The Grandmother Who Won Her Elder Fraud Case Against Her Grandsons

By Richard Eisenberg

Wealthy Beverley Schottenstein won a landmark case against her grandson brokers  Cathy Schottenstein

The Beverley Schottenstein $80 million elder financial fraud story is one you won't believe. But, as my "Friends Talk Money" podcast co-hosts and I explained in our two latest episodes, it's one you need to know about to protect your parents from becoming victims themselves.

Schottenstein, 94, recently won $19 million in her arbitration case against J.P. Morgan Securities and her grandsons Avi and Evan Schottenstein, her brokers there for five years, ostensibly managing her millions. (Schottenstein is matriarch of the family's Columbus, Ohio retail dynasty, whose stores included Value City and American Eagle Outfitters AEO -1.5%.)

Problem is, the grandsons wouldn't tell their grandmother what stocks they were buying and selling. They made hundreds of transactions this way, Schottenstein said.

"I would call and say, 'Now, what's going on, boys? I want to know.'" Schottenstein, who lives in Florida, told "Friends Talk Money" co-host Pam Krueger. (You can listen to the whole episode wherever you get podcasts.)

But, Schottenstein said, her grandsons told her only that they were doing well for her.

When the Brokerage Statements Stopped Coming

After Schottenstein insisted they check with her before trading in her account, her brokerage statements stopped coming. When she complained about that to her grandsons and got no satisfaction, Schottenstein got J.P. Morgan Chase CEO Jamie Dimon on the phone.

"I was very upset talking to Jamie," Schottenstein recalled. "He said: 'I'm going to let you talk to my Number One Man." She then spoke to that man, told him her story and started crying. "And he said: 'I'm going to take care of it immediately. Don't worry. Don't worry.' I never heard back from any of them."

Ultimately, Schottenstein went to arbitration through FINRA (Financial Industry Regulatory Authority) because retail investors can't take their brokers to court.

"J.P. Morgan made millions of dollars just in commissions and those commissions were also split with Evan and Avi," Schottenstein's granddaughter Cathy, a first cousin of Avi and Evan Schottenstein, said on the podcast. She's writing a book about the case and her grandmother, who she calls Nanny ("Twisted: Conflict, Madness and the Redemptive Power of a Granddaughter's Love"). 

Schottenstein's granddaughter sad that at one point, J.P. Morgan Securities froze her grandmother out of her own account and that the grandsons wrongly said she had dementia.

"Friends Talk Money" co-host Terry Savage said that after Schottenstein persevered and won the case in February 2021, J.P. Morgan Chase issued a statement saying that "the brokers involved are no longer with our firm" and "do not reflect the values of our firm." The grandsons' attorney said the $19 million award was inconsistent with the evidence presented at the FINRA hearing. 

FINRA permanently banned Evan Schottenstein in April 2021. The Schottenstein brothers have asked a court to nullify the arbitration panel's ruling.

The Lousy Odds of Winning in Arbitration

Most investors going through FINRA arbitration — where decisions are final — don't win a dime. When I checked the FINRA site, I learned that customers were only awarded damages 32% of the time in 2020, and that's down from 45% in 2019.

Even if you do win, Louis Straney, managing partner at the Arbitration Insight firm in Lamy, N. M., told "Friends Talk Money," you're "seldom fully made whole, because of attorney's fees and litigation costs and other expenses." The average filing fee with FINRA is about $1,200; the larger the case, the higher the fees, according to Investorlawyers.com.

The new Securities and Exchange Commission Chair Gary Gensler recently told Congress he favored legislation known as the Investor Choice Act that would let investors take brokers to court rather than arbitration.

Schottenstein's case and the FINRA arbitration realities show why it's so important for investors to watch their brokers like a hawk. And if they spot irregularities — such as churning of their accounts through excessive trading — they need to report this to the firm and to financial authorities.

"It's important that you have someone on your side to speak up," said Savage. And, she advised, put your accusations about unauthorized trading in writing.

First, send them to the brokerage firm's branch manager. If you get no results, Savage said, take it up the chain of command.

