Arbitration Case Summaries – Kern vs. Standard Financial Services,


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Kerns vs. Standard Financial Services, NASD Arb 01-03814

The idea that stock brokers would recommend variable products to IRA and other tax deferred accounts, in order to capitalize on the variable products’ tax advantages, is bewildering, but it evidently happens enough so that a class action based on that premise got underway in California.

We recently covered a decision in such a case in the Securities Litigation Alert (SLA 2002-22), in which putative class plaintiffs complained, among other things, of substantial fees unnecessarily paid for redundant tax benefits. The Ninth Circuit found that class action preempted by SLUSA (Patenaude v. Equitable Life, 5/14/02), but, in this arbitration, the merits were reached and the Claimants prevailed. Robert and Patricia Kerns sought $50,000 in damages for what the Award’s “Case Summary” describes, in barebones fashion, as “causes of action [that] relate to the transfer of CDs into variable annuities in Claimants’ IRA accounts.”

The pleadings in this matter describe the essential facts as involving the transfer of IRA accounts from one bank to another by both Mr. & Mrs. Kern, each of whom was past 70 years of age during the relevant period. They claim that they advised the bank’s representative to maintain their two IRA accounts, which had an aggregate value of about $300,000, in CDs, but that he placed about $250,000 of the total in variable annuities. As a result, Claimants alleged that they wrongfully incurred commissions, charges for the costs of insurance and other annuity servicing fees, interest, costs, and lost opportunity profits.

Respondents answer that the amount of paperwork and the nature of the forms, all of which were marked with the words “variable annuity,” could not have failed to alert the Kerns to the different investment they were making. Moreover, the investment was fully discussed with the couple and the product did, indeed, meet their investment objectives. Both the Statement of Claim and the Statement of Answer adeptly describe the respective claims and defenses.

After five hearing sessions, the single Arbitrator awarded $23,190 to Mr. Kerns and $23,071 to Ms. Kerns, while denying the punitive damages and attorney fees the couple requested. Forum fees were equally divided between the sides. (SAC Ref. No. 02-24-02) SNOWDEN v. EMPIRE FINANCIAL SERVICES, INC., No. 01-2149 (4th Cir., 5/15/02). “

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. 

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