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.
