Bright people do unwise things

The axiom that even bright people do unwise things is illustrated by Marriage of Kamgar, 2017 DJDAR 11672 (Dec. 8, 2017), which is one of the most interesting family law cases decided last year.

Wife studied at Harvard University beginning at age 16. Later, she transferred to Sarah Lawrence College, where she received a bachelor's degree in international relations and Russian language studies. She also earned a joint juris doctorate and master's degree in taxation. Husband earned a bachelor's degree from the USC in electrical engineering and computer science, as well as a master's degree in business administration from UCLA. During the parties' marriage he ran several businesses. His business successes enabled him to stop working over the last 10 years of the marriage.

Wife did not work the last 20 years of marriage, and she left most of the management and control of the family finances to Husband.

In 2010, Husband began studying options trading. In 2011, with Wife's consent, he opened an account to practice options trading. Both parties signed the brokerage application and both parties' signatures were required for withdrawals or transfers.

Wife authorized Husband to use $2.5 million for trading. He chose that amount because if he was successful it would create a large profit, while a loss of that amount would not seriously affect their lifestyle.

Then Husband got aggressive, secretive and, to put it diplomatically, unwise. He sought an upgrade in the account to permit higher risk trading. Both Husband and Wife were required to take a test on options trading for this upgrade. Wife was not interested, so Husband took the test for her and he signed her name to the upgrade application. Wife later claimed that Husband did not obtain her consent to sign her name. Then he changed the account so that Wife's signature was not required to make withdrawals or transfers.

Thereafter, without telling Wife, Husband deposited another $8,188,605 in community funds into the account, for a total community investment of $10,688,605. Husband also failed to inform Wife until just before their separation in January 2013 that he had replaced their professional financial managers, moving nearly all of the community's five liquid assets into the risky trading account.

Husband initially experienced considerable trading success, often trading on margin. At some point, all of the investments held in the brokerage account were in various call and put option positions held entirely in Apple stock. Husband bet that Apple stock would increase in value, placing his call option position at almost $10 million more than his put options, while also shorting put options. When the price of Apple shares dropped, it resulted in approximately $6.5 million in losses to the community.

When Wife asked how Husband was doing, he responded by saying "fine." However, in January 2013 he texted Wife saying he wanted to speak to her about "financial challenges." Wife then learned the parties were running out of money and needed to sell one of their properties. A divorce action ensued.

The trial court in the dissolution case found Wife only authorized Husband to invest up to $2.5 million in the trading account.

At trial, Wife's financial expert testified that Husband's' option trading was so highly speculative, due in larger part to a lack of diversification, that it amounted to gambling. Wife was awarded $2 million. Since Wife had authorized Husband to utilize $2.5 million in community funds, the recoverable loss to the community was approximately $4 million, half of which was Wife's.

Husband argued on appeal that since Wife agreed he could manage the account, he did not owe her a duty of ongoing disclosure relating to the account. The Court of Appeal rejected this argument, finding that Husband's claim was contrary to the family code provisions for spouses to have equal management and control of the community estate and it further held Husband's assertion was contrary to the everyday reality of marriage.

Speaking of the everyday reality of marriage, Kamgar makes one wonder why Wife, with her background in taxation and a law degree, relinquished control of the parties' finances to Husband. Wife was unwise in allowing Husband to have such complete control. Husband was even more unwise and breached his fiduciary duties by engaging in risky investments and hiding his actions from Wife.

Kamgar indicates that while a spouse is not under an obligation to disclose every trade to the other spouse, improvident investments can amount to a breach of fiduciary duty if they rise to the level of grossly negligent or reckless conduct, intentional conduct or a violation of the law.