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HOW OREGON’S ELDER ABUSE PREVENTION ACT UPS THE ANTE IN STATE SECURITIES LAW CASES
By Billy Dalto
Willamette University College of Law Securities Regulation 309 Professor Meyer Eisenberg April 14, 2011
TABLE OF CONTENTS I. INTRODUCTION ....................................................................................................................1 II. WHEN DOES AN EPDAPA CLAIM INVOLVE A SECURITY?...............................................4 A. Securities as a threshold question ...................................................................................6 1. The Howey test.....................................................................................................7 2. The Risk Capital test............................................................................................9 B. LLCs established to control passive real estate interests are securities ........................10 1. Tenant-in-Common real estate interests are also widely recognized as securities ............................................................................................................12 a. The DBSI Ponzi Scheme....................................................................................14 b. The Sunwest Management Ponzi Scheme .........................................................15 III. GATEKEEPER LIABILITY: THE DEEP POCKETS OF LAWYERS
AND ACCOUNTANTS...........................................................................................................17 IV. APPLICATION OF EPDAPA TO SECURITIES CLAIMS.......................................................21 A. Introduction...................................................................................................................21 1. Elements of proof required under EPDAPA......................................................22 2. Statute of limitations is much longer for EPDAPA claims................................23 3. Available EPDAPA claims are substantial ........................................................23 4. Attorney fees award is mandatory, but not reciprocal .......................................24 5. Cumulative remedies available in EPDAPA claims..........................................24 B. Limitations of EPDAPA. ..............................................................................................24 C. Potential EPDAPA claims for securities law violations ...............................................25 1. Background ........................................................................................................25 2. Ripe avenues for EPDAPA claims ....................................................................26 D. Notable successful elder abuse act claims ....................................................................27 V. TWO OREGON LEGISLATIVE PROPOSALS ........................................................................28 A. Standing to bring EPDAPA claims...............................................................................28 B. Including financial institutions and broker-dealers as liable parties .............................29 VI. CONCLUSION .....................................................................................................................31
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I. INTRODUCTION
Financial exploitation of elders is not new. We have all heard the stories: sensational
plundering of gilded age legacy fortunes,1 economic domination of wealthy Hollywood
luminaries,2 and thefts more mundane.3 Oregon even has its own Shakespearian mother of state
elder financial abuse cases.4 Advocates have sounded the bell for years,5 but states have only
recently begun to address the matter individually,6 and the federal government has yet to act.7
It is not surprising that financial abusers target the elderly; persons over the age of fifty
control seventy percent of the nation’s wealth.8 Financial abuse, the most common form of elder
abuse, costs Americans $2.6 billion each year.9 Despite being on the rise across the country,10
just one in twenty-five cases of elder financial abuse are reported.11 Seventy percent of older
1 Sam Roberts, A Potential Family Problem That Awaits the Rich and the Poor Alike, N.Y. Times, June 27, 2006. See also Bill Dedman’s compelling investigative work regarding 104-year-old heiress Huguette Clark. Bill Dedman, Attorney for 104-year-old heiress defends his handling of her finances, msnbc.com (March 14, 2011), http://www.msnbc.msn.com/id/39030815/ns/business-personal_finance/35266269. 2 Margaret Collins, Mickey Rooney Warns of Financial Abuse Against Seniors in Senate Hearing, Bloomberg (March 14, 2011), http://www.bloomberg.com/news/2011-03-02/mickey-rooney-warns-of-financial-abuse-against-seniors-in-senate-hearing.html. 3Eric Woomer, Tulare County official: Elder abuse is underreported, could get worse, Visalia Times Delta, February 18, 2011. 4 The woman who put a face on elder abuse, Oregonian, May 13, 2008. Accomplished actress and drama teacher Amelia Lewis de Gremli was kidnapped by her live-in caregivers, who moved de Gremli from Oregon to Nevada and looted de Gremli’s finances in the process. Despite suffering a stroke, de Gremli managed to scratch out the word “help” on a postcard and sent it to a friend. De Gremli’s case prompted the Oregon Legislature to pass its state elder abuse prevention act. 5 Jon Nordheimer, A New Abuse of the Elderly: Theft by Kin and Friends, N.Y. Times, December 16, 1991. In that article, it was called “the crime of the 90s.” It has since been characterized variously as “crime of the 2000s” and the “21st century crime.” 6 The states have been very slow to act, with only a handful enacting elder financial abuse statutes. 7 There is no federal private cause of action for elder financial abuse. See Brian H, Fant, The Civil Litigation Response To Financial Exploitation 2-4 (November 2010) (unpublished manuscript) (http://www.brianfantlaw.com/ articles/FINANCIAL-EXPLOITATION.pdf). 8 National Committee for the Prevention of Elder Abuse (March 14, 2011) (http://preventelderabuse.org/elderabuse /fin_abuse.html). 9 Broken Trust: Elders, Family, and Finances, MetLife Mature Market Institute (2009). 10 Sherisse Pham, Government Report Finds Elder Abuse on the Rise, N.Y. Times, March 3, 2011. 11 See Woomer, supra note 3.
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Americans have already been approached fraudulently.12 With the fastest-growing segment of
the U.S. population being those aged eighty-five and older,13 the problem will only grow worse.
