Aye lad, suitability'll get ya unless you get it in writin'.*
A core belief here at Dealbreaker HQ is that we’d be really good rich people.1 No conservative 401(k)s and unborn-children-college-funds for us; we’d dedicate ourselves to lives of sybaritic excess. For me, that means that if someone wants to die and leave me an oil fortune, I’ll be putting Morandis on the wall, DRCs in the cellar, and variable prepaid forwards in the trust fund. Everyone needs a little beauty in their life, and also in their trust fund.*I'm not much for cutting sophisticated investors or their advisers much slack and can usually be found on the side represented by the thinking of the appellate court in "Landesbank Baden-Wurttemberg v. Goldman, Sachs & Co.":
That must have been what motivated JPMorgan to pitch Skelly oil heiress and “acute stress syndrome” sufferer2 Ann Fletcher to enter into variable prepaid forwards on the Exxon Mobil stock in her trust. That or:
The value of the Trust prior to entering into the May 2000 VPF was $14,392,000. As of June 30, 2003, the sum of the Trust’s repayment obligations under the three VPFs had grown to $10,336,050. The value of the Trust at the time the Bank resigned as co-trustee [in March 2006] was $12,515,085.57. The Trust’s associated decline in principal was $1.88 million.So, I dunno, I feel like 7.8% in profits over 6 years is a not bad result on a pretty vanilla equity financing trade?
The Bank produced emails and spreadsheets to show that the Bank earned $1,127,189 from the VPFs. Expert testimony indicates that the Bank earned as much as $2,000,000 in profit.
Ten years later everyone freaked out and it came to court, and the court concluded among other things that (1) JPMorgan should not have helped Fletcher take money from her children and charity,4, but (2) it wasn’t Fletcher’s fault because she is old and unsophisticated and stressed, so (3) she gets to keep the money that JPMorgan gave her but JPMorgan has to pay it back to her heirs. More or less. Or something.
But for our purposes what’s of interest is the way that JPMorgan helped her take money from her kids and charity. And that brings us to the time that JPMorgan, in the form of its Oklahoma trust banker Jeff Morrow, approached Fletcher and the individual co-trustee, a securities lawyer named Rufus Griscom.
You can read the opinion, some of which strikes me as being pretty clearly wrong but hey I am not an Oklahoma trusts lawyer,3 here. Baaaaaasically there was a trust, and it had stock, and the idea was to pay the dividends of the stock to Fletcher during her lifetime and then, when she died, to give half the stock to her children and the other half to charity. At some point someone – JPMorgan? Fletcher? – conceived the idea that Fletcher should get much more money during her lifetime, basically by selling stock and pocketing the proceeds, leaving of course much less stock for the children and charity. So that happened....MORE
...Landesbank Baden-Wurttemberg (“Landesbank”) appeals from the dismissal of its common law claims for fraud, negligent misrepresentation, and unjust enrichment....Somewhere between "Trust no one" and "Trust but verify", that's where you'll find me, but then I read court decisions for fun and profit.
...The complaint in this case does not ascribe to Goldman or TCW any particular motive for committing fraud beyond a general profit motive common to all corporations, which does not suffice....
...by its own representations Landesbank possessed sufficient expertise to evaluate the risks of its investment....
...Landesbank argues that its representations affirming its status as a “sophisticated investor” with means to make an informed investment decision do not “undermine [its] allegation of reasonable reliance,”...
...We have considered Landesbank’s remaining arguments and find them to be without merit. For the foregoing reasons, the judgment of the district court is hereby AFFIRMED.