Thompson ex rel. Thorp Family Charit. v. Federico

• Decision Date: 08 July 2004
• Docket Number: No. Civ.03-496-MO.,Civ.03-496-MO.
• Parties: Roy B. THOMPSON, Trustee, on behalf of the THORPE FAMILY CHARITABLE REMAINDER UNITRUST, Plaintiff, v. Leonel FEDERICO, a resident of the State of Arizona, and Citigroup Global Markets, Inc. a New York corporation, f/k/a Salomon Smith Barney, Inc., Defendants.
• Court: U.S. District Court — District of Oregon

324 F.Supp.2d 1152

Roy B. THOMPSON, Trustee, on behalf of the THORPE FAMILY CHARITABLE REMAINDER UNITRUST, Plaintiff, v. Leonel FEDERICO, a resident of the State of Arizona, and Citigroup Global Markets, Inc. a New York corporation, f/k/a Salomon Smith Barney, Inc., Defendants.

No. Civ.03-496-MO.

United States District Court, D. Oregon.

July 8, 2004.

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Amy M. Bogran, Thompson & Bogran PC, Lake Oswego, OR, John H. Mayfield III, John Mayfield, Attorney at Law, Beaverton, OR, for Plaintiff.

Bruce L. Campbell, Ky B. Fullerton, Miller Nash, LLP, Portland, OR, for Defendants.

OPINION AND ORDER

MOSMAN, District Judge.

Plaintiff Roy Thompson acts as a trustee for a trust whose investment accounts were formerly managed by defendant Leonel Federico. Plaintiff alleges the trust suffered about $1 million in losses under Federico's watch. In an attempt to recover those losses, plaintiff brings negligence and fraud claims against Federico and his employer, Citigroup Global Markets, f/k/a Salomon Smith Barney, Inc. ("SSB"). Each side has filed a motion for summary judgment. For the reasons discussed below, the court DENIES plaintiff's motion (doc. # 33), and GRANTS in part and DENIES in part defendants' motion (doc. # 40).

I. BACKGROUND

In this securities case, plaintiff Roy Thompson in his capacity as a trustee claims that defendant Leonel Federico, while he was employed at Dean Witter and defendant SSB, caused plaintiff's trust to incur substantial losses. Plaintiff's allegations of misconduct on the part of Federico can be generally categorized thusly: (1) he failed to follow plaintiff's instructions to liquidate certain of the trust's holdings, (2) he made "dangerous" investments on behalf of the trust, and (3) he created a February 2002 investment proposal which did not adequately reflect plaintiff's instructions.

A. The Parties

The Trust Thorp Family Charitable Remainder UniTrust ("Trust") was formed on June 11, 1999, for the benefit of Robert and Judy Thorp. In November 1999, plaintiff Roy Thompson, a Portland attorney, was appointed trustee, a position he currently holds.

Defendant Leonel Federico is a stockbroker. He acted as the Trust's broker from August 1999 through August 2002. During this period, Federico worked for two different brokerage houses, Dean Witter (from August 1999 until April 2000) and SSB (from April 2000 until August 2002). As part of Federico's job change in April 2000, SSB agreed to perform brokerage and investment services for the Trust. In August 2002, plaintiff elected to end the relationship with defendants and directed defendants to transfer the Trust's holdings in SSB's possession to UBS Paine Webber. Thereafter, defendants transferred nearly all of the Trust's holdings to UBS Paine Webber. Despite the transfer to Paine Webber, as of May 2004, defendants had possession and control of approximately $14,000 of the Trust's assets.

Plaintiff in this lawsuit sues only Federico and SSB. Plaintiff, however, has brought claims against Dean Witter based on Federico's conduct while working there. Plaintiff's claims against Dean Witter presently are before a New York Stock Exchange arbitration panel, because the Trust's agreement with Dean Witter included an arbitration clause. (Although the SSB agreement included an arbitration clause, the parties agree it does not apply in this case, apparently because plaintiff crossed through the clause before signing the agreement.)

B. Non-Discretionary Trust Agreement

The Trust's "program agreement" with SSB provided that defendants lacked any independent discretionary authority over the Trust's accounts:

6. Additional Understandings: Client [plaintiff] understands and agrees to the following: Neither SSB nor any of its Financial Consultants, employees, or representatives will act or is acting as an investment advisor or investment manager or in a discretionary capacity with respect to Client ... for purposes of the Program nor will they provide specialized services or investment advice different from that which is solely incidental to SSB's business as a broker-dealer and customarily provided or available where brokerage and other transaction-related charges are paid on a per trade basis....

