A New York couple who lost more than $2 million on financial and health care stock investments made by their independent adviser in 2008 and who stopped opening their monthly statements has failed in a bid to collect damages from Fidelity Investments, the custodian for their RIA.
A three-person Finra panel last month denied the claim, adding support to brokerage firms' assertions that they aren't liable for investments made by their registered investment adviser custody clients or for related fair-dealing and client communications requirements. It also puts investors on notice that they should more carefully monitor their account statements, according to the Financial Industry Regulatory Authority Inc. award statement.
In a complaint filed in December 2008 and amended statements, Jonathan and Margaret Mandell sought $4.4 million in compensatory and punitive damages from their longtime tax preparer and investment adviser, Abed Mansoor; his RIA firm, Aim Resources Inc.; and Fidelity.
The couple alleged that Mr. Mansoor's purchases of stocks such as Freddie Mac and the now-defunct Lehman Brothers Holdings Inc., Countywide Financial Corp. and Washington Mutual Inc. — combined with margin calls and position sales from Fidelity — caused them to lose $2.4 million from about March 2008 through December of that year, according to the Finra document. Much of the nest egg managed by Mr. Mansoor — who had prepared their taxes for almost 20 years and who had discretion over their investment portfolio — came from sale of their cooperative apartment in New York, according to Mr. Mansoor and lawyers involved in the case.
In the course of the arbitration, the Mandells disclosed that on the advice of friends, they stopped opening monthly account statements and trade confirmations sent by Fidelity throughout the summer and fall of 2008 in the depths of the market collapse, according to lawyers representing them and Fidelity. Indeed, the couple testified that throughout Mr. Mansoor's more than four-year custody relationship with Fidelity, they opened only half the statements sent to them.
The arbitrators made no determination about him or his firm, because they aren't members of Finra, but dismissed all the Mandells' claims and implicitly criticized both investors' head-in-the sand mentality and the RIA custody model. While Fidelity Institutional Wealth Services “has flaws in the areas of oversight of advisers ... and communications with in-vestors,” the arbitrators' award statement laid most of the blame elsewhere.
“The losses in this case were caused by the actions of Mansoor, coupled with the failure of the claimants to monitor their accounts,”according to the award statement, which was signed Dec. 8 by Susan Lushing, the panel's chairwoman.
The Mandells, who are in their 50s and work in the advertising industry, through their lawyer de-clined to comment.
“We were pleased that the arbitration panel found in our favor, as ultimately, a custodian supports the individual and his/her adviser as they make their own trading and investment decisions,” Fidelity spokesman Stephen Austin wrote in an e-mail. “We do not feel that we should be liable for such claims and are regularly enhancing the services and support we provide for the advisers who use our brokerage platform.”
He declined to comment on whether Fidelity has been named in other claims by RIA clients.
Matthew Farley, a partner at Drinker Biddle & Reath LLP, who represented Fidelity, said he pressed the argument that in their role as custodians, Fidelity and other broker-dealers are merely “back-office factories, not cops” monitoring RIA trades for their customers. “The brokers can't be as knowledgeable about the RIA customers as they are about their own [direct] customers, and have no need to be,” he said.
Richard Menaker, whose firm, Menaker & Herrmann LLP, represented the Mandells, said he was dismayed by the argument, particularly after Mr. Mansoor was named in a May 2008 Finra publication for failing to comply with a settlement in another case.
“Our response was, you have a duty to them since your name is on the statement side by side with Aim Resources and you conduct due diligence [on RIAs on the platform],” he said. “My clients testified that if Fidelity had notified them that he had been suspended, they would have stopped dealing with him.”
Mr. Menaker said the arbitrators vigorously questioned Fidelity's attorneys about its failure to alert the Mandells to the Finra publication or to tell them in October 2008 that some margin positions in their accounts were being liquidated.
“The arbitrators were troubled by Fidelity's conduct,” Mr. Menaker said. “We were completely astonished by the ruling.”
Fidelity has 6-inch-high account-opening documentation procedures for new RIAs, Mr. Farley said, and discloses positions and margin accounts in statements. “We cannot protect people who don't open the envelopes we send them,” he said.
The Mandells did reach a settlement in a related civil suit in New York state that requires Mr. Mansoor to pay them over several months. Mr. Menaker and Mr. Mansoor declined to discuss the amount, but the lawyer said it far trails their losses.
Mr. Mansoor, who had prepared tax returns for the Mandells for about 20 years, said he sympathizes with them but wishes they had been more patient before closing their account with him in December 2008. Clients who remained with him averaged gains ranging from 40% to 50% in 2009, he said, noting that his firm waived management fees in 2008 and 2009.
Aim Resources, founded in 1993 to work with clients of his accounting firm, Broder-Mansoor Inc., manages about $9.8 million in 120 accounts, according to the firm's Form ADV regulatory filing, and typically charges a management fee of 4% of accounts of individuals with $750,000 or less or a net worth below $1.5 million. It assesses 1% plus a 10% performance fee on larger accounts.
Mr. Mansoor, who describes himself as a value investor, said 2008 taught him to diversify his clients' stock positions, trade more on momentum and dramatically reduce margin buying.
— Bruce Kelly contributed to this story.
E-mail Jed Horowitz at email@example.com.