While family members are the greatest perpetrators of financial abuse of the elderly,14
nearly one-third of abusers in Oregon are strangers and non-relative caregivers.15 Home repair
ploys, telemarketing fraud, “religious” hucksters, and sweetheart scams have traditionally been
the predominant forms for financial abuse.16 However, times change and so too, do the scams.
Today’s enterprising con artists have developed myriad ways to separate the elderly from their
money. Contemporary financial abuse of the elderly increasingly involves investments of
retirement savings. Many life insurance products, annuities, and real estate investments targeted
at elderly investors cross the line into securities. This distinction is critical, because the Oregon
Securities Law17 is perhaps the most aggressive investor protection statute in the nation.
Like all states, Oregon regulates the sale of securities.18 Oregon’s securities law dates
back to 1913, when the Legislature acted to “protect purchasers of stocks and bonds and prevent
fraud in the sale thereof.”19 Oregon courts apply the federal Howey test to determine whether a
given legal claim involves a security.20Oregon’s securities fraud statute21 mirrors the federal
securities fraud statute,22 with the exception that Oregon has no scienter requirement.23 While the
Oregon securities law is an essential weapon in the fight against investment fraud and deceit,
12 See Elder Financial Abuse Task Team Report to the California Commission on Aging, (March 14, 2011) (http://ccoa.ca.gov/pdf/Elder_Financial_Abuse.pdf). 13 Jill Lepore, Twilight, The New Yorker, March 14, 2011. 14 Jane Gross, Forensic Skills Seek to Uncover Elder Abuse, N.Y. Times, September 27, 2006. 15 2009 Community Adult Protective Services Investigations Number of Allegations Statewide, Department of Human Services, Seniors & People with Disabilities, April 9, 2010. 16 Pamela Camille, Getting Older Getting Fleeced: The National Shame of Financial Elder Abuse and How to Avoid It (1996). 17 ORS 59.005 – 59.995. 18 Oregon Securities Law. ORS 59.005 – 59.995. 19 Robert McGaughey, Oregon Securities Law Handbook 1 (1991). 20 Id. See SEC v. W J Howey Co., 328 U.S. 293 (1946). 21 ORS 59.135. 22 Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). 23 ORS 59.115.
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when it comes to older investors, Oregon has an even more powerful arrow in its statutory
quiver: The Elderly Persons and Persons with Disabilities Abuse Prevention Act24 (“EPDAPA”).
There is no federal private right of action for elder financial abuse claims25 and most
states do not provide a private right of action either, separate and apart from the civil remedies
generally available to investors.26 Oregon’s EPDAPA ups the ante in investment fraud cases
because of the substantial damages available for successful claims. Under EPDAPA, prevailing
parties may be awarded treble economic and noneconomic damages, pre- and post-judgment
interest, and reasonable fees for both the attorney and for the conservator or guardian ad litem
necessary to pursue a claim.27 The high potential liability exposure of an EPDAPA claim will
likely encourage quicker resolutions and settlements.
Elder financial abuse litigation is an emerging field, but securities claims litigants have
already started applying the nation’s few elder financial abuse statutes to great effect. In a 2009
California decision,28 FINRA, the independent securities self-regulating organization, awarded a
ninety-five year old retired airline pilot $1.6 million for a claim alleging broker misconduct and
self dealing, including $320,000 in compensatory damages and $960,000 for elder abuse.29
Even if Oregon litigants successfully bring securities claims or elder abuse act claims,
collecting on a judgment can often be a fruitless endeavor; the judgment debtor may be
insolvent, judgment-proof or otherwise unable to pay. Plaintiffs must therefore scrutinize claims
24 EPDAPA was enacted by the Oregon Legislature in 1995 and has been updated each legislative session since then. For the purposes of this paper, I will limit my review to the Elder Financial Abuse portion of the statute. The complete act provides protections for the disabled as well. Financial protection of the disabled is a topic unto itself and will not be treated in this paper. 25 See Fant, supra note 7. 26 Lisa Catalano and Christine Lazaro, Financial Abuse of the Elderly: Protecting the Vulnerable, Public Investor Arbitration Bar Association Bar Journal, 2008, at 11. 27 Elder Law, Oregon State Bar, §10.14 (2000 ed., 2005 supp.). 28 California’s elder financial abuse prevention statute is similar to Oregon’s statute. See Cal. Welf. & Inst. Code §§ 15600 et seq., “Elder Abuse Act.” 29 David Wolfson Living Trust UAD 4/2/90 v. Stockcross Financial Services, Inc., FINRA Arbitration Case No. 09-01512 (Decided December 21, 2009).
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for any deep pockets that may have potential exposure to liability. Oregon securities law has
been successfully applied in recent years against banks,30 law firms,31 and accountants aiding or
participating in the illegal sale of securities.32 In one such claim, a major regional law firm
reportedly paid $30 million in 200933 (the actual number is said to be much higher) to settle
securities violations claims against the firm. As many of these plaintiffs were elderly and thus
eligible to bring EPDAPA claims, could that law firm’s potential exposure have been three times
as great?
This paper explains how EPDAPA liability arises in Oregon securities regulation cases.
Section II examines the threshold question of whether an EPDAPA claim involves a security.