(Emphasis added). In a letter dated October 17, 2000, plaintiff counseled Federico: "While we appreciate your investment advice, it is important to make it clear that as the financial consultant to the Trust you are to have no discretionary authority to make investments on behalf of the Trust." Thus, plaintiff continued, "all investments on behalf of the Thorp Family Charitable Remainder Unitrust [must] first be cleared with the Trustee."

C. Alleged Dangerous Investments

At its inception in June 1999, the Trust's investment assets were worth a total of about $2,500,000.00. They reached a high of $2,700,000.00 in 2000. In February 2002, the Trust's assets had a total value of about $1,800,000.00.

Plaintiff contends that while Federico was with Dean Witter he made a number of dangerous investments on behalf of the Trust. These investments are the subject of the pending arbitration proceedings.

Plaintiff also alleges that Federico made dangerous investments on behalf of the Trust while he was with SSB. More specifically, plaintiff complains about Federico's decision to invest in an entity known as El Paso Partners L.P. ("El Paso"). Federico arranged for the Trust to purchase El Paso shares on July 28, 2000. Sometime in August 2000 plaintiff became concerned that the El Paso investment might generate unrelated business income and thereby jeopardize the Trust's non-profit tax status. As a result plaintiff ordered Federico to rescind the purchase of the El Paso shares. Although there has been no adverse action taken against the Trust because of the El Paso investment, plaintiff fears the IRS might decide to audit the Trust and discover the El Paso-generated income on some uncertain date in the future, thus placing the Trust's tax status at risk.

Aside from the El Paso investment, plaintiff additionally alleges that Federico, while with SSB, made other dangerous investments. The only other transaction plaintiff specifies, however, is Federico's July 2002 purchase of Worldcom stock.

D. February 2002 Investments Proposal

As mentioned, by February 2002, the Trust's assets were valued at around $1,800,000.00, a $700,000.00 decline from the Trust's beginning value in June 1999. On February 21 or 22, 2002, plaintiff and the Trust's attorney, Garth Nicholls, phoned Federico to express their concern about the Trust's assets' declining value. Plaintiff ordered Federico to stabilize the Trust's fluctuating value. Plaintiff and Nicholls thus requested that Federico devise a new investment strategy. In a February 26, 2002, letter, plaintiff reiterated that he wanted a revised investment strategy which would "[s]top the hemorrhaging of money from the Trust assets [and] essentially stabilize the trust value." In that letter, plaintiff asked Federico to collaborate with other SSB investment experts in formulating the new strategy.

In February or March 2002, Federico and SSB compiled an 83-page paper delineating five investment strategies available to the Trust. The paper compared the relative risks and predicted outcomes of the five alternative strategies. The strategies proposed different allocations of the Trust's assets; in general, the strategies proposed shifting more of the investment allocation from large-company stocks to cash, bonds, and small-company stocks. In large part, the paper relied on standard marketing materials. Plaintiff complains that the paper merely confused the relevant investment issues and set forth inappropriate investment strategies in light of the request to stabilize the Trust's value and his desire to abandon the equities market. Nicholls testified that the investment proposals failed to meet plaintiff's objective of ensuring that the Trust could effectively satisfy its obligations in the near term. Plaintiff, therefore, declined to pursue any of the five strategies.

In May 2002, the parties again discussed the five investment strategies proposed by Federico's February paper. Plaintiff reiterated his dissatisfaction with the five proposed strategies, given he wanted to pull the Trust out of the equities market. By the summer of 2002, the stock market was on a consistent downward trend. The Dow Jones Industrial Average fell from around 9,700 in the beginning of June to around 8,700 by the end of July. The NASDAQ fared poorly as well.

E. Liquidation Order

According to plaintiff's version of events, on May 31, 2002, he phoned Federico and instructed him to liquidate all of the Trust's assets invested in the stock market, in light of the market's downward trend. During that conversation, plaintiff contends, Federico agreed he should and would liquidate the Trust's equity holdings. Plaintiff further contends that they agreed that the Trust would maintain its positions in safer investments such as cash and bonds. In June the stock market continued to decline.

On June 9, 2002, Federico sent a letter to plaintiff acknowledging that the stock market seemed to be in the midst of a steep decline. The next day, on June 10, Federico phoned plaintiff to discuss the Trust's assets and the stock market's decline. According to plaintiff, during that June 10 conversation, he again ordered Federico to "liquidate [and convert] the Trust's equity position to cash, keeping the bond and cash investments intact." Plaintiff thus contends that he unambiguously ordered Federico to liquidate the Trust's stocks and also that Federico agreed to do so. On June 12, 2002, plaintiff sent a letter to Federico stating:

This letter is to confirm our phone conversation of a few weeks ago. You explained to me that you felt the market was at a point at which you desired to liquidate some...