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Franko v. Ameriprise Financial Services

June 11, 2009

JOSEPH FRANKO, ET AL.
v.
AMERIPRISE FINANCIAL SERVICES, INC., F/K/A AMERICAN EXPRESS FINANCIAL ADVISORS, INC.



The opinion of the court was delivered by: Padova, J.

MEMORANDUM

Petitioners Joseph and Judith Franko commenced arbitration under the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, against Respondent Ameriprise Financial Services ("Ameriprise"), formerly American Express Financial Advisors, after they sustained investment losses on their retirement portfolio, which was invested through Ameriprise. The arbitrators denied the Frankos' claims, and the Frankos filed in this Court a "Petition to Vacate Arbitration Award Pursuant to 9 U.S.C. § 12." Ameriprise filed a response and Cross-Petition to Confirm the Arbitration Award and for Sanctions. For the following reasons, we deny the Frankos' Petition to Vacate, confirm the Arbitration Award, and deny Ameriprise's request for sanctions.

I. BACKGROUND*fn1

Joseph Franko is 67 years old. He worked for more than 30 years as an hourly laborer for the Procter & Gamble Company ("P&G"). In 1997, P&G offered early retirement to many of its employees and Mr. Franko accepted that offer. At the time, Mr. Franko had a retirement account, which contained P&G stock and a fixed income note, and which had a value of approximately $775,000.

In the two years before his retirement in 1997, Mr. Franko attended a series of retirement seminars that P&G offered. In April of 1997, he was referred to Joseph P. Krugel, who operated a one man office of American Express Financial Advisors in Wilkes Barre, Pennsylvania. Krugel prepared an April 9, 1997 Asset Allocation Analysis to "assist [Mr. Franko and his wife] in the development of [their] long term investment strategy." (Pet'r Ex. 4 at 1.) The Analysis set forth a proposed asset mix that was developed using a computer program and various inputs, including (1) the Frankos' financial goals; (2) restrictions on investment categories that the Frankos wanted to avoid or limit; (3) the time frame of the Frankos' financial goals; (4) the historical performance of major categories of investments; and (5) "American Express Financial Advisors investment experts' forecasts about future long term performance of the financial markets." (Id.) At the same time, the Analysis warned that past performance was no guarantee of future performance and that the proposal did not provide a comprehensive analysis of the Frankos' ability to reach their goals, because that component of financial planning is "more appropriately handled by a comprehensive financial analysis." (Id.)

At the Frankos' request, the April 9, 1997 Analysis contemplated a $52,750 annual distribution from the retirement account for the initial 5 years. It proposed an investment plan that, if followed, was projected to result in a retirement account worth over $600,000 when Mr. Franko reached the age of 76 in 2017. In contrast, the Analysis projected that, if the Frankos made no changes to their existing investments, the retirement account would be worth less than $40,000 in 2017.

On April 25, 1997, Mr. Franko completed two investment applications with Krugel -- an IMA application and an IRA application. In the applications, as well as in a June 4, 1997 new account application for strategic portfolio services, as Mr. Franko represented that he was a "growth and income" investor with average or "moderately conservative" risk tolerance. (Resp. Ex. D; Resp. Ex. E. at 13; Pet'r Ex. 9.)

Between April 1997 and April 2000, Krugel provided the Frankos with four additional Asset Allocation Analyses. (Pet'r Exs. 5-8.) Like the April 9, 1997 Analysis, each Analysis explained the process of proposing an asset mix and warned about both the uncertainty of investment returns and the limitations of the Analysis. Although there were Analyses prepared between April 2000 and sometime in 2005, Ameriprise asserts -- and the Frankos do not dispute -- that the Arbitration record demonstrated that Krugel continued to review the investments with the Frankos on an annual basis, and the Frankos received monthly account statements, which Mrs. Franko reviewed.

From 1997 through mid-2000, the Frankos' investments gained value, so that the account largely held its value in spite of approximately $200,000 in withdrawals. (See Resp. Ex. H; Pet'r Ex. 14.) Between September 2000 and December 2002, however, the account value fell from approximately $660,000 to approximately $212,000, with only approximately $165,000 in withdrawals. (See Resp. Ex. H; Pet'r Ex. 14.) In 2002, Mr. Franko requested that the investments be adjusted to be "more conservative."*fn2 (Resp. Br. at 10.)

In April of 2005, after additional withdrawals of over $100,000, the Frankos' portfolio value was approximately $250,000. (See Resp. Ex. N.) One year later, in April of 2006, the value was $212,179. In May 2006, the Frankos filed with the National Association of Securities Dealers ("NASD") a Statement of Claim against Ameriprise on account of their disappointing investment returns. The Frankos asserted the following causes of action: violation of the anti-fraud provisions of the federal securities laws, sale of unsuitable securities, common law fraud, breach of fiduciary duty, failure to supervise, and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL"). Essentially, the Frankos asserted that Krugel had taken excessive risk with their life savings, recommended unsuitable high-risk investments, "guaranteed" returns that he could not deliver, and failed to advise them that they would prematurely exhaust their savings if they did not reduce their withdrawal rate. The Frankos sought a monetary award of $308,813, which is the sum of $76,393 in alleged investment losses, $163,477 in foregone interest, $27,953 in management fees, and $40,990 in attorneys fees. (See Pet'r Ex. 2 at 5.)

The Arbitration Panel held hearing sessions on 11 separate days between October 16, 2007, and September 19, 2008, and both parties submitted testimonial and documentary evidence. The parties stipulated that the Frankos had sustained gross losses of $76,393 in their principal investment between June 1997 and April 2006.*fn3 Respondent, however, offered the expert testimony of Paul Moulden, who testified that Respondent's investment recommendations were suitable under the circumstances and that the asset allocations were proper for early retirees who were long-term growth and income investors. (Resp. Br. at 12.)

In October 2008, at the conclusion of the Arbitration sessions, the Panel issued an Award denying the Frankos' claims in their entirety without explanation. Thereafter, the Frankos requested an explanation of the decision.*fn4 The Arbitration Panel subsequently issued a Modified Award, which included the following:

After taking into consideration the totality of the evidence including, but not limited to documents submitted in evidence by both Claimants and Respondent, the Panel unanimously concluded that the decline in value of Claimants' portfolio had been due to market conditions.

Furthermore, the entire Panel agreed that based on the totality of the evidence presented, the spread of investments selected by Ameriprise and/or their representative were within an acceptable spectrum and quality, as well as within the industry norm for the times and suitable to Claimants' objectives as stated by and/or acquiesced to by the ...


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