"Don't be shy about reaching out to the state securities administrator," said Krueger. "It's really important that people can recognize the red flags and follow in Beverley's footsteps and speak up."

Savage noted that the FINRA site's BrokerCheck area can also tell you whether there have been regulatory actions, arbitration cases and complaints against a broker.

Elder Financial Abuse: A $3 Billion Problem

While the dollars in Schottenstein's case may be astronomical, elder financial abuse is a serious problem for many mere older mortals on the planet. As Savage noted: "It's such a sad story. And unfortunately, it's not all that uncommon."

Estimates of elder financial fraud and abuse vary, but the Federal Bureau of Investigation said older Americans suffered $3 billion in losses in 2019. The average loss per case: about $18,000.

"About ninety percent of perpetrators of elder financial abuse are actually the children of the spouses or the caretakers," said Savage. But, I noted, many of these cases aren't reported because the victims are embarrassed or humiliated or they don't want to get a loved one in trouble or cause a family rift.

Schottenstein told "Friends Talk Money" that the whole financial exploitation experience was very upsetting for her. "I started losing my hair," she said. "Thank goodness it's coming back to me."

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The Grandmother Who Won Her Elder Fraud Case Against Her Grandsons

Why You Should Protect Your Investments By Designating A Trusted Contact

Occasionally, I’ll walk into a room and forget why. Or, my adult children will say, “Mom, you already told us this story” or “Mom, you just asked me that question.” It happens to all of us, but sometimes I wonder—am I a little forgetful or is it something more serious?

Credit: Getty Royalty Free

It's natural to fear age-related cognitive decline but it might be less of a threat than you imagine, according to the Center for Retirement Research at Boston College study “Cognitive Aging and the Capacity to Manage Money.” The study finds that most people in their 70s and 80s will be able to manage their own finances despite normal cognitive changes associated with age. That’s great for the majority; however, individuals who develop a cognitive impairment (whether mild or more severe like dementia or Alzheimer’s) may see a substantial reduction in their financial capacity and need someone to step in for them.

The research indicates that cognitive impairment is increasingly likely for those in their 80s and older. And the severity of the impairment increases with age. These individuals are usually unaware their cognitive faculties are slipping and can become more vulnerable to financial exploitation.

This year, the Financial Industry Regulatory Authority (FINRA) addressed these concerns by implementing new rules designed to help protect the finances of vulnerable individuals. One provision requires broker dealers to make a reasonable effort to obtain the name of a trusted contact for their brokerage and other retail customer accounts.

A trusted contact is an individual identified and selected by the account owner who can be contacted by the financial firm if something seems amiss. For example, if the firm is concerned that the account owner is no longer able to handle their financial affairs, if the account owner cannot be reached, or if there is a reason to suspect fraud or financial exploitation, the firm is authorized to reach out to the trusted contact for guidance. Additionally, the financial firm can temporarily withhold the disbursement of funds or securities while any matters are being investigated.

The firm is authorized to share transaction information, specific securities, beneficiary designations, and the account owner’s contact information with this individual. So, it is important the account holder selects someone he or she fully trusts.

At the same time, the trusted contact will not be able to act on the account. This is a protective measure – and it’s preferable that the individual selected to be the trusted contact is not already authorized to act on the account. Unfortunately, financial exploitation is often committed by those who may be closest to the account holder.

Institutions that deal with clients on a regular basis may recognize changes in behavior or unusual account activity before family members or friends do. So, when you are tackling items on your annual to-do list, contact your financial institution to add a trusted contact to your brokerage and other investment accounts. Make sure your trusted contact knows about your directive as well.

Designating such an individual to serve on your behalf provides another layer of account protection to keep you financially secure.

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Why You Should Protect Your Investments By Designating A Trusted Contact

FINRA Sets Standards Aimed at Protecting Senior Investors

For accountants and tax professionals with clients who are about to retire or are in retirement, here's some news that could be of help. In a groundbreaking move, the Financial Industry Regulatory Authority (FINRA) has released two rules that establish the first nationwide standards for the protection of senior investors.

