Whiteboard: Investors sue banks over fiduciary responsibility

whiteboard fiduciary

So I'm on the bus. It's early in the morning, and rather cold. And the driver has the window down. At first it's not a problem: we're only on side streets and going reasonably slowly. I figure he'll wind it up when we get on the freeway.

Or not. We turn onto the 10 and speed up. It's blowing a gale in the bus, and people start complaining. It becomes impossible to read the paper. So I lean forward and ask him, politely, to please wind the window up. He refuses. I ask again. He refuses again, and tells me to move to the back if it bothers me.

Now, this may sound a bit perverse, but it gets me thinking about fiduciary duty. Not at first, of course. At first I punch out an enraged letter to the L.A. Dept of Transport. But once my irritation subsides I do indeed start thinking about the duty a service provider has to a customer. Here's how the dictionary describes a fiduciary:

A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profits.

And here's how Cheryl Costa, CFP puts it:

Being a fiduciary means being able to sit across the table from clients, look them in the eye, and say that I work for them and only them -- all of the time.

Now, I know the bus driver isn't a fiduciary. He's not holding any of my assets, for one thing. But it is kind of similar. As an LADOT customer, I expect a certain level of service when I pay my fare and climb on the bus.

This isn't just a random expectation. The LADOT says it's committed to "convenience, reliability, safety, and speed." And striving to improve the quality of life for those who live, work or visit Los Angeles.

In other words, there's a contract there, both implicit and explicit. The driver has a duty to provide us with a convenient, reliable, comfortable ride. If he pays attention to his own needs at the expense of his passengers, he's not living up to his contract.

The same goes for asset managers. If I give my money to someone to invest, I expect her to invest it to my advantage, not her's. I expect her to do due diligence on the investment she makes, and give me good advice about where I could put my money. I expect her to tell me everything she knows and can find out about an investment, so that between us we invest my money to best meet my goals.

The lawsuits being filed against banks all seem to have the common thread of a possible breach of fiduciary duty. In the GS ABACUS case, did Goldman have a fiduciary duty to inform Abacus investors about the Paulson involvement and the GS collaboration? In the Wells Fargo/non-profit funds case, did Wells have a fiduciary duty to disclose the risks inherent in auction-rate securities? In the City of Milan/DB UBS JPM Depfa case, did the banks have a fiduciary duty to spell out the risks of investing in certain derivative instruments?

Goldman Sachs recently took a beating from lawmakers who were outraged at the idea that Goldman might sell someone a security and then take a position on the other side of the trade. But GS chief operating officer Gary Cohn later pointed out that acting as middleman for a trade, so called market-making, is distinct from managing assets on behalf of a client. Market-makers simply facilitate trades, and, as such, they are not fiduciaries, he says. Many people on Wall Street and beyond agree with this, but lawmakers don't seem entirely convinced. This gray area on fiduciary duty will be hotly contested in these lawsuits, and if decisions go against the banks, there will be many more suits to come.

Now, please wind up that bloody window!

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A question: Our bank flipped our 6% mtg 6 times in 5 years, adding 70 months, raising the rate to 7.75/5 and adding $64,000 in extra interest. This is predatory lending. Will this be actionable under predatory lending or fiduciary breach of duty too?
Little Red Hen

I am also seeking lawyers to sue a major financial institution for failure of their fiduciary responsibilities. I gave them my money to manage based on the alluded to, management by no less than five fund managers. I was steered into domestic investments when I really wanted to be totally in foreign markets. The bank I invested through could not even keep a representative in their desk long enough for me to establish a working relationship with and most of the time, there was no one calling me back when I asked for a return call!


First, I love your Whiteboard presentations! Now, I happen to be an attorney, and I have a few comments regarding the issues of fiduciary duty, and actually what the SEC investigations concerning ABACUS are. The reason why this idea of fiduciary duty is important is really because of fraud, and particularly fraud by omission. The legal standard for fraud by omission requires that the fraud perpetrator owe a legal duty to the defrauded to disclose detrimental information. This duty could be a fiduciary duty, but at the least it is a duty of disclosure, which can be imposed by law, i.e., the Sec. & Exchange Acts. Each security that is publicly traded requires full disclosure, thus the crux of the SEC investigation centers around one question (at least in ABACUS): would a reasonable investor want to know the person betting against the security picked out the component pieces that make it up? To be sure, the Supreme Court has increased the requirements over the last 20 years, so it still may be difficult to make the case.

The arguments Goldman and company are now making, regarding the role as market-maker, etc., ignores the fact that disclosure may nonetheless have been required, not because they are fiduciaries, but because they are making a public offering. And, if it isn't a public offering, the SEC doesn't get jurisdiction. Further, legally speaking, sophistication of the investor has nothing to do with it, though another oft heard defense is that the investors in these transactions were highly sophisticated. The smartest investor in the world and the dumbest investor in the world have an equal right to the same information.

But, of course, and I would love to hear your thoughts on this, there is perhaps an inherent conflict of interest when a broker-dealer is also a market maker? Perhaps, even worse, when the same entity switches hats in midstream, and perhaps this is what you were stating, that the broker/market maker does owe a duty to its clients because the clients know them as their broker-dealer?

Sorry for the diatribe, and keep up the great work!

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