A California Court of Appeals has ruled that a Trial Court was not wrong when it concluded that Father breached his fiduciary duty to Mother by transferring funds in excess of the amount to which Mother agreed into an Ameritrade account, without Mother’s knowledge, and then losing several million dollars in unsuccessful trades. The Appellate Court has also ruled that the amount of asset to which the breach of fiduciary duty applies is not measured by its highest value during the breach.
In the case of In re Marriage of Kamgar, Mother and Father were married in May of 1990, and later had four children. During their marriage, Mother, who had a joint law degree and master’s degree in taxation, worked at the Depository Trust Company and at another time, for a well-known law firm. Father, who had a B.S. degree in Electrical Engineering and Computer Science from U.S.C. and an M.B.A. from U.C.L.A., ran various businesses. Once those businesses sold, that allowed him to stop working in January of 2003. By the time that Mother and Father separated in January of 2013, Mother had not worked outside the home in 20 years.
Beginning in 1999, Mother and Father had their substantial liquid assets managed by a series of professional managers at JP Morgan, Merrill Lynch, and Bessemer Trust. Those managers were instructed to pursue conservative investment strategies that would preserve the couple’s assets. Mother then left the basic management and control of those assets to Father, who made all of their investment decisions, but didn’t always consult Mother in making them.
In 2010, Father got interested in options trading, and began doing research, attending investment classes, reading trade publications on the topic, and talking with other investors. By that time, Father had been investing community property funds in Apple, Inc. stock for about seven (7) years. When Father discussed opening a self-directed trading account with Mother, Mother consented to it. She agreed that Father could deposit $2.5 million of their Apple stock into the account so that Father could “try his hand at doing something that he would find interesting or amusing.” Mother believed that this sum was just a “sliver” of their net worth and Father figured that he could lose that much without detrimentally affecting their lifestyle.
In December of 2011, Father transferred 6,000 shares of Apple stock into a newly opened TD Ameritrade account, then applied for an upgrade that would allow him to engage in enhanced margin trading. Ameritrade required both Father and Mother to demonstrate their financial knowledge and awareness of trading risks before it would authorize the enhancement. Believing that Mother was “not interested,” Father signed Mother’s name on the application, took the test in her place, and falsely represented that Mother had extensive trading experience. Father listed the couple’s goals as “growth, income, and conservation of capital, but not speculation.” Father later changed the terms of the account to eliminate the need for Mother’s signature to make withdrawals or transfers to the account. During the following 13 months, Father converted the Apple securities to cash, deposited more than $8 million of community property funds into the account, along with almost all of the community property funds under professional management. Father then assumed full control of the community property assets.
The value of the Ameritrade account went up and down between December of 2011, and January of 2013, when Father stopped trading. By that time, there was only $409,000 left in the account, which had reached a high of $19 million at one point (before Father withdrew more than $3 million). Meanwhile, Father kept telling Mother that the account was doing fine. However, the marriage wasn’t, and the couple had been living in separate houses and seeing a marriage counselor for several months. When Mother told the counselor that she knew nothing about the couple’s finances, the counselor advised her to start asking questions.
In January of 2013, Father texted Mother that they needed to meet face to face to discuss “financial challenges.” Mother balked at meeting in person and told Father to conduct the discussion by text messages. Father finally texted Mother with the distressing news that they were running out of money, due to investment losses and high expenses, and urged her to sign papers to sell property at Emerald Bay. Outraged, Mother replied that this was a “disaster” about which Father had not told her and reminded him of his assurances that he was being “prudent” in his option trading. The couple then formally separated and began divorce proceedings.
At trial, Mother’s expert opined that Father’s option trading “was so highly speculative, particularly for lack of diversification, that it amounted to gambling.” Father’s expert countered that Father had relied on other analysts who had predicted a rise in Apple’s stock value and denied that Father’s strategy was grossly negligent. In a detailed statement of decision, Trial Court found that Father had breached his fiduciary duty to Mother by failing to disclose investment transactions he made in the Ameritrade account between December of 2011, and January of 2013, that Mother had agreed to only the initial $2.5 million deposit to that account, and that Father had additionally breached his fiduciary duty by his grossly negligent mismanagement of the community property assets in the trading account. Trial Court awarded Mother $1,952,056 as her community property share of the funds Father lost through “undisclosed and reckless trading.” Father and Mother both appealed, but now the Court of Appeals has affirmed Trial Court’s decisions.
The Appellate Court has ruled that (1) pursuant to California Family Code Section 1100(e), spouses owe a fiduciary duty to each other that requires full disclosure of all material facts and information regarding existence, characterization, and valuation of community property assets and debts; (2) spousal fiduciary duties set forth in California Family Code Section 721(b) also include provisions of California Corporations Code dealing with disclosure duties of partners where there has been no demand for disclosure; (3) those statutes do not require, as Father contends, frequent and continuous updating regarding assets and debts; (4) California Corporations Code Section 16403(c)(1) describes spousal disclosure requirements as governed by their partnership agreement; (5) here, Mother and Father agreed that Father could risk $2.5 million in options trading; (6) Father breached his fiduciary duty by risking more than that amount without disclosing his actions to or consulting with Mother; and (7) Trial Court was not required to calculate the amount owed to Mother from Father’s breach based on the peak value attained by the Ameritrade account, but rather its value at the date of the breach (the date that Father transferred an additional $8 million without Mother’s knowledge or consent).