US Pharm
. 2006;6:84-87.
If I had a million dollars,
We wouldn't have to walk to the store.
If I had a million dollars,
We'd take a limousine ‘cause it costs more.
--Barenaked Ladies
1
Ev
er think that if enough money falls out of the sky onto your lap, your
residency on Easy Street will be assured? If this premise sounds anything like
the cliché about things being too good to be true are, in fact, too good to be
true, pay close attention to the details of this fascinating lawsuit.2
Facts
June 5, 2005,
turned out to be a red-letter day for a woman residing in southeast Michigan.
Her mail included a surprise package with a certificate for 150,000 shares of
Express Script stock, valued at over $7 million. This sounded like a really
great windfall, given that she thought she had sold all of her 100 shares of
this company back in 1992 and 1993. Her fortune seemed even more realistic
when she received a letter from the CEO of Express Scripts on June 29, 2005,
announcing the awarding of a two-for-one split of its stock.
Still not absolutely certain
whether her newfound fortune actually belonged to her, she took the letter and
the stock certificate to H&R Block Financial Advisors (HRBFA), where she asked
her broker to determine whether the stock was hers for sure. The broker called
American Stock Transfer & Trust (AST)--the organization that is the registered
transfer agent for shares of Express Script stock. The telephone call was
recorded by AST, and the transcript was made available during the course of
discovery in the lawsuit that was about to happen. The HRBFA broker asked the
AST agent if the certificate was valid. The stock certificate number was
confirmed, and the AST agent confirmed that the certificate was valid and that
there were no stops or restrictions on it.
Upon being assured that this
certificate was for real, the customer instructed HRBFA to sell the stock, and
approximately $7 million was deposited into an investment account. Most of
this money went to buying municipal bonds. On July 13, 2005, she had $1.5
million from that account transferred to another account she had at Salomon
Smith Barney. What happened to those dollars is not discussed in the trial
court's opinion. More importantly, on that same date, HRBFA assumed that since
the customer received her 150,000 stock shares as the result of a two-for-one
stock split, she must have previously owned 150,000 shares. That is when HRBFA
began looking for the other 150,000 shares.
Before the customer is judged
as a possible carpetbagger taking advantage of a situation just too good to be
true, there is a vague, if not plausible, explanation as to how this money
might have found its way to her. In a footnote to the opinion, the judge
observed speculation that perhaps a now-deceased former boyfriend had bought
the shares for her without letting her know. (Convenient, yes, but how
likely?) This does, however, beg the question: What really happened to cause
such unfounded wealth in the pockets of this investor?
This is where the facts get
dicey. HRBFA contacted AST to see what happened to the other stock. AST
stated that the customer herself had inquired into the matter. This
statement may be nothing more than a red herring designed to question her
credibility. Or perhaps the woman did have some inside information that she
was relying on. At any rate, AST told HRBFA that it was investigating the
matter. HRBFA communicated with AST several more times and even paid AST a $55
fee for the investigation. On August 12, AST advised HRBFA that the research
should be completed very soon.
Parts of the puzzle started
coming together on August 19 when Express Scripts notified AST that the
150,000 shares that it asked AST to purchase in 2003 were missing. That
prompted AST to go back into its databank, where it found the mistake.
Discovery during the lawsuit showed that when the customer sold off the 100
shares of Express stock she owned in 1992 and 1993, AST was also the transfer
agent, which explains why she had a file with personal information in AST's
database. In November 2003, Express Scripts directed AST to buy 150,000 shares
of Express Scripts stock on the open market and deposit it into Express
Scripts' treasury account. AST did as instructed and collected the stock.
However, instead of depositing it into Express Scripts' account, a
data-processing error prompted AST to mistakenly deposit the 150,000 shares
into the customer's account. Apparently, AST credited the shares as a
so-called "book entry," meaning that no physical stock certificate was ever
created. The error went undetected for almost two years before the stock split
would activate a physical certificate being sent to her.