"These important changes, developed in collaboration with our members, provide firms with tools to respond more quickly and effectively to protect seniors and vulnerable investors from financial exploitation," said Robert L.D. Colby, FINRA's chief legal officer, in a statement. “With the aging of the U.S. population, financial exploitation is a serious and growing problem, and protecting senior investors remains a top priority for FINRA.”

Although the new rules were approved by the Securities and Exchange Commission a year ago, FINRA set the effective date for this year to allow firms to develop policies and procedures.

The need for the new rules became evident after FINRA talked to firms and also learned that calls to the Securities Helpline for Seniors revealed some of the issues they face.

According to FINRA, the helpline has handled more than 12,000 calls since its launch in April 2015. More than $5.3 million in voluntary reimbursements from firms to customers has been made since the launch.

Here’s a snapshot of the new rules:

Rule 4512: Customer Account Information

• Firms are required to collect information for a “trusted contact” when an account is opened or updated. That includes the names of associated people who are responsible for the account and a record of their responsibilities for the account as long as it’s not an institutional account. (Institutional accounts are those owned by a bank, insurance company, savings and loan association or registered investment company; or owned by a registered adviser with the SEC or with a state securities commission; or owned by anyone with total assets of at least $50 million.
• The “trusted contact” is supposed to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of senior investors.
• Members don’t have to meet the rule’s requirements for accounts opened according to a prior FINRA rule until the member updates the information for the account.

Rule 2165: Financial Exploitation of Specified Adults

• Creates a “safe harbor” period that makes it permissive for advisors to hold disbursements from the account of a “specified adult” if several criteria are met. That includes investors 65 and older or individuals 18 and older who have a mental or physical impairment.
• “It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists,” FINRA states in the rule.
•  “Financial exploitation” means the wrongful or unauthorized taking, withholding, appropriation or use of a senior’s funds or securities; any act or omission by a person, including someone with the power of attorney, guardianship or any other authority regarding the senior to get control through deception, intimidation or undue influence over the senior’s money, assets or property or convert the senior’s money, assets or property.
• A member who relies on the rule should establish and maintain written supervisory procedures. The procedures should identify the title of anyone authorized to place, terminate or extend a temporary hold on behalf of the member and who is an associate serving in a supervisory, compliance or legal capacity for the member.
• Members must retain records related to rule compliance and make them available to FINRA.

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FINRA Sets Standards Aimed at Protecting Senior Investors

Broker Bilked Elderly, Blind Widow

A Northport, N.Y., broker has been fined by the Financial Industry Regulatory Authority for bilking a blind, elderly client out of her retirement money by charging her excessive fees, FINRA announced Monday.

Hank Mark Werner sold his client an unsuitable variable annuity and then churned the account by frequently buying and selling assets to generate excessive fees for himself and losing her investment money, the FINRA complaint says.

FINRA ordered Werner to pay more than $155,000 in restitution to the widow, fined him $80,000 and ordered disgorgement of more than $10,000 representing commissions received for recommending the purchase of an unsuitable variable annuity. He also was barred from the financial industry.

Werner had been broker for the elderly widow and her husband, who also was blind, since 1994. The husband died in 2012 and that same year Werner began “plundering” her account by engaging “in such an active trading strategy that, when the high commissions he charged were taken into account, it was impossible for her to make money.”

FINRA found Werner frequently bought and sold a security within a week or two, and charged exorbitant commissions even though the blind widow’s financial circumstances required that Werner invest her assets with a minimum amount of risk. She was 77 and in ill health when Werner began churning her accounts. Werner engaged in more than 700 trades from October 2012 to December 2015, generating approximately $210,000 in commissions while the customer lost more than $175,000 as a result of his reckless trading.

Werner worked for Legend Securities Inc., which was also named in the complaint for failing to respond to FINRA and for failing to properly supervise him. Legend was censured and fined $200,000. Legend voluntarily paid $20,000 in partial restitution to the customer.

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Broker Bilked Elderly, Blind Widow