Your Investment Adviser Owes You A Fiduciary Duty

Your investment adviser was right – they are held to a fiduciary standard as a matter of law. But what they didn’t tell you is that they consider that duty for marketing purposes alone. When it’s time to actually do the job, they’re going to sell you on ideas that line their pockets first. Unfortunately, greed will always serve to corrupt a number of people and lead to bad results.

Determining whether the investment advice offered was appropriate for you isn’t terribly difficult for a disinterested party to determine. Attorneys, experts, and subsequent financial professionals are all capable of reviewing a portfolio and reaching a conclusion regarding the quality of the adviser’s work.

But Your Investment Advisor Might Have Breached That Fiduciary Duty By Trying To Make Accountability Impossible

An insidious, but common, breach of fiduciary duty is often found buried in the advisory services agreement(s) you signed when you hired the adviser. The language of those agreements could potentially serve to prevent you from ever seeking a recovery from the adviser who acted wrongfully.

Had you decided to do business with a stockbroker, your efforts to recover the money they lost you would proceed before a panel of arbitrators in the Financial Industry Regulatory Authority’s (“FINRA’s”) arbitration system. While not perfect, the FINRA arbitration program offers modest expense and a known structure for fact-finding and evidence presentation. FINRA prevents its members from including class-action waivers or hedge clauses meant to scare investors away from bringing claims. An example of a hedge clause we see too often is a provision that says, “If you bring a claim against me and lose, you’ll pay my legal fees.” FINRA members are barred from forcing you to travel across the country for the arbitration. They’re also forbidden from including choice of law provisions that would deprive you of rights your local law would otherwise provide.

Your investment adviser isn’t subject to such explicit prohibitions. That said, it is not uncommon for investment advisers to use the contract that you signed as a shield against liability. Too often, investment advisers attempt to:

• Require you to select an arbitration forum that could alone cost you hundreds of thousands of dollars just to have your claim heard;
• Include contractual terms that require you to travel across the country to participate in the arbitration for a chance to recover your money;
• Forbid you from participating in class action lawsuits; and,
• Include contractual provisions that would put you at great risk if you attempted to file a claim against them.

In short, while your adviser told you (correctly) that they have a fiduciary duty to you, they often violate that duty by making it difficult, if not impossible, to file and prosecute a claim against them.

These are not hypothetical scenarios. In fact, they are so important that they gained the attention of the Securities and Exchange Commission, which addressed the issue in a report issued in June 2023. Late last year, the SEC’s Office of the Investor Advocate’s year-end ‘2023 Report on Activities’ included the Ombuds’ message in which she recommended that the SEC consider “temporarily suspending the use of mandatory arbitration clauses in advisory agreements until further exploration of the associated costs and benefits to advisory clients is undertaken.” What the SEC itself will do with that recommendation remains to be seen. However, the fact remains that countless investors may find themselves subject to fundamentally inappropriate dispute resolution requirements until, and unless, the regulators step in to level the playing field.

The vast majority of investment advisers mean their clients no harm. It’s a business relationship that, in an ideal world, provides benefits to both adviser and client alike. The problems with investment adviser arbitration are increasing thanks to the fact that the number of investment advisers is growing (44% growth in ten years according to the SEC), and the number of clients has grown accordingly.  

Do yourself a favor and if you’re already using an investment adviser, review the terms of your agreement. If things go wrong, are the dispute resolution terms in your agreement fair? If not, and if the adviser won’t change those terms, you may want to consider whether you want to continue to do business with them. If you’re considering hiring a new investment adviser, check the agreement for the same thing: what happens if they violate their duty to you? If you find that you’d have to travel across the globe just to pursue your claim, consider whether that adviser really has your interests at heart.

Our Team Has Experience With Investment Adviser Claims

As the number of advisers and advisory clients steadily increases, we are receiving more and more calls from investors questioning whether they were the victim of an adviser’s wrongdoing. We have experience in not only working through the investment portfolios, but the advisory contracts themselves, and helping investors determine whether they can, or should, pursue a claim. And our input in that process costs the investors nothing until they decide to hire us to pursue a claim. If we need an expert’s help in assessing the case, expenses can be incurred in the claim review process, but our time and input before we’re hired is free.

Advertising a fiduciary duty is great marketing. Honoring the duty is more difficult. If you believe you’ve been the victim of your investment adviser’s wrongdoing, let’s discuss your particular circumstances.