Section III discusses the broad reach of aider and abettor liability and its application to
gatekeepers involved in securities transactions. Section IV discuses applying EPDAPA to
securities claims. Finally, Section V advances two Oregon legislative concepts to strengthen
EPDAPA with respect to securities violations.
II. WHEN DOES AN EPDAPA CLAIM INVOLVE A SECURITY?
Oregon EPDAPA claims apply to persons age 65 or older.34 A claimant must prove the
following elements: (1) a taking or appropriation (2) of money or property occurred (3) of
property belonging to an elderly or incapacitated person, and (4) the taking was wrongful.
Church v. Woods, 190 Or App 112, 117 (2003). A taking of money or property is wrongful if the
taking is carried out in pursuit of an “improper motive” or “through improper means.” Church v.
30 See C. Thomas Framatone, LLC, et al. v. Bank of Whitman, Marion County Circuit Court Case No. 09C14130, Opinion, (Mar. Co, Or. Jul. 22, 2010). 31See DeVaney et al. v. Davis Wright Tremaine, LLP, Case No. 6:10-CV-06134-HO, (D. Or May 27, 2010). 32Under ORS 59.115(3), parties participating or materially aiding in the illegal sale of securities are liable jointly and severally with and to the same extent as sellers. 33 See infra note 129. 34 ORS 124.005(2).
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Woods, 190 at 119. An Oregon securities law violation victimizing an elderly investor is a
wrongful taking of money, and likely triggers EPDAPA liability.
A security is a written obligation issued to investors to finance a business enterprise.35
Oregon securities law describes a laundry list of financial instruments constituting securities.36
However, court interpretation of the term “security” is much more important than a plain reading
of the definition itself37 as Oregon courts have liberally construed the definition of a security in
order to effectuate the purposes of the securities law.
We do not deem it advisable to lay down any hard-and-fast rule to determine whether similar offerings to the public may be sold without a license. Were we to do so, a certain class of gentlemen of the “J. Rufus Wallingford” type – “they toil not neither do they spin” – would lie awake nights endeavoring to conceive some devious and shadowy way of evading the law. It is more advisable to deal with each case as it arises.38
The Oregon Supreme Court reiterated this approach in Marshall v. Harris, 276 Or 447 (1976), in
which the court noted that “Oregon securities law must be liberally construed to afford the
greatest possible protection to the public.”39
As we will see below, real estate investments are particularly fertile ground for sowing
securities violation cases. Real estate itself is not a security. However, it can involve a security
depending on how it is sold.40 A real estate transaction can become a security when a sale of real
property is coupled with a service to be provided by a seller or third-party from which the buyer
expects to profit.41 Thus, real estate investments involving sellers who manage properties on an
35 Webster’s Third New International Dictionary 2054 (3d ed. 1976). 36 ORS 59.015(19)(a). 37 See McGaughy, supra note 19 at 6. 38 Robert J. McGaughey, Oregon Corporate & Securities Law 159 (1988) citing State v. Whiteaker, 118 Or 656, 661 (1926). 39 Marshall, 276 Or at 453. 40 In Los Angeles Trust Deed & Mortg. Exchange v. SEC, 285 F.2d 162 (9th Cir. 1960), the Ninth Circuit upheld a Securities and Exchange Commission ruling that a firm which sold trust deeds and mortgages as part of a “Secured 10% Earnings Program” to some 9,000 investors was selling investment contracts that were securities. 41 SEC v. W J Howey Co., 328 U.S. 293 (1946).
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ongoing basis or who manage rental or interest payments for buyers of investment property
interests are likely securities.
Such transactions typically involve developers or promoters seeking “Other People’s
Money”42 to finance property acquisition and construction of commercial projects. Often, the
investors are elderly, and money is sought on the promise of attractive, predictable returns, with
little to no investor involvement in the management of the real estate projects. Investors may
also be geographically dispersed. Creative new real estate investments, such as Tenants-In-
Common (“TIC”) schemes and private Real Estate Investment Trusts (“REITs”), have emerged
in recent years as investors have sought to take advantage of a seminal tax ruling43 to mitigate
capital gains tax exposure by using Internal Revenue Code section 1031 to like-kind exchange
real property. The TIC and private REIT schemes have, in turn, spawned a new line of securities
cases addressing violations of securities law by TIC and REIT promoters.
A. Securities as a threshold question.
Whether or not a securities claim involves a security is a threshold question. Oregon courts
have sought to answer this question by examining whether an “investment contract” is
involved.44 In Oregon, two tests are used for determining whether an investment contract is
present: the Howey test, after the leading case of SEC v. W J Howey Co., 328 U.S. 293 (1946),
and the risk capital test.45 An instrument or transaction need only meet one, not both, of these
two tests in order for the securities law to apply.46
42 The term “Other People’s Money” is taken from contemporary usage, but the saying was coined by Supreme Court Justice Louis D. Brandeis in his seminal 1914 work Other People’s Money and How the Bankers Use It. 43 See Wes Larson, Is a Tenant-in-Common Interest a Security or Fee-Simple Real Estate? Caution Is the Better Part of Valor, Washington State Bar Association, Bar News, June 2007. 44 See McGaughey, supra note 19 at 7 45 Id. 46 Id.
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1. The Howey Test.
