interest on the compensatory damages amount of $246,440.00 at the Florida statutory rate running from September 12, 2011 through the date of the Award,” and “Claimant is the prevailing party on Count 5 (Florida Statutes, Section 825.103) and may seek to recover his reasonable attorney’s fees and costs under Florida Statutes Section 772.11, in an amount to be proven before a court of competent jurisdiction.”);

Kramer v. Traderight Securities, Inc., Newbridge Securities Corp., Linsco/Private Ledger Corp., Leighton David Applefeld, FINRA Case No. 07-02447, 2008 WL 3981934 (Aug. 14, 2008) (the arbitration panel found that Respondent Applefeld, “fraudulently induced Claimant, an elderly vulnerable adult, to invest in a security and then absconded with Claimant’s funds for his own use and benefit, constituting common law fraud and a violation of Chapter 415 of the Florida Statutes,” and awarded punitive/treble damages pursuant to Chapter 415 Florida Statutes and Section 772.11 of the Florida Statutes, as well as attorneys’ fees pursuant to Chapter 415 Florida Statutes).

4. Other Protections for Senior Investors

Consumer protection acts, deceptive trade practices acts, and similar consumer protection laws can be applicable to a senior investor’s arbitration claims, and may permit a senior investor to permit to recover double or treble damages and attorneys’ fees, particularly in the absence of an elder abuse statute.

Certainly, other investors have made successful claims under such acts. See, e.g., Estate of Virginia Lasher, Gloria Roder, Albert Wood, Lydia Wood, Matthew Fieber, Ronald Gonzales, Anne Solis, Mark Simmons, and Gene Chantler v. Jeremy Michael Hart, FINRA Case No. 11-00666, 2011 WL 1463894 (March 28, 2011) (awarding treble damages pursuant to Colorado Consumer Protection Act, C.R.S. § 6-1-113(c)(2)(III));

Ronald B. Schmoll and Gerlind R. Schmoll, Jt Ten, Ronald B. Schmoll Roth IRA, Ronald B. Schmoll Rollover IRA, Gerlind R. Schmoll Rollover IRA v. Kenneth J. Pujdak, H. D. Vest Investment Services, Inc., Ais Financial, Inc., and Workman Securities Corporation Advantage Advisory Services, Inc., FINRA Case No. 07-01303, 2008 WL 1913340 (April 18, 2008) (Claimants alleged various causes of action relating, among other things, investments in WF 100% Treasury Money Market Fund and day trading in claimants’ accounts, including violation of North Carolina’s Deceptive Trade Practice Act, N.C.G.S. § 75-16; the arbitration panel found Respondent Pujdak liable for violation of North Carolina’s Deceptive Trade Practice Act, and “liable for punitive (treble) damages” pursuant to the Act.);

William J. Pickert V. Respondents Mclaughlin, Piven, Vogel Securities, Inc., Steven D. Ircha V. Third-party Respondent, TD Ameritrade, Inc. F/k/a Ameritrade, Inc., FINRA Case No. 06-04088, 2008 WL 465517 (Feb. 8, 2008) (claims related regarding fraudulent opening account in claimant’s name, which was then used to steal from claimant; the arbitration panel found that the DelawareConsumer Fraud statute was applicable to the facts, and Respondents MPV and Ircha were liable for treble damages in the sum of $1,200,000.00 pursuant to the Delaware Consumer Fraud statute).

5. Brokerage Firms

Brokerage firms are well aware of the potential for elder abuse.22 Indeed, large firms like Wells Fargo have published materials warning their customers of the potential for elder abuse23:

Elder Financial Abuse
A Growing Concern
Distressing. It’s a word that describes the fact that older Americans are losing about $2.9 billion every year to people who take advantage of their vulnerabilities – and that’s only for the cases that are actually reported.* It’s called elder financial fraud, and it’s occurring more frequently every year.

Who’s victimizing older Americans? It could be anyone. In fact, one study* shows that:

 

 

 

Know the Signs of Elder Financial Exploitation

To help protect older family members and friends from financial fraud, it’s important to know what to look for:

Similarly, firms like Morgan Stanley have developed training materials for their financial advisors that highlight issues concerning elderly customers. In those materials, Morgan Stanley trains its brokers to look at certain issues, as set forth in the following slides from their training materials:

Conclusion

While firms long have recognized seniors as a source of business and revenue, states have been slow to recognize the need for legislation to protect seniors from financial abuse and exploitation by firms. Thus, while senior investors – and victims – are plentiful, investment-related claims based upon elder abuse statutes remain a developing area of the law.24 In some instances, a private cause of action may not exist.25

In other instances, a private cause of action exists, but may be untested in the context of a senior investor versus a firm or broker.26 As a result, the challenge for securities practitioners is not only to recognize what advances have been made in legislation, but also to develop existing legislation through litigation of claims on behalf of senior investors.

