Chase Bank tells First Circuit it’s not liable for investors’ losses

BOSTON (CN) — The First Circuit heard oral arguments Tuesday in a case that could decide how much legal responsibility investment advisers have for clients’ financial losses.

Peter Doelger sold his energy audit company for eight figures in 1995 and poured money into a wide range of investments, from biotech companies to Korean real estate. He set up a brokerage account with JPMorgan Chase in 2009 and hit the jackpot over the next five years with energy-related master limited partnerships, which generated tens of millions in profits and funded a lavish lifestyle including homes in Boston, Florida and Paris. After 2014, however, the MLPs rapidly lost value.

Doelger and his wife Yoon claim in a lawsuit that Chase encouraged them to stay with the MLPs because it was profiting from their losses. They say Chase employees lied in order to evade internal controls, ignored signs that Doelger was developing dementia and ripped them off for millions.

“Defendants’ malfeasance would make for a good John Grisham novel,” they wrote in their brief.

Chase, however, says that it didn’t breach any fiduciary duties because, under Massachusetts law, the extent of its duties was limited by the investment contract, and the firm was merely executing the strategy that the Doelgers had signed up for. A lower court agreed with Chase.

“Fiduciary duty is not an all-or-nothing proposition,” insisted Chase’s lawyer, Tracy Appleton of Nagy Wolfe Appleton in New York. “The scope of fiduciary duty is based on the agreement and the discretion that you can exercise.”

Here, she said, “the agreement specifically limited defendants to choosing and managing MLPs, and barred them from changing that.”

“Mr. Doelger in writing confirmed that his MLPs were suitable for him in light of his investment objectives,” Appleton said. “He was not interested in any other strategy,” and he warned that he’d use another adviser if Chase didn’t focus on MLPs.

But the Doelgers’ lawyer, James Serritella of Kim & Serritella in New York, said that Chase was an investment adviser, not just a stockbroker, and it was obliged to make sure the couple’s investments were suitable to their needs.

“They want to argue that advisers are below where brokers originally were” in terms of client obligations, Serritella said. “It’s absurd.”

“JPMorgan didn’t even know what the clients’ objectives were,” he complained. He said that when investment adviser James Baker was required to create a profile for Doelger, Baker never called Doelger’s accountant to confirm his net worth. Baker claimed internally that Doelger’s net worth was $100 million, far more than the actual amount, Serritella said.

“Baker was telling the client for years that you’re making $2 million a year, but that wasn’t true. They were making $400,000 in dividends and paying $500,000 on line of credit to JPMorgan. So Morgan didn’t want them to sell. Baker said hock your house instead of selling MLPs, and don’t sell MLPs for a margin call; use your savings. That’s the advice.”

U.S. Circuit Judge William Kayatta, a Barack Obama appointee, got Serritella to admit that Chase didn’t make any transactions without notice and consent, and on at least one occasion suggested that the account might be too heavily focused on MLPs. But “their obligation is not to issue a CYA letter, it’s to do a suitability analysis,” Serritella countered. “It’s not supposed to be a get-out-of-jail-free card.”

U.S. Circuit Judge Julie Rikelman, a Joe Biden appointee, asked if Chase had an obligation to reassess the suitability of the couple’s investments over time.

“No,” Appleton insisted. “There’s no duty to continuously reassess suitability. There’s no suitability requirement unless you make an affirmative recommendation. And there’s no record of defendants encouraging the Doelgers to maintain the MLPs.”

Kayatta objected that the recommendation to use savings rather than selling the MLPs for a margin call might qualify. “But they also recommended selling MLPs to pay down the line of credit,” Appleton said. “There was no recommendation to increase the MLPs.”

The three-judge panel — which included U.S. Circuit Judge Lara Montecalvo, another Biden appointee — gave little indication of where it stood, but in the end the issue boiled down to how far investment advisers are required to go to save their clients from their own bad decisions.

“When an agreement says that you, the client, are responsible for certain things,” Appleton argued, “you cannot have a fiduciary duty making the other side responsible for those things.”