A few weeks ago I got a call from a lawyer I had worked with on a case in November. He called to tell me the outcome of the arbitration. I only got the case in October, so it was not the usual careful and drawn out process that has characterized most of my expert witness work over the past six years. It was a case where I represented the respondent/defendant in an arbitration over an estate management claim. Usually I prefer to be on the side of the “widows and orphans” in such matters versus the big bad brokers or investment managers, but this one was representing the investment advisor. The circumstances were, in my opinion, so one-sided in favor of my client that I didn’t mind being on the institutional side at all. The case involved a long-time investment management relationship of a trust put in place by a man with failing health who died at the end of December 2019. The manager had been introduced to the man years before by his daughter, for whom he also managed money. He had done an admirable job in the process and had compounded the investment quite nicely. Both daughter and father preferred that he manage the money all in equities, which he did and which was his forte. The manager was so respected by the family that he was actually mentioned in the will as the person who should continue managing the trust while the estate issues were resolved and the various distributions of assets made. The daughter was designated as the successor trustee of the trust and executor of the estate.
Back during the 1990’s I ran the Global Private Banking business for Bankers Trust Company. During those years I was the senior fiduciary of the bank, which was one of the three largest trust banks in the country. If there was one thing with which I was totally familiar and a world class expert in, it was the proper procedures for settling an estate with regard to the duties of the financial institution handling the affairs of the estate in liquidation and/or distribution. Those proper procedures involve the importance of obtaining proper documentation and the two most critical are a fully authorized death certificate and a letter of testamentary issued by the probate court to properly validate the executor. Estate settlement is simply too touchy a subject for beneficiaries to do anything but be 100% buttoned up on documentary issues prior to taking any actions. An institutional trustee must not jump to any conclusions or take anything for granted and must operate strictly by the book.
A basic tenet of good fiduciary management is investment prudence and diversification is a primary means of risk management to insure this. While risk concentration is considered potentially imprudent, modern investment thinking has gone well beyond thinking that diversification must entail equities, bonds and cash or that equities, when properly diversified are unduly risky. Many investors have stopped thinking that strict income generation is important versus total return investing where liquidity of the underlying instruments can provide cash flow as needed without impairing a portfolio….and, indeed, may be a better way to manage a portfolio.
This first case involved a claim that the investment manager should have immediately altered the portfolio away from the all equities composition it had had for many years and was both the preference of the grantor and the successor trustee (the daughter), who was also more or less a 50% beneficiary to the trust and the estate. This was a claim of “convenience” since the advent of COVID in early 2020 caused an overall market retracement literally days after the death certificate was obtained and before the probate court ruled on the executor issue. During those days the new trustee specifically told the investment manager to stay the course on the portfolio in order to maximize the potential for tax basis flexibility. In other words, every indication was that nothing should change in the portfolio composition. As for tax payment liquidity, no payments were due for another 8-9 months, do an obligation to remain fully invested was also very much in order. Despite this, an added claim was that the manager should have gone to cash ASAP, something that, in hindsight, would have benefited the portfolio in the moment, but which would have also hurt the portfolio as the markets recovered their loses and went on to have an extraordinarily strong year. The trustee panicked and demanded that the manager effectively relinquish his discretionary control (as specifically requested by the grantor during this unwinding time) and suddenly sell half the portfolio at what proved to be the market nadir. He dutifully did so only yo then be accused of breach of fiduciary obligation because he had not rebalanced the portfolio to a lower equity position to reflect the likely risk appetites of the beneficiaries that included the trustee, but were not yet formally designated. He was supposed to have done this during a few days or weeks during which market turbulence was high and estate documentation and clarity was in flux.
I very strongly opined y III the court that the managers foremost obligation of prudence demanded that he stay the course until more clarity and documentary precision was achieved. They argued he should have dramatically altered his investment approach regardless of the uncertainties, lack of clarity and lack of complete documentation. I cannot imagine any fiduciary taking the knee-jerk actions they suggested or operating on faith and ignoring the “stay the course” directives they received directly from the now-offended trustee. I personally thought all claims should be dismissed and vacated as frivolous.
What I learned in the call a few weeks ago was that the sole arbitrator did not agree with the defenses of my client or with my opinions, but rather chose to grant a more or less 2/3 award to the claimant. Thst amounted to several million dollars. That was a shocking conclusion that reminded me that litigation can go in any direction, especially when at the whim of one person, who may or may not have pre-established biases.
Then yesterday I got a call on another case that concluded in November. This was one where I represented the claimant, who lost $25 million in an aggressive investment strategy solicited, recommended and managed by a broker. Our claim was that it was inappropriately and imprudently recommended and managed and was, indeed, not a suitable investment for the client. These sorts of claims are always hard because they require adjudication of whether an investor should have known better than to allow themselves to be misled. While I also believed quite strongly in our case and my opinions as expressed to the panel of three arbitrators over a hearing span of almost three years, I also expected a moderated outcome with perhaps half the loses awarded to the claimants. What happened was that the panel awarded full restitution plus treble damages totaling almost $100 million. According to the lawyers, this was in large part due to the credibility placed by the arbitrators on the strength of my opinions. I am obviously very pleased by this outcome (as is the client) and feel that the very careful preparation of the case and the thoughtful consideration by the three arbitrators led to this very positive and well-deserved outcome.
What these two cases remind me is that the reason the civil justice system exists is that differing opinions of righteousness will always exist. Sometimes you lose when you perhaps should have won and sometimes you win bigger than you thought possible. Why should litigation be any different than life in general?