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Breach of fiduciary duty leads to $14.2 million judgment against firm, advisor

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A high-profile former telecommunications CEO who was convicted of insider trading, paid fines of $70 million and spent five years in prison found himself on the winning end of a big lawsuit recently over the mishandling of his life insurance policy.

Joseph Nacchio, 67, the former chief executive of Qwest Communications (since taken over by CenturyLink), and his wife Anne M. Esker were awarded $14.2 million in a lawsuit against a division of Goldman Sachs over its alleged mishandling of their $95 million life insurance policy, according to Nacchio’s attorney Bruce Nagel.

In a four-week Superior Court trial that concluded Jan. 7 in Morristown, N.J., Nacchio and his wife sued Ayco Co., a division of Goldman Sachs, and their former financial advisor David Alan Weinstein.

Weinstein had testified against Nacchio in the insider trading case back in 2007, helping convict Nacchio of using confidential information to trade Qwest shares, but in this case, Nacchio turned the tables.

The suit involved the sale of $95 million in variable life insurance coverage to Nacchio and his wife in 2000. Nacchio claimed Weinstein was negligent and breached his fiduciary duty by failing to properly explain the risks of the variable life policies.

According to a statement from Nacchio’s attorneys, Ayco had been working with Nacchio and his wife for almost 14 years when, in 2000, they invested about $4.5 million in an estate enhancement plan with the help of Ayco advisor Weinstein. The plan was made up of two life insurance policies. It was Nacchio’s understanding that the policies would provide about $95 million in benefits upon his death to satisfy the inheritance tax on his estate. He also understood those policies would cover him up until age 100, but in reality they would have lapsed once he reached the age of 72, leaving him and his wife uninsured.

The issue was discovered in 2010, and after advice from their new insurance broker, who ran numerous scenarios, the Nacchios canceled the policies. They spent the $4.5 million plus millions more, for a total of about $30 million, to purchase the sort of estate enhancement plan they wanted and thought they were getting in the first place. The lawsuit, filed in 2010, claimed it would have cost Nacchio about $14 million in 2000 to buy the life insurance policies he thought he was getting through Ayco.

According to a Jan. 8 article in the Daily Record, Nacchio’s suit charged, in part, that the life insurance policy recommended by Weinstein earned less than 1 percent over a 10-year period. The jury found that Weinstein breached a duty of care as a financial advisor in recommending or implementing the estate enhancement plan. The jury also found that Weinstein made negligent misrepresentations of material facts that Nacchio relied on to invest in the plan.

“We are disappointed in the verdict and we plan to appeal,” Ayco spokesman Brian Cuneo said following the verdict.

In a September motion to dismiss the case, Ayco attorneys said the key risk of the policies was that their investment returns were subject to market forces and might not support the death benefit. Nacchio also risked having to pay additional premiums or the policies could lapse, according to the filing.

“This risk was fully disclosed to plaintiffs by Weinstein, Ayco and plaintiffs’ own estate planning attorney,” according to the filing.

The motion to dismiss was denied, and the jury obviously was not convinced that Nacchio had been properly advised of the risks associated with the policies.

When advisors have a fiduciary relationship with their clients, they have a legal obligation to serve the clients’ best interests. Courts closely examine this type of relationship because it imposes one of the highest levels of care that is legally required. Fiduciaries are required to uphold certain legal duties, which include the following:

• A duty to put the client’s interests before that of the advisor or the advisor’s firm.

• A duty to recommend investments only if they are in accordance with an investor’s goals, financial situation and risk tolerance.

• A duty to understand and explain the risks of investments they recommend.

• A duty not to misrepresent or omit relevant facts.

The No. 1 complaint in Financial Industry Regulatory Authority arbitration cases is breach of fiduciary duty. Financial advisors can breach their fiduciary duty to clients in a number of ways. Typically, that occurs when the financial advisor places his or her interests ahead of the client’s interests. Here are some common examples:

• Negligently recommending unsuitable investments or investment strategies (as was alleged in this case).

• Recommending an excessive number of transactions in order to increase commissions for the financial advisor’s gain.

• Failing to disclose a conflict of interest, such as a financial advisor’s personal interest or stake in a security.

• Buying or selling securities from the client’s account to the financial advisor’s personal account.

Without being privy to all the testimony in the Nacchio case, it’s impossible to say whether Weinstein and Ayco properly disclosed the risks associated with the variable life policies or properly profiled Nacchio’s risk tolerance. But the case underscores the importance of preparing and maintaining documentation in order for advisors to protect themselves and their company.


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