Sue Your Broker When Your Investments Lose Value

Advertiser Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services.
Last updated on July 23, 2019 Comments: 6

I know Larry Hagman from watching re-runs of I Dream of Jeannie, but he’s apparently better known as the answer to the question, “Who played J.R.?”. Hagman’s now in the news, not because his next movie is in production, but because he has won $1.1 million plus legal fees in a suit against Citigroup. That’s not all. Citigroup was required to pay $10 million to charities as a result of the arbitration.

Here is how it all began. Hagman and his wife moved their investments to Smith Barney in 2005, when the broker was a branch of Citigroup. Although Hagman requested a conservative portfolio, the broker invested in a mix of 75% stocks and 25% cash and bonds, a mix better described as moderately aggressive. The broker also sold Hagman a $4 million life insurance policy requiring annual premium payments of $168,000.

After the market collapsed, Hagman sold the insurance at a significant loss and was also required to pay a $437,000 exit fee.

The broker was obviously not exercising fiduciary duty, and this was the arbitration panel’s finding. There may be many investors with a similar story. When a full-service broker makes her own decision to invest differently than instructed by the investor, there could be legal consequences. Of course, there would be no such suit in a better market. If a broker’s independent decision resulted in a windfall for the investor, he wouldn’t in his right mind sue the brokerage for providing higher-than-expected returns with a riskier portfolio. Risk only seems to matter when the results are unfavorable.

Most investors should be more hands-on and involved than Larry Hagman. He’s a busy actor, and probably doesn’t put in the effort to handle his investments personally, and will probably only look at them when there is a problem. Furthermore, Hagman has the resources to hire and pay an attorney to take his case, not knowing whether he would receive compensation for those legal fees.

If my investments lose value, I have no one to blame to myself and no one to sue. If I had enough money to hire someone to take care of my investments while acting in my best interest, my options for passing the blame would be expanded. Most people have lost money in the stock market — and that doesn’t include victims of scams like Bernie Madoff‘s operation — over the past few years and would love to get that back.

Should Larry Hagman be responsible for monitoring his broker or should Citigroup be liable for his investment losses?

It’s Not Nice to Mess With J.R., Gretchen Morgenson, New York Times, October 9, 2010

Article comments

Anonymous says:

I am curious as to where damages come out? is it from 2005 or is it from 2008? And what standard will be applied? Fiduciary (high) or a lower standard? Just seems to open a lot of questions.

Anonymous says:

The said the Hagmans moved their investments to Smith Barney in 2005. It seems that they didn’t bother to review the holdings in the account statements until several years went by.or maybe they just looked at the net asset value on page one, and as Flexo noted, were all hunky dory as long as the number was going up, which it did from 2005 to about 2008. The broker did wrong, and the panel was right to fine SmithBArney/citigroup, esp since that broker had 9 other complaints filed against her.
But i think its a lesson to all who read it to take some responsibility for our own finances. Clearly, the Hagmans abdicated responsibility to their own peril.
The again, he ” hires people to do these things for me” so maybe he should also sue whoever it is he hires to look over his account statements.
Back in 1980 something when i first began investing, i opened up an account with Smith Barney. It was fun for me to ” have a broker” but that wore off after about 5 minutes and i realized what i really had was a ” clueless, self centered, commissioned salesperson” , and i also realized that no one had my interests in mind better than i did, so I closed the account and have been a DIY investor ever since.

Anonymous says:

I wonder if this will set a precedent…

Anonymous says:

My broker is also a certified financial planner and seems to have followed rules regarding fiduciary responsibilities. That said, there is still the opportunity for abuse and malfeasance which is what occurred here. Since I retired my mix of investments is focused on income & conservative growth but I do look at allocations each and every quarter and I do a sit-down with my broker twice a year. Even while still working and being “busy” you can’t pass responsibility to others. If this broker profited unreasonably from the deeds, punishment is appropriate. It is a shame/crime the broker didn’t follow the explicit instructions (I assuming they were explicit) of Mr. Hagman.

Anonymous says:

People still use brokers?

Anonymous says:

I read the original article and the problem seems straightforward to me. The client made it clear he didn’t want a risky portfolio and handed one over that was light in equities and heavy in income producing assets. The broker, who has had about 10 accusations leveled against her for mishandling portfolios, promptly dismantled the client’s portfolio, putting it in much riskier investments.
I don’t blame the client. The point of handing your money to a professional and paying for the pleasure is that they should now have your best interests at the forefront. Instead, too many brokers begin buying and selling to generate fees for themselves. You also may want to mention the broker sold them a large life insurance policy they didn’t need.
In short, the broker was without ethics and her manager failed to oversee her actions. I’m delighted the court acted as it did. The client paid a premium for a service he did not receive and had every right to sue for damages. I hope to see more of this as too many banks and brokerage houses are getting away with what is essentially theft.