Stockbroker’s Bad Investment Strategy Not Fraudulent Conduct

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By Diane Davis

A stockbroker whose conduct was unprofessional and unresponsive to an investor but not false or fraudulent, can still wipe out the debt from her claims in his Chapter 7 bankruptcy case, the U.S. Bankruptcy Court for the Eastern District of Wisconsin held.

Susan Dorsch’s complaint failed to state a claim for false pretenses, false representation, or fraud under the Bankruptcy Code, and she couldn’t prove that Jeffrey Butler committed fraud or defalcation in a fiduciary capacity, Chief Judge Susan V. Kelley wrote Nov. 6 ( Dorsch v. Butler (In re Butler) , 2017 BL 398139, Bankr. E.D. Wis., Chapter 7 Case No. 17-22141-svk Adv. No. 17-02169, 11/6/17 ).

Butler was Dorsch’s stockbroker. Dorsch told him she was losing her job, near retirement age, and needed to live off her consistent and stable income from her retirement account. She then transferred her accounts to Butler.

When Dorsch noticed he hadn’t invested her funds, Butler told her he was developing a “new investment strategy” that would a be a long-term investment, and purchased and sold shares of “aggressive, high-risk stocks,” according to court papers.

After Butler was unable to produce a signed copy of her wealth management agreement, Dorsch filed a complaint with the Wisconsin Department of Financial Institutions for failure to have a written contract. Later, that organization required Dorsch’s advisory fees to be refunded.

Butler refunded the fees, but reached no agreement with Dorsch on her financial losses. Dorsch then filed a claim with the Financial Industry Regulatory Authority regarding a pending arbitration proceeding. At that point, Butler filed Chapter 7.

Investing in securities is “risky by nature,” and Butler isn’t a guarantor of the return an investor can expect in the stock market, the court said.

There was no indication that Butler profited personally from investing Dorsch’s money in those stocks, and any fees earned he returned to her. There was no intent to deceive Dorsch on these facts, the court said.

Although he had control over Dorsch’s accounts, he didn’t commit any fraud or defalcation in his fiduciary capacity, the court said. Butler’s conduct was much closer to negligence than intentional or criminally reckless enough to find defalcation, the court said. Butler invested in products he believed were sound long-term investments, the court said.

Michael H. Schaalman of Halling & Cayo, Milwaukee, Wisc., represented Dorsch; Paul G. Swanson of Steinhilber Swanson LLP, Oshkosh, Wisc., represented Jeffrey L. Butler represented himself.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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