Garrison v. Sagepoint Fin., Inc.

• Decision Date: 20 January 2015
• Docket Number: No. 69625–4–1–I.,69625–4–1–I.
• Citation: 345 P.3d 792,185 Wash.App. 461
• Parties: Jack M. GARRISON; the Garrison Family LLC, a Washington limited liability company; Lesa B. Neugent, individually and as Trustee of the Jack M. Garrison and Charlotte L. Garrison Revocable Trust, the Jack M. Garrison Survivor's Trust, the Charlotte L. Garrison Marital Trust, The Charlotte L. Garrison Exempt Marital Trust; The Charlotte L. Garrison Exempt Family Trust FBO Mark Garrison, and the Charlotte L. Garrison Exempt Family Trust FBO Lesa Neugent, Appellants, v. SAGEPOINT FINANCIAL, INC., a Delaware corporation licensed to business in Washington, f/k/a AIG Financial Advisors, Inc., Respondent, Mark M. Garrison and Michelle Garrison, his wife, and their marital community, Defendants.
• Court: Washington Court of Appeals

185 Wash.App. 461

345 P.3d 792

Jack M. GARRISON; the Garrison Family LLC, a Washington limited liability company; Lesa B. Neugent, individually and as Trustee of the Jack M. Garrison and Charlotte L. Garrison Revocable Trust, the Jack M. Garrison Survivor's Trust, the Charlotte L. Garrison Marital Trust, The Charlotte L. Garrison Exempt Marital Trust; The Charlotte L. Garrison Exempt Family Trust FBO Mark Garrison, and the Charlotte L. Garrison Exempt Family Trust FBO Lesa Neugent, Appellants

v. SAGEPOINT FINANCIAL, INC., a Delaware corporation licensed to business in Washington, f/k/a AIG Financial Advisors, Inc., RespondentMark M. Garrison and Michelle Garrison, his wife, and their marital community, Defendants.

No. 69625–4–1–I.

Court of Appeals of Washington, Division 1.

Jan. 20, 2015.

Publication Ordered Jan. 30, 2015.

Jason T. Dennett, Carl Jerome Carlson, Tousley Brain Stephens PLLC, Seattle, WA, for Appellant.

Mark M Garrison, (Appearing Pro Se), Michelle Garrison, (Appearing Pro Se), Chanhassen, MN, Troy Donald Greenfield, Averil Budge Rothrock, Schwabe Williamson & Wyatt PC, Shannon Lavell McDougald, Trent M. Latta, McDougald & Cohen P.S., Seattle, WA, for Respondent.

Opinion

SCHINDLER, J.

¶ 1 Mark M. Garrison was a licensed investment advisor and co-owner of a financial advice firm, Acumen Financial Group Inc. In 1999, Mark¹ entered into an independent contractor agreement with AIG Financial Advisors Inc. to act as a registered securities representative (stockbroker). In 2002, Mark's grandparents Jack and Charlotte Garrison established the Garrison Family LLC. In 2006, Jack and Charlotte transferred all of the assets of the LLC to the Jack M. Garrison and Charlotte L. Garrison Revocable Trust (Revocable Trust). The Revocable Trust designates Jack and Charlotte as the cotrustees and income beneficiaries, and names Mark and his sister Lesa B. Neugent as the remainder beneficiaries. The Garrison Family LLC and the Revocable Trust held approximately $26 million in two brokerage accounts at Wells Fargo Investments LLC. After Charlotte died in August 2006, Jack appointed Mark as the sole manager and trustee of the Garrison Family LLC and the Revocable Trust.

¶ 2 In April 2011, Jack Garrison, Lesa Neugent, the Revocable Trust, and the trusts created after Charlotte's death (collectively Garrison Trusts) filed a lawsuit against Mark and SagePoint Financial, formerly known as AIG Financial Advisors Inc., alleging joint and several liability for the loss of more than $20 million and claims of breach of fiduciary duty; negligent supervision; violation of the “Washington State Securities Act” (WSSA), chapter 21.20 RCW; and respondeat superior. AIG filed a motion for summary judgment dismissal arguing that under National Association of Securities Dealers (NASD) Rule 3050, Transactions for or by Associated Persons (amended effective Oct. 15, 2002), AIG had no duty to supervise the transactions in the Wells Fargo accounts. The Garrison Trusts filed a cross motion for summary judgment, arguing AIG owed a duty to supervise under NASD Rule 3040, Private Securities Transactions of an Associated Person (amended effective March 23, 2004). In the alternative, the Garrison Trusts argued AIG had a duty to investigate and monitor the suspicious activity in the Wells Fargo brokerage accounts. The court granted AIG's motion for summary judgment and dismissed the claims against AIG. We affirm dismissal of the respondeat superior claim against AIG. Because there are material issues of fact as to whether AIG knew or should have known by October 2007 that Mark was acting as an investment advisor for compensation triggering a duty under the NASD Rules to either supervise the securities transactions in the Wells Fargo brokerage accounts or to investigate and monitor the securities transactions in the Wells Fargo accounts, we reverse summary judgment dismissal on the claims against AIG for negligent supervision and violation of the WSSA.

FACTS

¶ 3 Mark M. Garrison was a licensed investment advisor registered with the United States Securities and Exchange Commission (SEC). Beginning in 1995, Mark was co-owner of a financial investment advice firm in Bloomington, Minnesota, Acumen Financial Group Inc.

