Estate Planning Malpractice

I always say 99% of the lawyers give the rest of us a bad name.

Brianna Bailey writes for News OK:

"A federal judge has sentenced a Midwest City man who conned seniors out of their savings to serve nearly 10 years in prison and pay $4.6 million in restitution for his role in the Ponzi scheme.

Joe Don Johnson, 43, was an estate planner who drew up wills for his elder clients. He would convince the seniors to invest their life savings with the now-defunct Oklahoma City-based company Global West Funding Ltd., operated by Brian McKye.

Johnson promised his clients returns as high as 20 percent, but the bulk of the money went to pay off earlier investors, commissions to Johnson and other salesmen, as well as McKye’s personal expenses, according to court documents."

Read rest of storyhere.

Attorney Jospeh Caramadre and his associate Raymour Radhakrishnan were to be tried for a scheme of defaruding dying individuals and make more than $15 million.  On November 20, 2012 they admitted in the U.S. District Court in Rhode Island that they had committed wire fraud and conspiracy. The guilty pleas were entered as part of a packaged agreement.

In exchange for the pleas, the U.S. Attorney’s Office will recommend that the court give the two men prison terms of no longer than 10 years. Each faced a maximum sentence of 25 years in prison and $500,000 in fines.

As reported by Darla Mercado for InvestmentNews:

" From 1995 through 2010, Mr. Caramadre created a strategy for investors that involved using variable annuities and naming a terminally ill person as the annuitant. Once the annuitant died, the investor received the death benefits, as well as a guaranteed return of the principal and other enhancements.

“The insurance companies collectively lost millions of dollars from defendants’ submission of variable annuities utilizing terminally-ill annuitants,” authorities noted in a court document stating the facts of the case. Some 20 carriers were involved, including Metropolitan Life Insurance Co., Western Reserve Life Insurance Co. and Transamerica Life Insurance Co.

The lawyer also offered “death put bond” strategies. Those involved assigning a sick person as a co-owner on the bond, along with an investor, who then profited when the co-owner died.

Federal authorities said that from July 2007 to August 2010, Mr. Caramadre and Mr. Radhakrishnan conspired to commit mail, wire and identity fraud.

The pair “concealed from the terminally-ill individuals and their family members that their identities would be used on annuities and bonds that were purchased by Caramadre and others,” authorities said. "

Here is the FBI’s new release:  click here

The FBI says:  "According to court documents, Caramadre located terminally ill individuals in various ways, including by visiting AIDS patients at a House of Compassion in Cumberland, Rhode Island, by locating family members and associates who were terminally ill, and by soliciting individuals who were terminally ill to purchase small life insurance policies.

According to court documents, Caramadre placed an advertisement in a local Catholic newspaper that provided that there was a compassionate organization that would immediately give $2,000 in cash to terminally ill individuals. Dozens of terminally ill responded to the ad. Caramadre gave Raymour Radhakrishnan, who began working for Caramadre in July 2007, the job of meeting with the people who responded to the ad for the purpose of obtaining their identity information and using that information on annuities and brokerage accounts.

According to court documents, Caramadre and Radhakrishnan made misrepresentations to terminally ill and elderly patients and their family members in order to obtain their personal identity information. They used the information, including names, dates of birth, and Social Security numbers, to obtain more than 200 variable annuities and to open more than 75 brokerage accounts in order to purchase death-put bonds in the victims’ names without their knowledge and consent. Caramadre and Radhakrishnan either forged the signatures of terminally ill people on account documents or obtained the signatures by means of misrepresentations. When the terminally ill person died, Caramadre and others reaped substantial profits by exercising death benefits associated with the investments."

In a suit filed against Philadelphia law fimr Duane Morris LLP and two of their estate attorneys, Stanley M. Joffee, Esq. amd Stanley A. Barg, Esq.,  plaintiffs claim  they suffered "substantial losses" after the lawyers allegedly ignored their requests for conservative investment strategies and their money was invested in a Madoff feeder fund instead.  Plaintiffs are real estate developer Daniel Keating III and his wife Sarah.  

The complaint makes interesting reading:  Click Here.