AST notified HRBFA of its findings
on August 23, 2005. Following AST's request, HRBFA put a hold on the
customer's investment account. HRBFA also notified Salomon Smith Barney of the
situation and asked that it put a hold on the customer's account at that
brokerage house. The court's opinion does not address whether the request by
HRBFA was honored. On August 24, HRBFA explained the problem to the customer,
liquidated the investment account, and purchased 150,000 shares of Express
Scripts stock to cover its potential liability to that company. Most ironic,
because of the $1.5 million transferred out of the customer's account, and
because Express Scripts stock had increased in value, HRBFA's debit balance at
the time of the court hearing was down to approximately $3 million.
Lawsuit
On August 26, the
litigation began with all of the parties suing each other; then they each
filed cross-lawsuits against each other. For purposes of this part of the
litigation, the federal district judge assigned to the case was presented with
two motions from the parties. The first from HRBFA was motion to dismiss
counterclaims against it by AST. The second was from AST, seeking to have
HRBFA turn over the money it was holding in the customer's account. While it
is noteworthy that AST sued the woman of the windfall, her involvement at this
stage is not mentioned. As aptly noted by the judge, "The parties are
wrangling over who should suffer the losses incurred and reap the benefits
generated by this transaction gone awry."
In the lawsuit by HRBFA
against AST and Express Scripts, HRBFA alleged negligence, estoppel, and
fraud. Each count focused on AST's misconduct in representing the validity of
the stock transfer, because HRBFA asked for and received notice that the stock
certificates were "good, valid, and free and clear of any stop and/or
restriction, and therefore, were transferable." In addition, HRBFA claimed
because it was "required to repurchase shares of Express Scripts and incur
damages in excess of $3,000,000.00, in the form of an unsecured debit
balance," AST and/or Express Scripts should be held liable for its potential
losses.
On October 31, 2005, AST filed
a suit against the customer and HRBFA for "statutory conversion, common law
conversion, common law fraud/misrepresentation, negligence, recovery of
payment by mistake, unjust enrichment, and civil conspiracy." AST made several
allegations, including: (1) HRBFA knew that its customer had no right to
and/or ownership interest in the stock certificate; (2) HRBFA failed to
investigate whether the customer actually owned any shares; (3) it was
unreasonable for HRBFA to believe that its customer would seek advice or
assistance regarding the certificate from HRBFA if she already maintained
150,000 shares of Express Scripts somewhere else at another broker-dealer; (4)
HRBFA had no basis to believe that the customer had any right to or an
ownership interest in the stock certificate, given the current value of her
shareholder investment account at HRBFA; and (5) the unusual nature of the
presentation of the stock certificate by this customer should have raised
immediate and significant red flags at HRBFA. In support of its position, AST
claimed that the red flags should have been glaring in the face of HRBFA
because:
HRBFA only requested
confirmation from AST that the certificate was validly issued by AST; when
doing so, HRBFA failed to inform AST and intentionally withheld from AST the
fact that [the customer] did not own any shares of Express Scripts common
stock; that the certificate was not transmitted by AST to HRBFA because it was
brought in by the customer off the street; that the customer was not and had
never been a "high-end" customer/account; that the customer's investment
history/activity in no way supported entitlement to or ownership of over $7
million in Express Scripts common stock; that the facts surrounding the
presentation of the certificate were highly unusual and suspicious; and that
HRBFA decided to immediately credit the customer's account with $7 million
worth of shares, despite knowing or recklessly disregarding the fact that she
had no right to or ownership interest in the shares, in order to generate
significant commissions for HRBFA.
Most of the court's
decision is mired in highly technical language involving interpretation and
application of the Uniform Commercial Code (UCC), as adopted in the state
where this litigation was pending.3 The UCC is a very long and
complicated document that puts even good lawyers to sleep. The judge did,
however, show some sober understanding of a few key points. For example, AST
argued that:
The facts available to
HRBFA could only give rise to one reasonable conclusion: i.e., that the
certificate had been mistakenly issued… Fearing that its clear
suspicion/knowledge would be confirmed, and with dollar signs dancing in its
head, HRBFA … telephoned AST … and asked a calculated, limited inquiry:
whether any "stops or restrictions" existed with respect to the certificate.