The investment contract test applied by both federal and Oregon courts was established in
Howey.47 In Howey, the SEC sought to enjoin a Florida company that was selling small citrus
groves and long-term service contracts to vacationing tourists.48 The service contract specified
that, for a fee, the company would maintain, harvest, and sell the orange crop and then forward
the profit to the “owner.”49 Given the size of each plot and the distance separating that plot from
its owner, it was not economically feasible for owners to purchase the plot and manage the
orchard themselves.50
In determining whether the transaction involved a security, the Howey Court held that
form should be disregarded for substance and it emphasized that economic realities of the
transaction are paramount.51 In defining a security, the Court applied an older state law approach
(echoing Oregon’s State v. Whiteaker), which “embodies a flexible rather than a static principle,
one that is capable of adoption to meet the countless and variable schemes devised by those who
seek the use of money of others on the promise of profits.”52 The Court held that the transaction
in question contained all of the elements usually associated with a security, i.e., the investor
provided the capital and shared in the profits while the promoters managed, controlled, and
operated the enterprise.53 The Court then adopted a test which, with some later modification,
remains today as a cornerstone of federal and state securities laws:
The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.54
47 Id. at 8. 48 Id. 49 Id. 50 Id. 51 Id. at 8. The Howey court wanted to retain the freedom to find securities as appropriate. 52 SEC v. W J Howey Co., 328 U.S. at 299. 53 See McGaughey, supra note 19 at 8. 54 Sec v. W J Howey Co., 328 U.S. at 300-01.
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Howey was modified by SEC v. Glenn W. Turner Enterprises, 474 F2d 476 (9th Cir.
1973), cert denied, 414 U.S. 821 (1973) to effectively eliminate the word “solely” from the
Howey test.55 In that case, the Ninth Circuit (in a case arising from Oregon) analyzed a
transaction it called a “gigantic and successful fraud,” which, but for the minimal effort required
of the investors in order for them to receive a profit, would otherwise have met the Howey test.56
Recognizing that Congress intended that a flexible approach be employed, the Ninth Circuit held
that an investment contract is created when “the efforts made by those other than the investor are
the undeniably significant ones….”57 The court explained “undeniably significant” to mean
“those essential managerial efforts which effect the failure or success of the enterprise.”58 In
other words, an investment contract constitutes a security under the Howey test, even if the
owner participates in the enterprise in some way.
The Oregon Supreme Court adopted the Howey test in Pratt v. Kross, 276 Or 483
(1976).59 The Pratt court modified the test as follows:
(1) an investment of money (or money’s worth),
(2) in a common enterprise,
(3) with the expectation of profit,
(4) to be made through the management and control of others.60 The essence of Howey is the elevation of substance over form.61 Economic realities
determine whether an investment contract is a security. Even transactions which are structured to
55 Id. 56 Id. 57 Id.. 58 SEC v. Glenn W. Turner Enterprises, 474 F.2d at 482. 59 See McGaughey, supra note 19 at 8. 60 Id. at 9, quoting Pratt v. Kross, 276 Or at 498. 61 Id. at 9.
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fall outside of the securities law may be brought within the law if the economic realities of the
transaction so dictate.62
2. The Risk Capital test.
Oregon also employs the “risk capital” test in determining the existence of an investment
contract.63 Oregon’s risk capital test has its roots in Silver Hills Country Club v. Sobieski, 55 Cal
2d 811 (1961). In that case, a real estate developer sought funds needed for golf course
construction by selling memberships in advance of construction.64 Although a member had no
expectation of monetary profit, the court noted that a member’s risk was not lessened because the
member only had a membership, rather than an equity interest.65 The Oregon Supreme Court,
discussing Silver Hills in Pratt, stated that “the interest comes within this test if the investor
contributes the capital necessary to finance the enterprise and receives in exchange some
benefit.”66
Oregon courts have only applied the risk capital test once, in State ex rel Healy v.
Consumer Business Systems, Inc., 5 Or App 19 (1971).67 In that case, the court held that a new
venture’s sale of a franchise involved the sale of a security, stating:
[I]f a substantial portion of the initial capital which a franchisor uses to initiate its operations is being provided by its franchisees, then the franchisor must register his enterprise under the Oregon Securities Act.68
While the decision was targeted at the developing franchise industry, the opinion expands the
Howey test, in cases in which investors had a role in the investment’s management.
62 Id. at 9. 63 Id. at 17. 64 Id. 65 Id. 66 Pratt v. Kross, 276 Or at 490. 67 See McGaughey, supra note 19 at 18. 68 Id., quoting State ex rel Healy v. Consumer Business Systems, Inc., 5 Or App at 29.
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Modification of the Howey test has reduced the need for the risk capital test, and no
Oregon appellate court has since applied it.69 However, if an Oregon court is reluctant to
consider a particular TIC or REIT transaction a security under Howey as they should, the court
could revive the risk capital test to deal expressly with real estate transactions like TIC or REIT
sales, which often feature investment vehicles, like limited liability companies (“LLCs”), as the
investment conduit. If TIC or REIT promoters use LLCs to draw investors into the management
of an investment, then promoters may be attempting to insulate themselves from securities
liability. However, Oregon courts have seen through that charade and found liability under the
investment contract theory as codified by the anti-fraud provisions of ORS 59.135.
