Morgan Stanley and adviser win lawsuit over annuity distribution

The judge said the adviser erred in recommending a lump-sum distribution, but barred plaintiffs from recovery because they were also negligent

Jan 8, 2018 @ 2:07 pm

By Greg Iacurci

Morgan Stanley has prevailed in a lawsuit alleging the company and one of its advisers acted negligently when it told clients to take a particular type of annuity distribution, which cost the clients nearly $300,000 in tax liabilities.

While the judge in the case, Berkenfeld et al v. Lenet et al, said the Morgan Stanley investment adviser did indeed give advice that was "erroneous" and "negligent," state law in Maryland barred the clients from recouping any damages because the clients' own negligence contributed to their ultimate losses.

"The firm is pleased with the court's decision," said spokeswoman Christine Jockle. She declined further comment on the lawsuit.

David E. Fink, the attorney for plaintiffs, declined comment due to the likelihood of an appeal.

(More: New York State proposes 'best interest' standard for life insurance and annuities)

The plaintiffs — Brandon Berkenfeld, Barbara Holland-Eytan and Sandra Ricki Diamond — filed suit in Maryland district court against Morgan Stanley adviser Gary R. Lenet in April 2016.

The plaintiffs were equal beneficiaries of two annuities owned by a recently deceased relative, Claire Blumberg. They incurred roughly $287,000 in tax liabilities after Mr. Lenet advised that they should take lump-sum annuity distributions, plaintiffs alleged. They contend the adviser "specifically and incorrectly" said there were no other distributions available to them.

Judge Paula Xinis agreed with plaintiffs. However, she ruled in favor of Morgan Stanley and Mr. Lenet due to plaintiffs' "contributory negligence," according to the Jan. 4 ruling.

(More: Complexity of new indexed annuities causing concern)

Contributory negligence, defined as the "failure to observe ordinary care for one's own safety," bars recovery for plaintiffs according to Maryland state law, according to the court document.

Plaintiffs, who themselves are annuity investors, ignored readily available information such as annuity documents describing alternative distribution options, and also failed to seek out independent tax advice before taking the lump sum, despite Mr. Lenet's recommendation that they do so, Ms. Xinis said.

Further, the forms plaintiffs completed to elect a lump-sum distribution "clearly identified" the other distribution options available, and required plaintiffs to select one of the choices, according to the court order.

(More: Advisers fear private equity's reach into variable annuities)

"No reasonable finder of fact could ignore that plaintiffs' own dereliction in failing to read the relevant forms and seek advice on the tax implications of their decisions contributed to their losses," the judge wrote. "Accordingly, plaintiffs cannot recover from Lenet as a matter of law."


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