For more information or to seek counsel from our investor claims group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post The Irony of Investment Advisers appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

So, how does a majority shareholder, officer, or director of a corporation avoid a trap? The answer is to exercise sound business judgment, in good faith, and in a fair and rational fashion, with input from a disinterested board of directors. 

Ohio law has long since recognized “the rights of the majority to exercise control over the corporate affairs to which ownership of their shares entitled them.” Armstrong v. Marathon Oil Co. (1987), 32 Ohio St.3d 397, 402, 513 N.E.2d 776, 782. “Ohio courts adhere to the ‘business judgment rule,’ and will not inquire into the wisdom of actions taken by majority shareholders, directors or officers in the absence of fraud, bad faith or abuse of discretion * * *. [T]he business judgment rule recognizes that many important decisions are made under circumstances of uncertainty, and it prevents courts from imposing liability on the basis of ex post judicial hindsight and lowers the volume of costly litigation challenging the directorial actions.” Radol v. Thomas (C.A.6, 1985), 772 F.2d 244, 256.

The protection of the business judgment rule can only be “claimed by disinterested directors.” Gries Sports Ent., Inc. v. Cleveland Browns Football Co. (1986), 26 Ohio St.3d 15, 20, 26 OBR 12, 16, 496 N.E.2d 959, 964. “Disinterested directors” does not mean indifferent directors, or directors with no stake in the outcome. If that were so, shareholders could never be directors or officers. Johnson v. Trueblood (C.A.3, 1980), 629 F.2d 287, 292 (“by the very nature of corporate life, a director has a certain amount of self-interest in everything he does”); Asarco, Inc. v. Court (D.C.N.J.1985), 611 F.Supp. 468, 473 (“the fact that Asarco directors own stock * * * is not sufficient to deprive their decision of the benefit of the business judgment rule”).

Disinterested directors are those who “neither appear on both sides of the transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves [641 N.E.2d 273] upon the corporation or all stockholders generally.” Gries, supra, 26 Ohio St.3d at 20, 26 OBR at 17, 496 N.E.2d at 964. The decisions of disinterested directors will not be disturbed if they can be attributed to any rational business purpose. Id. “The burden is on the party challenging the decision to establish facts rebutting the presumption” of good faith of directors invoked by the business judgment rule. Id.

If you have questions regarding your rights and responsibilities as an owner, officer, director, manager, or partner of a business entity, please reach out to request a consultation or visit David’s bio for his contact information to reach out to him directly, or give us a call at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Fiduciary Duty Litigation: Part 2 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

When times are good, the economy is running smoothly, and businesses are profitable, business partners are inclined to “get along.” In other words, when there is enough money and benefits to “go around,” business partners are more likely to overlook minor grievances and treat each other with fairness – at least one hopes. However, when times get tough, the economy slows, and businesses become less profitable, business partners tend lose patience with one another. As a result, we tend to see an uptick in legal disputes between business partners during these less prosperous periods. Those business partners, however, have fiduciary duties which they to one another. When a fiduciary duty is breached, litigation can be difficult to avoid. And, when litigation is brought, the stakes can be very high. When it comes to fiduciary duty litigation, there are several pitfalls and traps to avoid.

Fiduciary duties are typically found amongst business partners, shareholders in a close corporation, members of a limited liability company, officers and directors of a corporation or limited liability company, and trustees of a trust to its beneficiaries. The elements of a breach of fiduciary duty claim, most recently upheld by the Ohio Court of Appeals for the Third District, Shelby County are (in re: Thomas v. Fletcher):

1. The existence of a duty arising from a fiduciary relationship;
2. A failure to observe those duties; and
3. An injury resulting proximately therefrom.

For purposes of this discussion, the reader can simply substitute “majority members of a limited liability company,” or “partners of a partnership,” for majority shareholder of a closely held corporation. This is because, for purposes of applying fiduciary law, close corporations bear a striking resemblance to a partnership or a limited liability company. In essence, the ownership of a close corporation, like limited liability companies or partnerships, is limited to a small number of people who are dependent on each other for the enterprise to succeed. Just like a partnership, the relationship between the shareholders must be one of trust, confidence, and loyalty if the business is to thrive. Crosby v. Beam, 47 Ohio St.3d 105, 107 (1989); Gigax v. Repka, 83 Ohio App.3d 615, 620 (Montgomery Cty. 1992).