B. LLCs established to control passive real estate interests are securities.
The body of analysis purporting to answer the question of whether or not an LLC is a
security is extensive. While some states expressly include LLCs in their statutory definitions of
securities, Oregon does not.70 In the absence of an LLC being statutorily recognized as a
security, regulators treat LLCs as they do partnerships and apply the Howey test as illustrated by
Williamson v. Tucker, 645 F.2d 404 (5th Cir., 1981).71 With several recent Oregon securities
cases involving LLCs as the investment instrument of choice for financing complex real estate
development projects, state courts can no longer adopt a piecemeal approach. Persuasive
authority supports the argument that LLCs, at least those established to own passive real estate
interests, are securities.72
69 Computer Concepts, Inc. Profit Sharing Plan v. Brandt, 98 Or App 618, N 7 (1989) (“Modification of the Howey test has reduced the need for the alternative test, and no Oregon appellate court has since relied on the risk capital test.”) 70 Seth L. Smythe, Definition of a Security, Advising Oregon Business, 15-8 (2007 Supplement). 71 Irving L. Faught and Shaun M. Mullins, Application of Securities Laws to Limited Liability Companies, 49 Consumer Finance Law Quarterly Report 3, 287 (1995). 72 See Triple Net Leasing, LLC, SEC No-Act., LEXIS 824 (August 23, 2000); SEC v. Edwards, 540 U.S. 389 (2004) (A sale and lease-back scheme involving coin-operated phones can be a security subject to the federal securities laws); and SEC v. Sunwest Management, Case No. 09-6056-HO, Findings of Fact and Conclusions of Law, (D. Or Oct. 2, 2009).
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Few courts nationally have taken on the challenge of determining whether LLC interests
constitute securities.73 Courts examining the issue have reviewed LLC interests by analogizing
them to partnership interests and determining whether they constitute investment contracts using
the Howey test, as supplemented by Williamson.74 The Williamson court argued that investors
claiming a joint interest in an investment, like a TIC investor who established a single-member
LLC might, have a “difficult burden to overcome.” But the Williamson court explained that joint
venture interest can be a security if an investor can establish that:
(1) An agreement among the parties leaves so little power in the hands of the partner or venture that the arrangement in fact distributes power as would a limited partnership; or (2) the partner or venture is so inexperienced and unknowledgable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or (3) the partner or venture is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture powers.75
After finding that investors had invested money in common schemes, the courts looked to the
factors described in Williamson for guidance in determining whether the investors’ profits were
to come from the efforts of others.76
While some courts have found that LLC interests are not securities in situations in which
investors actually acquired a substantial amount of managerial control,77 SEC. v. Parkersburg
Wireless, Ltd. Liability Co., 991 F. Supp 6, 1997 US Dist. LEXIS 22546 (D.DC, 1997) provides
better guidance for the purposes of this examination. In that case in which ownership interests
were sold to a large number of mostly senior citizen investors, the court dismissed the promoter’s
arguments that the investors were active managers, holding that:
73 See Smythe, supra note 70 at 15-63. 74 Id. 75 Williamson v. Tucker, 645 F.2d at 424. 76 Id. 77 See Smythe, supra note 70 at 15-63. Courts have found that LLC interests did not constitute securities in Great Lakes Chemical Corp. v. Monsanto Co., 96 F. Supp2d 376 (D.Del 2000) and Keith v. Black Diamond Advisor, Inc., 48 F. Supp 2d 326 (SDNY 1999), however, in these cases, investors actually acquired a substantial amount of managerial control, or even all of the outstanding LLC interests.
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Regardless of the general treatment of LLCs under the applicable state law, the “ultimate power” over [the LLC] rested not with the geographically dispersed, inexperienced, predominately retired [LLC] investors, but with defendant…. While the investors theoretically may have possessed a right to manage the affairs of [the LLC] under the terms of the Operating Agreement, the inexperience and geographical diversity of the 700-odd investors essentially precluded this from ever coming to pass.78
Parkersburg involved a “master” LLC that had many investor members, but a novel LLC
structure has surfaced, discussed infra, in which promoters push LLCs into the hands of
investors in an effort to evade securities regulations. Nonetheless, these LLCs are also
securities.
1. Tenant-in-Common real estate interests are also widely recognized as securities.
TIC interests have been widely recognized as securities.79 Thus, LLCs formed for their
express use as a channel to funnel money into TIC interests, typically at the behest of TIC
promoters, are also securities. But this view is not without controversy. Corporate entities
commentator Larry Ribstein argues that LLCs should not be securities owing to their hybrid
nature.80 Instead, Ribstein notes that LLCs fall more readily into the spectrum of unincorporated
entities like general partnerships, in which the partners retain all control and limited partnerships,
in which limited partners cannot exercise control, making it unlikely that an LLC can meet the
definition of an investment contract, because there is a question of whether an LLC relies on the
efforts of others.81 Ribstein’s argument, however, does not anticipate fractional ownership of real
78 SEC v. Parkersburg Wireless, 991 F Supp at 9, n 3. 79 The SEC has deemed TIC interests securities. See Beth Mattson-Teig, SEC Confirms TICs as Securities, National Real Estate Investor, January 28, 2009. Oregon appears to consider TICs securities as well. See Offering or selling tenancies-in-common (TICS), Securities implications in the promotion/offer and sale, Division of Finance and Corporate Securities, Department of Consumer & Business Services, (March 27, 2011). FINRA classifies TICs as securities as well and it has offered rules and advice to its broker-members on how to comply with securities regulations. See Guidance: Private Placements of Tenants-in-Common Interests, 05-18 (March 2005). See also Id. at 3. “When TICs are offered and sold together with other arrangements, they generally would constitute investment contracts and thus securities under the federal securities laws.” 80 Larry E. Ribstein, Form and Substance in the Definition of a “Security”; The Case of Limited Liability Companies, 51 Wash & Lee L. Rev. 807 (1994). 81 Id.