In fact, HRBFA intentionally limited its inquiry in this regard, suppressing
both the existence of glaring red flags and its clear suspicion/knowledge that
[the customer] had no interest in the shares, presumably to give the false
impression that nothing unusual existed.
The judge characterized the
above arguments as an attempt by AST "to turn a negative into positive. It
argues that HRBFA's failure to apprise it of ‘red flags' constituted
affirmative misrepresentation"--that HRBFA contacted AST not to
ensure the validity of the stock certificate, as the transcript would suggest,
but rather as a slick means of lulling AST into complacency--"so that AST would
not conduct its own investigation and uncover its own negligent error."
The judge wrote, "This
argument, while clever, is unpersuasive. It was not HRBFA's job to police
whether the transactions recorded are appropriate. And because its conduct
was, at best, merely passive, it did not reach a level of affirmative
misconduct in assisting the customer in the commission of a wrong." She
observed that even assuming the truth of AST's allegations, HRBFA conduct was
protected by provisions of the UCC. Therefore, she dismissed AST's
counterclaim against HRBFA.
In the remaining motion by AST
to compel HRBFA to surrender the 150,000 shares it purchased to cover its
threatened liability in correcting the transactional error, the judge wrote
that while technically, under the UCC, AST had no legal authority to compel
HBRFA to give the stock back to AST, there were practical sense reasons
arguing in favor of the "turnover" motion. Furthermore, in the opinion of the
judge, AST suggested a way of maintaining each party's status quo until the
remaining issues were resolved at trial.
AST proposed that it be
allowed to post bond in the amount of its potential liability to HRBFA--about
$3 million--which would protect HRBFA from any losses. The judge stated that
this suggestion is a "fair and reasonable solution to the dilemma now facing
these parties. The 150,000 shares of Express Scripts stock now in HRBFA's
possession are intended to balance Express Scripts's books, and that is
exactly how they should be used." The gist of this temporary solution was to
grant a part of AST's Motion for Turnover of Express Scripts Stock. She
concluded that upon AST's posting of adequate bond to cover HRBFA's potential
losses, HRBFA would turn over 150,000 shares of Express Scripts stock to AST.
The judge also allowed AST to post a bond in an escrow account until the
conclusion of the trial.
Analysis
This scenario
suggests a plot that could sustain a made-for-television reality show:
"Millionaire for a Month." One could imagine a storyline where the contestants
make compelling presentations on why they should get the money at the expense
of other participants. At the end of the winner's month with a million
dollars, whatever money is not spent would revert to the producer. While there
will be some who scoff at this idea, I just have to wonder what happened to
the $1.5 million the customer moved to her other brokerage house. If she spent
all or part of it, how would this money be recouped? What if she traded the
money for stock that went down in value? Would she be liable out of her own
assets? Could the authorities make her sell off her assets, including cars,
boats, planes, and her firstborn male child? Remember, the customer did
nothing wrong in getting this money deposited into her own account; at least
nothing suggests that she might have something to do with it yet. When she
could not figure out what happened, she went to her trusted broker. The broker
made a good-faith attempt to determine the validity of the stock transfer and
was assured by an AST employee that the transfer was correct and without any
reservations. Can you blame her for wanting to upgrade her lifestyle after
acquiring this new largesse?
Here is where the honesty
question gets asked: If the same or similar circumstances discussed in this
case happened to you, i.e., you were notified that a stock transfer worth $7
million was deposited into your account, would you raise the idea to your
broker or anyone else that this must be some kind of mistake, that you know
you do not have a right to this money? Does this case remind you of high
school English classes, where you read the classic stories of Edgar Allan Poe
or O. Henry about the acquisition of wrongful riches? Or in more contemporary
times, how about John Grisham's stories concerning newfound wealth?4
Don't you hope, like I do, that one day we get the opportunity to find out
our true values?
References
1. Lyrics available
at: www.bnlmusic.com.
2. H&R Block
Financial advisors v. Express Scripts and American Stocktransfer & Trust
Company (Slip Op No 05-73306, April 6, 2006), USDC South Div, ED
Mich, 2006 US Dist Lexis 16677.
3. Michigan Compiled
Laws. § 440.8102(n)(ii).
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