Majority shareholders owe a heightened fiduciary duty to minority shareholders. That duty is defined as the “utmost good faith and loyalty.” Crosby v. Beam, 47 Ohio St.3d 105, 108 (1989); Gigax v. Repka, 83 Ohio App.3d 615, 621 (Montgomery Cty. 1992); and Thomas v. Fletcher, 2000-Ohio-6685 (Shelby Cty. App.) at ¶15. It is a breach of fiduciary duty for a majority shareholder, to use their majority control of the corporation, for their own advantage, without providing the minority shareholders with an equal opportunity to share in the benefits of the corporation or to deprive minority shareholders of the benefits of their stock ownership in the corporation. Crosby v. Beam, 47 Ohio St.3d 105, 109 (1989); Gigax v. Repka, 83 Ohio App.3d 615, 621 (Montgomery Cty. 1992); Yackel v. Kay, 95 Ohio App.3d 472, 477 (Cuyahoga Cty. 1994).

There are many traps waiting for majority shareholders to fall into when dealing with minority shareholders. Examples of a majority shareholder’s misuse of their majority control of a corporation include:

• Removing a minority shareholder from the payroll of a close corporation which has never paid a dividend and where there is no legitimate business purpose for the removal. Crosby v. Beam, supra at 109; 
• A majority shareholder who derives excessive personal financial benefit from the close corporation that deprives the minority shareholders of their just share of the corporation’s profits; 
• Excessive personal financial benefit can include: excessive salary and bonuses, personal automobile and gasoline expenses, excessive medical insurance benefits, excessive use of credit card to pay personal expenses, which are reimbursed by the close corporation. Yackel v. Kay, 95 Ohio App. 3d 472, 475 (Cuyahoga Cty. 1994);
• A majority shareholder who induces a minority shareholder to extend loans or to post personal assets as collateral for loans to the close corporation at the same time that the majority shareholder is taking action against the interest of the minority shareholder constitutes a breach of fiduciary duty. Estate of Louise Morad v. Task, 1994, Ohio App. LEXIS 921 at 5. Both the Yackel case and the Morad case present analogous fact patterns that are instructive for our case.

A director and an officer of a close corporation owes a fiduciary duty of utmost good faith and loyalty to a minority shareholder as well. Cousins v. Brownfield, 83 Ohio App.3d 782, 791 (Franklin Cty. 1992). The failure of a director or officer of a close corporation to comply with the duties specified by Ohio statute constitute a breach of fiduciary duty owed to a minority shareholder. Id. For example, it is a breach of fiduciary duty for a director or officer to fail to provide a financial statement of the corporation to a minority shareholder who has properly requested one. Cousins v. Brownfield, supra at 785; Ohio Revised Code Section 1701.94(A)(4). The failure to send amended regulations to a minority shareholder violates a statutory obligation under Ohio law and amounts to a breach of fiduciary duty. Ohio Revised Code Section 1701.94(A)(2).

When litigation is filed, the stakes are high. That is because compensatory and punitive damages can be awarded for a breach of fiduciary duty that has caused actual damages to be suffered by the minority shareholder. For punitive damages to be awarded, there must be actual malice, which is evidenced by extremely reckless behavior revealing a conscious disregard of a great and obvious harm to another. Actual malice requires conscious, deliberate, or intentional wrongdoing, in the absence of which punitive damages cannot be awarded. Preston v. Murty, 32 Ohio St. 3d 334 (1987); Cousins v. Brownfield, 83 Ohio App.3d 782, 793 (Franklin Cty. 1992); Yackel v. Kay, 95 Ohio App. 3d 472, 481 (Cuyahoga Cty. 1994). Examples of actual malice can include wrongful termination, breach of majority shareholder fiduciary duty, and increasing personal compensation and maintaining family members on the payroll of the close corporation. Blake v. Faulkner, 1996 Ohio App. LEXIS 5288 (Shelby Cty.) at 17. In one case, Estate of Morad, punitive damages were awarded where the Court found that the majority shareholder, President, and Director of the close corporation fraudulently induced the minority shareholder to extend loans and to post collateral to the corporation and the majority shareholder.

If you have questions regarding your rights and responsibilities as an owner, officer, director, manager, or partner of a business entity, please reach out to request a consultation, visit David’s bio for his contact information to reach out to him directly, or give us a call at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Fiduciary Duty Litigation: Part 1 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.