Facts

Andrew and Blenda Wright, as Trustees of the Wright Family Living Trust, filed a claim against John Marshall, Rollance Verkennis, and Lincoln Financial Advisors Corp. in relation to investments made in the Mount Yale Large Cap Growth Fund, the Mount Yale Large Cap Value Qualified Fund, the Mount Yale Small Cap Qualified Fund, the Johnston Asset Management International Equity Fund, Kinetics Advisers Institutional Partners, the RYE Select Broad Market Fund, and the RYE Select Broad Market Prime Fund, L.P., which were feeder funds for Bernard Madoff Investment Services LLC.

CLAIMANTS' CONTENTIONS:
Claimants alleged negligent misrepresentation, fraud, intentional misrepresentation or omission, failure to supervise, breach of fiduciary duty, unsuitable transactions, unauthorized transactions, elder abuse, and breach of contract.

Claimants Andrew and Blenda Wright as Co-Trustees of the Wright Family Living Trust (hereafter the "Wrights") commenced a FINRA Arbitration against respondents to recover damages they suffered as a result of respondents allegedly having placed them in a highly unsuitable investment portfolio which respondents represented as having the "safety of bonds with the appreciation potential of equities" but allegedly actually consisted of highly risky equities, futures and hedge funds, including a $750,000.00 investment in the now infamous Bernard Madoff Ponzi Scheme.

Claimants contended that respondents grossly breached their fiduciary duties to claimants and failed to comply with their regulatory obligations by, among other things: (1) respondents allegedly engaged in a "Bait and Switch" scheme in which they obtained $48,000 from the Wrights purportedly to provide objective Financial and Estate Planning services as Investment Advisors. However, after receiving claimants' funds, respondents allegedly switched the Wrights to the broker-dealer side of their business in order to sell them 11 highly risky, aggressive and unsuitable proprietary funds in which the respondents earned or would have earned high fees at the expense of the Wrights. These fees included: Asset Under Management Fees, Incentive Performance Fees, Service Fees and Place Agent Fees.

As part of their alleged Bait and Switch strategy, respondents provided the Wrights with a series of "Projections" titled "Monte Carlo - Recommended Portfolio" which showed if the Wrights invested with respondents, that their initial investment of $2,750,000 would grow to more that $30,000,000. (2) After the initial $2,750,000 investment, respondents solicited the Wrights to invest additional funds with them. After those funds were received and, in a transaction that was allegedly not authorized by the Wrights, respondents sold the Wrights a $500,000 interest in a Madoff Feeder Fund, resulting in the loss of their entire $500,000 investment. (3) Respondents allegedly placed the Wrights in 11 aggressive and risky investments despite the Wrights' acknowledged conservative mindset and low risk tolerance. (4) Respondents allegedly failed to conduct adequate due diligence on the investments they recommended to the Wrights which resulted in $750,000 of the Wrights monies being placed in the fraudulent Madoff Ponzi Scheme. (5) Respondents allegedly failed to follow their own internal supervisory procedures and disclosure requirements. Claimants contend that Lincoln's own supervisory procedures were systemically deficient as it was impossible for Lincoln to determine if the Wrights, as well as Lincoln's other clients, were suitable for the aggressive proprietary product sold to them. Claimants contend that, as a direct result of respondents' actions, claimants lost approximately one third of their investments with respondents or over $1,500,000 in the eleven months they entrusted their monies to respondents.

RESPONDENTS' CONTENTIONS:
Respondents defended on the basis that: (1) in light of the Wrights' overall portfolio of more than $8 million, most of which was held in cash and bonds, and a piece of which was managed independently by BNY Mellon, Marshall and Verkennis acted in accordance with their duties pursuant to Modern Portfolio Theory and the California Prudent Investor Act, by reducing the risk to the Wrights' entire holdings through the addition of the market neutral Rye Fund, managed futures, and a hedge fund of funds, amongst other bond funds and alternative investments; (2) their backtesting, review of historical performance, and use of the Monte Carlo probability simulation tool confirmed the suitability of the choices, without promising future returns; (3) Mount Yale Advisors, which created the fund which had exposure to the Madoff feeder fund, and Tremont, who managed it, had the obligation to conduct due diligence on Rye, not Respondents; (4) they did not cause the Wrights' losses, that responsibility belongs to the fraud perpetrated by Madoff and the worst recession since the Great Depression; and (5) all transactions were authorized by claimants, who verified in writing that they received and reviewed numerous prospectuses, private placement memoranda, and subscription agreements, as well as Lincoln disclosure forms, only to subsequently claim complete ignorance.

Settlement Discussions

An all day mediation before Ralph Williams of ADR Services, Inc. was held, but resulted in no settlement.

Damages

Claimant sought $10 million.

Result

After a nine day hearing, the three member FINRA Arbitration Panel unanimously awarded claimants $1,761,100 against respondents as follows: $1,170,500 against respondents jointly and severally, plus interest at 10% per anum; $590,000 against respondent Lincoln Financial, plus 10% interest per anum; and $600 against respondent Lincoln Financial to reimburse claimants for the nonrefundable portion of claimants' initial claim filing fee.