Wednesday, November 26, 2008
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C.A. Orders Hearing on Claim Bank Defrauded Drug Chain Founder
By KENNETH OFGANG, Staff Writer
A Superior Court judge must determine whether a banker took fraudulent advantage of an elderly founder of the Sav-On drug chain and his wife in order to get them to open a brokerage account with the bank, the Court of Appeal for this district ruled yesterday.
Div. Three rejected Los Angeles Superior Court Judge John Shook’s conclusion that an arbitration clause in the brokerage agreement between the investment arm of Wells Fargo Bank, NA and Ira and Ronnie Brown was unconscionable. But the panel agreed with Shook that the parties had a fiduciary relationship, sending the case back so that the judge may “consider and rule upon the consequences of this conclusion.”
If the judge decides that there was fraud in the execution of the brokerage agreement, Justice Walter Croskey wrote, no part of that agreement, including the arbitration clause, can be enforced.
The lawsuit arises from a 2004 agreement that Ira Brown, then 93 and now deceased, and Ronnie Brown, then 81, signed with Wells Fargo. Ira Brown and a partner started Sav-On in San Bernardino in 1945, and by 2004 he had amassed more than 100,000 shares of the company’s stock, then valued at more than $1.8 million.
He was in failing health and legally blind at the time.
‘Relationship Manager’
In late 2003 or early 2004, the bank—with which the Browns were already doing business—assigned the couple a “relationship manager,” Lisa Jill Tepper. Tepper began visiting the Browns every other week to help with their financial paperwork.
Tepper introduced the couple to an estate attorney and certified public accountant, and began advising them with respect to investments. She suggested to them that their then-current investments were inappropriate for persons their age, and urged them to open a brokerage account with Wells Fargo, introducing them to a stock broker who worked for the bank, Jack Harold Keleshian.
Following a meeting with Tepper and Keleshian, the Browns executed documents opening up several investment accounts with Wells Fargo. One of those accounts was for a new “Brown Family Trust,” and the supporting documents included an arbitration clause.
During the meeting, Tepper took possession of the Browns’ Sav-On stock certificates, later placing them in a Wells Fargo vault.
Pressure Alleged
In May 2006, Ronnie Brown sued the bank, claiming that the previous September, while her husband was in hospice care and she was fatigued and mentally weary as a result of the burden of his care, she was pressured into selling nearly 75,000 shares of stock at $24.71 a share. Contrary to Keleshian’s advice that the stock’s value would drop to nothing if she did not sell immediately, the value subsequently rose, the complaint alleged.
Not only did she lose out on the subsequent increase in value, Brown alleged, she incurred significant capital gains taxes and thus suffered damages totaling more than $1 million, including Wells Fargo’s unjustified commission on the stock sale.
The bank moved to compel arbitration. Brown responded that the arbitration clause was unconscionable and that the bank breached its fiduciary duties.
Brown said she and her husband had become dependent on Tepper to handle their finances over a period of six months before the brokerage agreement was executed.
Following a hearing, Shook found that the arbitration agreement was “unfair and...procedurally unconscionable” but said the fraud issue was for a jury to decide. The bank, he said, should have done more to assist the couple in understanding the import of the documents they were signing.
But Croskey, writing for the Court of Appeal, said the arbitration agreement, a standard clause subjecting any dispute between the parties to resolution under the rules of the National Association of Securities Dealers, was not substantively unconscionable on its face.
“Without substantive unconscionability, procedural unconscionability is an insufficient basis on which to deny a motion to compel arbitration,” the justice added.
The trial judge, however, must decide the constructive fraud issue, Croskey went on to say, because it was raised by the petition to compel arbitration.
The justice cited evidence that Tepper had been handling the Browns’ financial needs; that the bank understood that the Browns were incapable of handling their own financial affairs, even at a simple level; that the bank knew that Ira Brown was too sick and his vision too poor to read the documents; that the bank knew the Browns signed the documents without reading them, and that Tepper, who had encouraged the Browns to trust her to act in their interests, was present at the meeting with Keleshian so that the couple would feel more comfortable.
“These facts, if accepted by the trial court, would support the conclusion that Wells Fargo’s fiduciary duty to the Browns encompassed a duty not to treat the execution of the Agreement as an arm’s-length transaction and to instead explain the material terms of the Agreement to them,” the jurist said.
The justice emphasized that the court was not finding a generalized duty on the part of stock brokers to explain initial agreements to prospective customers.
“We simply conclude that when the facts establish that an investment professional has previously voluntarily induced a vulnerable individual to repose trust and confidence in the professional, that professional has a fiduciary duty toward that individual, and may be required by that duty to fully disclose, in a manner the individual understands, the material terms of a contract between them,” the justice wrote.
The case is Brown v. Wells Fargo Bank, NA, B196258.
Copyright 2008, Metropolitan News Company