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property that utilizes LLCs to structure TIC real estate ownership arrangements. Indeed, Ribstein
himself concedes that publicly marketed TIC interests are securities.82
Moreover, it is clear that Ribstein did not consider the contemporary structure of LLC
fractional title owners in real property that are subject to TIC agreements that accord to a single
TIC promoter the right to control all management decisions for the other TIC owners and that are
subject to “master lease” agreements by which the TICs lease their property to a management
company that controls all management decisions about the property. On the other hand,
Ribstein’s analysis predated the 2002 Internal Revenue Service tax ruling on section 1031. The
combination of these agreements results in a delegation of all day-to-day management of the
properties to third parties, and thus provides the argument that the TIC owners are acting not as
partners, but as true co-tenants.
TICs exploded as an investment vehicle83 following a 2002 Internal Revenue Service
ruling making them eligible for tax deferred treatment under Internal Revenue Code section
103184 (the so-called “1031 Exchange”). Since then, TIC-based investments have emerged as
fertile ground for securities claims due to investment losses resulting from the real estate crisis.
Investors widely adopted TICs as a way to own real estate without day-to-day management
headaches.85 At the heart of these TIC transactions is a “master lease” arrangement, whereby the
sponsor or promoter or an affiliated entity is also the master tenant.86 In reviewing these master
82 Id. 83 The value of TICs sold between 2001-2004 was $7 billion. In 2006, $7 billion were sold. See Lenin E. Lopez, A Matter of Semantics: Should Tenancies-in-Common be Treated as Securities or Real Estate Interests?, 8 J. Bus. & Sec. L.1,2 (2007). 84 See Larson, supra note 43. 85 Id. 86 Id.
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leases, it is clear that the promoter is providing all of the entrepreneurial activities, and as such,
the SEC has ruled these arrangements to be securities.87
The TIC market overheated with the real estate boom. As real estate prices plummeted
starting in 2007, many TIC investors lost money from the declines in value and rentals, with
properties falling into foreclosure or becoming otherwise unprofitable.88 This economic turn
came despite promoter touts of properties as safe or no-risk investments.89 Some promoters even
pitched “guaranteed” monthly interest payments to investors.90 DBSI was one such spectacular
failure in which a TIC promoter’s real estate scheme collapsed under the weight of crushing debt
caused by sinking property values.91 Sunwest Management, an Oregon-based senior housing
developer, was another TIC promoter that imploded in a Ponzi scheme that pitched real estate-
based securities as safe investments to investors, many of whom were elderly.
a. The DBSI Ponzi scheme.
DBSI, a commercial real estate developer with a successful thirty-year track record,
pioneered the fractional sale of real property as a way to buy land and develop office buildings
and apartment complexes.92 Along the way, it used TIC investments from many of its twelve-
thousand equity investors to amass 18.6 million square feet of commercial space in thirty-four
states, valued at approximately $2.6 billion.93 The success of a real property deal depended on
servicing bank debt used to purchase the property, which was to be paid through rental income.
“Surplus” rent was to be paid to investors as a return on their investment. When the real estate
87 Id. 88 Securities Law Firm of Menzer & Hill, P.A. (March 27, 2011), http:// www.suemyadvisor.com/tenants-in-common-real-estate-tics . 89 Jeffrey B. Kaplan, Regulators Accuse DBSI of Securities Fraud, Dimond Kaplan & Rothstein, P.A. (August 18, 2009), http://www.investmentfraud-lawyer-blog.com/DBSI-InvestmentFraud/DBSI-SecuritiesFraud.shtml. 90 Id. 91 Janet Leiser, DBSI seeks bankruptcy protection, Tampa Bay Business Journal, November 10, 2008. 92 Id. 93 Id.
15
and rental markets collapsed, DBSI experienced serious cash flow problems94 DBSI made a $90
million offering purportedly to finance additional development projects. In reality, however, the
company seized the cash to finance its daily operations and pay off existing debts,95 including
making “guaranteed” investment payments to earlier investors, in classic Ponzi scheme
fashion.96 DBSI was forced to seek Chapter 11 bankruptcy protection from its creditors.97
b. The Sunwest Management Ponzi scheme.