Accordingly, in evaluating the claim of a senior investor, the securities practitioner may consider:

  1. By Jennifer P. Farrar, Esq., Kirk Reasonover, Esq., Jeffrey Sonn, Esq., and Jeffrey Erez, Esq.
  2. See The Graying of America, CBS, www.cbsnews.com/2100-204_162-1387709.html
  3. The Elder Justice Coalition, www.elderjusticecoalition.com.
  4. http://www.aoa.gov/AoA_programs/Elder_Rights/EJCC/
  5. FINRA Regulatory Notice to Members 07-43.
  6. http://www.sutherland.com/newsevents/News_Detail.aspx?News=82c38b36-e145-489b-aba4-a6a4c1 74278b
  7. http://www.finra.org/Newsroom/NewsReleases/2012/P191729
  8. http://www.sec.gov/spotlight/seniors/seniorspracticesreport092208.pdf; and www.sec.gov/spotlight/seniors/seniorspracticesreport081210.pdf
  9. See http://www.sec.gov/spotlight/seniors/seniorspracticesreport092208.pdf
  10. See http://www.sec.gov/spotlight/seniors/seniorspracticesreport081210.pdf
  11. For a comprehensive list and discussion of elder abuse statutes, see, e.g., Carolyn L. Dessin, Financial Exploitation Statutes’ Impact on Domestic Relations Practice, 16 Journal of the American Academy of Matrimonial Lawyers 379 (2000), available at http://works.bepress.com/carolyn_dessin/5/
  12. https://www.azag.gov/seniors
  13. The APSA exempts a person acting within the “scope of [his/her] duties” as an agent of a financial institution or licensed securities dealers. A.R.S. § 46-456(H).
  14. Arizona Revised Statute § 46-456 was substantially amended in 2009. See 2009 Ariz. Sess. Laws, ch. 119, § 9 (1st Reg.Sess.). See also In re John D, Case No. 1 CA–CV 12–0262, 2013 WL 773039 *4 (Feb. 28, 2013) (discussing significance of 2009 amendments).
  15. See Timothy A. Canning, “Elder Abuse Remedies in Securities Arbitration,” (2d Cal. Mtg. 2004), available from PIABA.org, which includes discussion, analysis, and draft excerpts from various statements of claim.
  16. “Abuse of an elder or a dependent adult” includes “financial abuse” and “other treatment with resulting…mental suffering.” CA Welf. & Inst. Code § 15610.07(a).
  17. Section 3345(a) incorporates by reference the definitions of “senior citizens” and “disabled persons” found in the Consumers Legal Remedies Act (Civ.Code, § 1761, subds.(f), (g)).
  18. For a defense bar discussion of client bequests to brokers, see http://www.bressler.com/pub/files/Publications/ClientBequeststoFinancialAdvisors.pdf
  19. http://www.wellsfargoadvisors.com/about-wells-fargo-advisors/community-involvement/elder-finan cial-abuse.htm
  20. In the 2012 legislative session, for example, 26 states had pending legislation to address financial crimes and exploitation against the elderly and other vulnerable adults. In addition, 14 – Arizona, California, Colorado, Delaware, Illinois, Iowa, Maryland, Michigan, Missouri, Nebraska, Oregon, Vermont, Washington and West Virginia – enacted legislation in 2012. Financial Crimes Against the Elderly 2012 Legislation (last updated January 15, 2013). Last visited August 1, 2013: http://www.ncsl.org/issues-research/banking/financial-crimes-against-the-elderly-2012-legis.asp
  21. 25 See, e.g., Everett F. Boykin v. Harold Earl Blondeau Richard S. Ferguson John F. Matthews Morgan Keegan & Company, Inc. John T. Pace, Jr. Michele F. Wood, FINRA Case No. 10-05544, 2012 WL 4481989 (Sept. 20, 2012) (parties argued whether North Carolina Statute § 14-112.2 (exploitation of an elder adult) permitted a private cause of action as part of claimant’s motion to amend, which was denied by the arbitration panel).
  22. 26 Lisa A. Catalano and Christine Lazaro, “Financial Abuse of the Elderly: Protecting the Vulnerable,” PIABA Bar Journal (Fall 2008) at 11-14 (discussing state elder abuse statutes, including Florida, California, Utah, Nevada, and Illinois).

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