John Doe
v.
Full-Service Brokerage Firm
Claimant's Attorney:
David E. Robbins, Esquire
Kaufmann, Feiner, Yamin, Gildin & Robbins, LLP
777 Third Avenue
New York, NY 10017
Defense Attorneys:
withheld
Claimant's Expert:
Harold J. Bursztajn M.D.
co-Founder,
Harvard Medical School Program in Psychiatry & the Law
96 Larchwood Drive
Cambridge, MA 02138
Total Award:
A lump-sum settlement. [Amount withheld by confidentiality agreement.]
Case Summary:
The claimant was an aging Polish-born child survivor of the Holocaust
who had made millions of dollars in the taxicab business in New York
City before being disabled by neuropsychiatric impairments in the early
1990s. Thereafter, no longer able to work, he invested most of his life
savings with a well-known full-service brokerage firm. When Doe initiated
this relationship, he told the brokers that he was a conservative investor
concerned about safeguarding his assets and, as a result, his opening
account forms indicated such. However, toward the end of the decade,
at the recommendation (according to him) of the firm's brokers, increasingly
risky stock trading occurred.
Dr. Harold Bursztajn, a forensic neuropsychiatric expert, was retained
by Doe's attorneys to analyze the fact pattern and to examine Doe. Subsequent
to completing his forensic neuropsychiatric evaluation he prepared a
report wherein he opined that he was prepared to testify that Doe had
severely diminished neuropsychiatric capacity to engage in or consent
to trading. Thus it was an irrational, inconsistent, erratic, and frenetic
pattern of trading contrary to his clearly stated self-identification
as a conservative investor which resulted in the losses in question.
Over $200 million of largely speculative securities, on margin, were
traded, which resulted in millions of dollars of losses and over $700
thousand of margin interest, until the firm finally told Doe he must
close his accounts. By contrast, when Doe went to a second brokerage
firm, his trading lasted less than two weeks before that firm closed
his accounts.
Dr. Bursztajn's detailed forensic neuropsychiatric analysis of how Doe's
abnormal mental condition made him unable to make informed investment
decisions supported Doe's attorney's case development. On examination
it emerged that Doe was chronically distracted by the haunting voices
of relatives murdered in the Shoah, relatives he had never met yet whose
voices he lived with every day. Doe lived with constant fear, pain, and
helplessness. At times his suffering became so excruciating that he needed
to be hospitalized. A man of great courage, he struggled with his suffering
valiantly and, although severely debilitated, was able to avoid the endpoints
of patients who otherwise reach their limits and become at high risk
for long-term hospitalization, institutionalization, or suicide. Further
support for this analysis was obtained when comparing trading records
with medical records; that is, a pattern of irrational trading was evident
at the same time he was under the care of psychiatrists, institutionalized,
or hospitalized. For example, while he was institutionalized for a full
month, his accounts engaged in over $7 million of transactions.
Doe sued the brokerage firm in arbitration for breach of fiduciary duty,
claiming that his initial instructions, together with his evident mental
impairment, created a duty on the part of his brokers to safeguard his
investments and only to recommend a suitable investment strategy and
appropriate investments.
The case proceeded on the controversial principle of "economic suicide" that
is examined by the claimant's New York City attorney, David E. Robbins,
in his two-volume treatise, Securities Arbitration Procedure Manual (5th
ed., 2003, Matthew Bender). While the claimant insisted that his purchases
were the result of recommendations from his brokers, the brokers contended
that the millions and millions of dollars of trading were strictly "unsolicited," the
idea of the customer alone, and that they had no obligation to question
the propriety of "his" self-directed trading, even if its nonsensical
patterns would lead to inevitable financial ruin.
Normally, an investor who engages in self-directed trading is considered
responsible for his actions. However, a number of factors may create
a duty on the part of a brokerage firm to prevent an investor from engaging
in strategies that expose him to intolerable risk. Among these factors
are the customer's expressed investment objectives, in this case conservative
ones. In addition, personal characteristics of the customer, in this
case mental impairment, may increase the customer's dependence on the
broker and imbue the broker with de facto control of the account.
The question becomes: Who was, in reality, making the investment decisions?
If the customer evidences his dependence on the broker by consenting
to all of the broker's recommendations, then many commentators argue
that a fiduciary relationship has been established, which can then be
breached by the broker if the recommendations are inconsistent with the
customer's stated investment objectives. Viewed as either unsuitable
recommendations or the broker's knowing assistance in a customer's economic
suicide (where the customer is reliant on the broker), the result is
the same: breach of fiduciary duty. In the latter instance, some arbitration
panels have ruled that the broker may have a duty to warn the investor
of the likely consequences of his investment decisions and to even refuse
to carry out clearly unsound orders. The internal Compliance Manuals
of some brokerage firms even impose those obligations on their brokers.