Closer to home, Sunwest Management (“Sunwest”), a now-bankrupt Salem-based
operator of senior housing developments, met a similar fate. It also sold fractional interests
through TIC arrangements to finance the down-payments it needed to obtain real estate
mortgages on its acquisitions of senior housing and commercial real estate developments during
the firm’s nationwide boom-time buying spree. Using a network of investment promoters,
including broker-dealers and realtors, Sunwest’s captive brokerage arm, Canyon Creek
Financial, approached prospective investors in multiple states, many of whom were elderly, to
sell them TIC interests in Sunwest properties. The sales were based on the inducement of a
section 1031 tax-deferred exchange into a new fractional property interest and the promise of
stable income in the form of “rent” at an attractive rate of return (10% to 12% annually).98 The
sale was also predicated on the return of the investor’s principal investment in a short period of
time.
Investors were told by brokers and promoters that Sunwest had never missed a rent
payment and that the company’s financials were solid. Investors were also told that their
investments were going to finance a specific project, which later turned out to be largely
94See Kaplan, supra note 89. 95 DBSI Investigator Issues First Report, Wall Street Journal, August 6, 2009. 96 See Kaplan, supra note 89. 97 See Leiser, supra note 91. 98 SEC v. Sunwest Management, No. 09-CV-6056-HO, Motion for Summary Judgment at 3 (D. Or. Nov. 4, 2009).
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untrue.99 Many investors in Sunwest were sitting on capital appreciation from previous
individual real estate investments and needed a vehicle to defer capital gains taxes using section
1031, so Sunwest’s proposal seemed like a prudent investment opportunity based on the
information supplied by promoters.
Sunwest, through its Canyon Creek Financial investment arm, structured deals by having
investors pay their investment cash into an escrow account, in exchange for newly formed
single-purpose and single-member LLCs, which Sunwest’s attorneys established to deed a
fractional interest in the real property being developed. Investors’ funds were then usually co-
mingled with the proceeds of a bank loan, with combined proceeds used to pay closing costs,
promoters’ fees, promoters’ attorneys fees, and purchase the facility or the land on which the
facility would be built. After these acquisitions and contrary to statements in offering
memoranda, income generated from existing facilities or funds for acquisition or construction
purposes would then often be diverted to cash flow shortages at unproductive properties or to
finance the promoters’ lifestyle and private investments. More than one thousand investors
bought into this model, pouring a total of $430 million into Sunwest between 2001-2008.100
Sunwest used the money to go on a seven year acquisition spree, culminating in the firm
achieving the level of fourth-largest senior housing provider in the nation.101
Unfortunately for Sunwest investors, the economic downturn dried up its credit facilities
and Sunwest began to shuffle money between properties to pay “rents” on less successful
properties and to finance new acquisitions.102 Sunwest did not tell new investors that it planned
to move their money to other properties, including moves to failing properties.103 Eventually,
99 Id. 100 Id. 101 Mary Mooney, Sunwest senior housing problems mount, Oregonian, November 1, 2008. 102 See SEC v. Sunwest Management, supra note 98 at 3-4. 103 Id.
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Sunwest stopped making “rent” payments to investors in 2008. In 2009, the SEC filed an action
accusing Sunwest of operating a Ponzi scheme and forcing the firm into Chapter 11 bankruptcy
and SEC receivership.
Sunwest is a novel variation on Parkersburg in that while both investment schemes
involved large numbers of inexpert, geographically-dispersed investors, the Parkersburg
investors bought “membership” shares in an existing LLC, whereas Sunwest established LLCs
for investors, and the LLCs, in turn, received TIC interests in Sunwest developments. Ultimately,
Sunwest CEO Jon Harder himself admitted that he and his firm were selling securities and that
the LLCs his firm formed for investors were also securities.104 Oregon courts should take note of
Harder’s admissions and view LLCs established for the purpose of TIC investments as securities.
Sunwest required investors to use LLCs to execute investments in the company’s development
projects. Sunwest’s attorneys formed the LLCs for investors and the investors themselves took
no part in managing the properties in which they had a fractional ownership interest. Applying
the Williamson test, there is little doubt that LLCs were securities under the Sunwest scheme.
III. GATEKEEPER LIABILITY: THE DEEP POCKETS OF LAWYERS AND ACCOUNTANTS
Assuming an EPDAPA claimant has a winning claim, like many claims, obtaining a
judgment is only the first, and sometimes the least significant, step in obtaining payment for a
claimant.105 It can be extremely difficult to collect on judgments. One way for claimants to
increase the likelihood of collecting is to pursue “gatekeepers” – auditors, lawyers, underwriters,
lenders, and stock analysts – to collect on liability for securities fraud.106 The Supreme Court
held in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) that
104 Id. 105 Effective Collection of Judgments, Oregon Law Institute of Lewis & Clark Law School, 3-1 (November 12, 2010). 106 Assaf Hamdani, Gatekeeper Liability, 77 So. Cal. L. Rev. 1, 54 (2003).
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there is no federal private right of action for aider and abettor liability in section 10(b) of the
Securities Exchange Act of 1934107. However, Oregon securities law does provide a private right
of action against gatekeepers.108
Securities markets have long employed gatekeepers to protect the interest of dispersed
investors who cannot easily take collective action.109Accounting and law firms are two of the
private gatekeepers to financial markets110 that have duties to protect investors from misleading
or dubious representations in securities transactions. Accounting firms might provide a promoter
with an audited certification of the promoter’s financial statements.111 A securities attorney
might provide a promoter with its legal opinion that all material information of which he or she
is aware concerning the promoter has been properly disclosed.112 The professional gatekeeper
essentially assesses or vouches for the promoter’s own statements about itself or a specific
transaction.113
Gatekeepers have a duty to prevent promoter misconduct by withholding support from
illegal transactions.114 Accountants and lawyers fail as gatekeepers when they provide audits or
legal opinions that allow promoters to draw investors into fraudulent securities transactions.