¶ 4 In 1999, Mark entered into an “Independent Contractor Agreement for Registered Representative” with AIG Financial Advisors Inc.² AIG is a securities broker-dealer registered with the SEC and a member of the National Association of Securities Dealers (NASD).³ As a licensed registered securities representative or stockbroker, Mark also registered with the SEC.

¶ 5 As part of the Independent Contractor Agreement with AIG, Mark agreed to comply with “the statutes, rules, regulations and statements of policy of the [SEC], the Conduct Rules of the NASD and any state securities and insurance laws and regulations,” and AIG policies and procedures. Mark agreed to notify AIG “in writing of any outside business activity prior to engaging in such activity.”⁴ The Independent Contractor Agreement states, in pertinent part:

I will notify the Company in writing of any outside business activity prior to engaging in such activity. I will not engage in any conduct which conflicts with the business of the Company, nor will I engage in any conduct which is not the business of the Company at the location where I conduct the business of the Company without advising the Company of such business activity in writing. I will not accept or retain employment or compensation from any person or business or as a self-employed person as a result of business activity outside the scope of my affiliation with the Company without advising the Company in writing of such employment or compensation. I agree to make books and records with respect to my outside business activities available to the Company upon request.^{[ 5 ]}

¶ 6 Mark's grandparents Jack M. Garrison and Charlotte L. Garrison owned a shipping company. In 2002, Jack and Charlotte established the Garrison Family LLC, transferring approximately $11 million to the LLC. Jack and Charlotte were the sole shareholders and Jack was named the manager of the LLC. The Garrison Family LLC assets were held in brokerage accounts at the Seattle branch of Wells Fargo Investments. Jack worked with Wells Fargo registered securities representatives Jean Adams and Rebbie Thomas.

¶ 7 In 2006, Jack and Charlotte established the Jack M. Garrison and Charlotte L. Garrison Revocable Trust. Jack and Charlotte transferred their Garrison Family LLC shares plus approximately $16 million into the Revocable Trust. The “Revocable Living Trust Agreement” designates Jack and Charlotte as the cotrustees and lifetime beneficiaries of the trust, and names their grandchildren Mark M. Garrison and Lesa B. Neugent as the remainder beneficiaries, with a 62 percent interest allocated to Mark and a 38 percent interest to Neugent. The Revocable Trust directs the creation of several other trusts upon the death of either Jack or Charlotte—an exempt marital trust, a marital trust, a survivor trust, an exempt family trust for the benefit of Neugent, and an exempt family trust for the benefit of Mark.⁶

¶ 8 Charlotte died on August 8, 2006. Shortly after her death, Jack was diagnosed with dementia. On September 11, 2006, Jack resigned and appointed Mark as the manager of the Garrison Family LLC and the trustee of the Revocable Trust.

¶ 9 Over the years, Jack had invested conservatively in the Wells Fargo brokerage accounts. In September 2006, the assets in the Wells Fargo accounts for the Garrison Family LLC and the Revocable Trust totaled approximately $26.5 million, consisting of approximately $21.8 million in the LLC brokerage account, $4.6 million in the Revocable Trust brokerage account, and $120,000 in the LLC checking account.

¶ 10 In compliance with NASD Rule 3050, on October 6, 2006, Wells Fargo sent a letter requesting approval of Mark's appointment as “trustee, owner and manager on accounts held with our firm.” The letter states, in pertinent part:

This letter is to inform you that Mark M[.] Garrison, an employee of your firm, has requested to be appointed trustee, owner and manager on accounts held with our firm. In order to execute his request, we must have approval in writing from your Compliance Officer (Rule 407 letter).^{[ 7 ]}

¶ 11 On October 16, 2006, Mark's assistant faxed the Wells Fargo letter to the AIG Compliance Department. The cover sheet states, in pertinent part:

[P]lease find a letter from the Seattle, WA office of Wells Fargo requesting approval from your department for Mark Garrison to act as the trustee, owner and manager on accounts held in a trust for Mark's grandparents. Please forward your approval to the address shown on the Wells Fargo letterhead.

¶ 12 On November 14, 2006, the AIG Compliance Department sent Mark a “Letter of Understanding for Acting as Trustee/Owner /Manager on the Garrison Wells Fargo Accounts.” The letter states that AIG does not object to Mark acting as the “trustee/owner/manager” on the conditions that Mark does not act as a registered representative/stockbroker and that he complies with the requirements to disclose annually his outside business activity on the AIG “Outside Business Activities Questionnaire” (OBAQ). The November 14 letter states, in pertinent part:

Re: Letter of Understanding for Acting as Trustee/Owner/Manager on the Garrison Wells Fargo Accounts (# s W35823867, 745–1146604, & W29758675)

Dear Mr. Garrison:

This letter will serve as your record that AIG Financial Advisors, Inc. (“AIGFA”) is aware that you are trustee/owner/manager on the above-referenced Garrison accounts held at Wells Fargo. AIGFA does not object to your participation in this activity as long as the following are met:

1. You sign and return the attached Indemnification Form;

2. You may not act as the representative of record for these or any other accounts of Garrison (held at Wells Fargo or elsewhere);

3. You are limited to acting solely as

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