Dr. Bursztajn, Director of the Harvard Medical School Program in Psychiatry
and the Law, opined that, during the years in question, John Doe, first
as a child and then as an adult, suffered from a severe psychosis and
panic disorder, which impaired his ability to make sound investment decisions.
These conditions may have been caused in part by an early life history
of overwhelming dislocation, discontinuity, and loss, compounded by subsequent
losses of loved ones, and in part by brain damage resulting from brutal
beatings Doe endured in his teens in Israel and as a professional boxer,
thereafter, in the United States. Dr. Bursztajn referred to his published
work on the neuropsychiatric assessment of competence. Both cognitive
and affective factors need to be considered, as illustrated in his chapter
on "Competence and Insanity" in Jacobson and Jacobson's text, Psychiatric
Secrets (2nd ed., Philadelphia: Hanley & Belfus, 2000; 485-498).
This opinion was supported by Dr. Bursztajn's forensic neuropsychiatric
examination of Doe, the observations of Doe's long-time psychiatrist
and internist, and psychological testing. In his extensive history of
medical and psychiatric treatment, no clinician had ever suspected Doe
of faking, malingering, or exaggerating. In the arbitration, the brokerage
firm initially took the position that Doe was faking his illness and
that none of its employees ever saw him evidence such illness. However,
both the claimant's expert and Doe's treating physicians found his neuropsychiatric
impairment to be so evident to laymen and doctors alike that his brokers should
have known that he was profoundly disorganized, driven by pervasive
fear and anxiety, incapable of elementary reality testing, unable to
concentrate and focus attention, incapable of engaging in complex financial
decision making, and totally trusting of such authority figures as brokers
who worked at large, international brokerage firms. He could not have
understood the nature of the securities in his accounts or the risks
of trading speculative stocks on margin. Besides his demeanor (in particular,
his pressured, incoherent speech), a clear indication of Doe's incompetence
was his drastic, unexplained shift from conservative to high-risk investments.
Trading profits was unnecessary to maintain a lifestyle that was being
more than adequately funded through the income generated from conservative
investments. Trading losses, however, dislodged his fragile mental state.
In Bayesian terms, given the expectations Doe had set up for his brokers,
the probability that such a radical departure was based on an informed,
considered decision on his part was very low. This behavior instead should
have given his brokers grounds for questioning whether Doe really knew
what he wanted to do. Anyone could see that Doe was a very troubled person.
Doe's life history made him especially susceptible both to the undue
influence of his brokers and to the emotionally devastating consequences
of the loss of his life savings. His survival as a Jewish infant in Nazi-occupied
Poland depended on his mother's having the resourcefulness and financial
wherewithal to provide false identities for her and for him. Money was
a condition of survival. Even so, his life also depended on his mother's
being able to trust unreservedly the people in whose care she placed
him while she was shipped off to a labor camp. These early experiences
left him pathologically trusting of people who were in charge of his
financial security - his brokers. Moreover, his emotional dependence
on having money heightened his confusion and distress when faced with
financial decisions. The subsequent repeated head trauma he suffered
resulted in further impairment of executive functions, including being
able to bear loss without compounding it to avoid overwhelming helplessness
and fear.
According to the "bankroll effect," articulated most recently
by the Nobel Prize-winning economic psychologist Daniel Kahneman, the
more assets one has, the more one can afford to lose. Given his feeling
that his life depended on his having a secure financial cushion, John
Doe did not have the psychological wherewithal to take large financial
risks, as he recognized when he presented himself to the brokerage firm
as a conservative investor. Thus, his extensive and debilitating monetary
losses, compounded by the feeling that "his friends" at the
brokerage firm betrayed his trust, exacerbated his mental disorder and
made it less likely that he could reconstitute himself.
Dr. Bursztajn also provided litigation consultation during discovery
and mediation. Fortunately, Doe's attorneys, working with Dr. Bursztajn,
were able to settle the case in mediation, which has allowed Doe to regain
a semblance of control over his financial affairs and avoid the risk
of a complete loss if the arbitrators had ruled against him. Indeed,
after the settlement was negotiated, Dr. Bursztajn was asked by Doe for
his opinion as to whether to complete the settlement process or to proceed
to arbitration. Rather than telling Doe what to do, the doctor asked: "What
would you have done if you had gone forward with the case and lost it?" Doe
responded: "I would have killed myself." On reflection, Doe
accepted the settlement, satisfied that what happened to him had been
meaningfully understood.