Claire Zillman writes for The AmLaw Daily:

"The Keatings complaint alleges that Joffe suggested Notz Stucki & Cie as one of two managers for a trust established in 2008. According to the complaint, the Keatings thought that Notz would be instructed to allocate the assets into conservative investments, but nearly half of the sum was invested in risky equity and hedge fund investments, including feeder funds of Bernard L. Madoff Investment Securities, which they discovered in December 2008."

Here is my question:  Why are these lawyers giving investment advice? 

Hat Tip to the Trust Advisor Blog.

Adam F. Steisand, Esq. of Loeb & Loeb LLP gave a presentation at the ACTEC Annual Meeting in Rancho Mirage, California, March 2009, entitled "To Tell the Truth (T&E Lawyers’ Edition):  Will My Real Client Please Stand Up.  A pdf of his excellent presentation is posted on the Loeb & Loeb website:  click here.

He discusses the question of whether or not an attorney owes a duty to non-client beneficiaries as well as whom the attorney represents when he or she represents a fiduciary, what are the ethical duties when representing a husband and wife, and what duty is owed to a client with diminished capacity.

Lou Ann Anderson writes for the Bell County Michigan Legal News Examiner.  See her article about an attorney who stole $800,000 from the estate of a now deceased client.  More details form Danielle Quisenberry writing for the Jackson Citizen Patriot here.

Anderson says:  "Using the probate system or probate instruments (wills, trusts, guardianships, powers of attorney) to steal assets is a growing problem.  Many of these actions are fueled by a sense of entitlement, others by plain greed.  Sometimes, as with guardianships, the asset owner is alive, but a person can be posthumously victimized by probate theft through estate planning vehicles like a will or a trust.  These cases manifest themselves in a variety of configurations, but "players" usually include one or some combination of greedy attorneys, disgruntled family members and/or wannabe heirs."

For more on this uplifting topic, see Estate of Denial – Shining Light on the Dark Side of Estate Management.   Anderson includes a post about "Legal industry silent on Astor estate attorney culpability."

 In their February  11, 2008 Trusts & Estates article, Corporate Trustees Beware,  Samantha E. Weissbluth and Erika Alley, both of Foley & Lardner, LLP, in Chicago  discuss the case of Janice Galloway Trust, No. C5-04-200042 (Minn. Dist. Ct. 2007).   A corporate fiduciary was sued for breach of fiduciary duty on the theory that it failed to do estate planning.

Weissbluth and Alley point out that while the corporate trustee won the case, it might not be that way the next time:

"But it’s surprising the amount of attention the trial court paid to what seems like a cut-and-dry breach of fiduciary duty claim. And, given the court’s emphasis on the facts in this case, it seems possible that a different set of facts and different experts testifying for the beneficiaries would have meant a decision against the fiduciary."

In Galloway, U.S. Bank as trustee was criticized for not contributing the assets of a QTIP trust to a Family Limited Partnership.  In a very long opinion the court discussed whether or not the trustee had a duty to invest in the FLP (no).  And discussed whether or not it was a good idea for various tax reasons (maybe so and maybe not).

The children who were beneficiaires and saw the QPRT reduced by $10.2 million in estate taxes when their mother, the income beneficiary, died, objected to the payment of trustee’s fees to U.S. Bank on various grounds, including that the bank had breached its fiduciary duty to the children as remaindermen by failing to contribute the QTIP’s assets to a FLP.  They claimed this technique would have resulted in a substantial valuation discount for estate-tax purposes.

The trial court dismissed all of the children’s objections — except for one breach of fiduciary duty claim.

Weissbluth and Alley describe the court’s reasoning:  "Janice wanted to keep her financial affairs private and did not want to involve her children in her estate planning. She was not particularly close with either of her children and did not always approve of how they handled money. Also, Janice had rejected even simple estate-planning techniques recommended by her estate-planning attorney. Clearly, she was not interested in engaging in planning as complicated as a partnership."  (And what does that have to do with it?  She was not the trustee.)

The bank’s marketing materials were examined.  And of course, they said they did estate planning. (Doesn’t everyone?)   But the materials made it clear that clients should depend on their outside advisors (rather than the bank) to implement estate-planning strategies.

Weisbluth and Alley’s advice:

"Although the bank was ultimately found not liable, based on the Galloway court’s decision, corporate trustees would be well-advised to carefully document meetings with clients regarding estate planning and ensure that their marketing materials are clear in directing clients to rely on outside advisors when implementing estate-planning techniques."