Securities law applies aider and abettor liability to gatekeepers who fail to disrupt promoter
107 The SEC has authority under section 20(e) of the 1934 Act to bring aiding and abetting actions. See John C. Coffee, Jr., Securities Regulation: Cases and Materials, 1122 (2009). 108 Under ORS 59.115(3), persons who materially aid or participate in the illegal sale of securities are liable in securities claims. 109 John C. Coffee, Jr., Gatekeeper Faillure and Reform: The Challenge of Fashioning Relevant Reforms, 84 Boston Univ. L. Review 2, 302, 308 (2004). Professor Coffee explains the concept of gatekeeper in relevant part as the party that has significant reputational capital, acquired over many years and many clients, which it pledges to assure the accuracy of statements or representations that it either makes or verifies. 110 Frank Partnoy, Barbarians at the Gatekeepers?: A Proposal for a Modified Strict Liability Regime, 79 Wash. Univ. L. Quarterly 491 (2001). 111 See Coffee, supra note 109 at 309. 112 Id. 113 Id. 114 Id at 54.
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misconduct.115 Gatekeepers can be particularly attractive targets in securities cases because they
typically have malpractice insurance for negligent acts116 or other means to pay judgments.
Like federal117and state securities law, EPDAPA also provides for gatekeeper liability.118
Unlike state securities law, however, which has no scienter requirement for gatekeeper liability,
EPDAPA requires scienter.119 In order to establish gatekeeper liability under EPDAPA, a
claimant must establish that the gatekeeper (a) knowingly acted, or (b) failed to act (c) under
circumstances in which a reasonable person should have known of the abuse.120 The key to
establishing gatekeeper liability in Oregon is the existence of “red flags,” i.e. facts known or
knowable to the aider or abettor sufficient to submit the question of liability to a jury.121
Oregon courts have not yet reported decisions on EPDAPA gatekeeper liability claims
under ORS 124.100(4).122 Nonetheless, several cases on gatekeeper liability are instructive. In
one such case, Ernst & Young, a “big four” accounting firm, was found to have gatekeeper
liability for a fraudulent audit report it knew its client would include in a public securities
filing.123 The Ernst & Young court found the firm liable because the Central Bank holding forced
plaintiffs to work around the Supreme Court’s interpretation that section 10(b) did not permit
private rights of action for aider and abettor liability. Still, Ernst & Young illustrates that
accountants can be liable for securities fraud even if a firm did not actually trade in securities.
115 Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J. of L., Econ., & Org. 1, 53 (1986). 116 Representing Elder Abuse Victims, Oregon Law Institute of Lewis & Clark Law School, 6-5 (March 4, 2005). 117 Federal claims involving gatekeeper liability may only be brought by the SEC. See Coffee, supra note 108. 118 “An action may be brought under this section against a person for permitting another person to engage in physical or financial abuse if the person knowingly acts or fails to act under circumstances in which a reasonable person should have known of the physical or financial abuse.” ORS 124.100(5). 119 Id. 120 This is the objective negligence standard. See supra note 116 at 6-5. 121 Id. 122 Id. 123 McGann v. Ernst & Young, 95 F.3d 821 (9th Cir.1996).
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EPDAPA claimants can look to Ernst & Young for guidance on how accounting firms may have
direct liability or gatekeeper liability.
Lawyers have also been held liable under Oregon securities laws if they participate or
materially aid in the sale of securities.124 In Ainslie v. Spolyar, 144 Or App 134 (1996), a lawyer
providing ongoing legal services to a company that illegally sold securities, including aiding in
the preparation of offering materials, was held liable for materially aiding the illegal sale. In
Towery v. Lucas, 128 Or App 555 (1994), the court reversed summary judgment on the basis that
attorneys could be liable as participants for statements or omissions made in connection with the
sale of securities. Therefore, EPDAPA claimants may be able to find gatekeeper liability against
attorneys for financial abuse of elders.
Oregon’s Sunwest litigation may provide some guidance on the exposure of attorneys to
bystander liability under EPDAPA. While the SEC and Sunwest’s investors went after the firm
and its associated entities for securities violations and other claims associated with the Ponzi
scheme that the SEC accused Sunwest of operating,125 plaintiffs also set their sights on the
Portland office of law firm Davis Wright Tremaine (“DWT”), Sunwest’s counsel for the TIC
offerings, as well as K&L Gates, and Thompson & Knight.126 In one claim against DWT and a
DWT partner, an investor argued that the firm was liable for the investor’s losses because the
124 Robert J. McGaughey and James G. Harlan, Oregon Securities Law, Advising Oregon Business, 18-19 (2001). 125 See SEC v. Sunwest Management, supra note 98. 126 Brian Baxter, Davis Wright, K&L Gates, Thomspon & Knight Ensnared in Ponzi Probe, The American Lawyer, May 11, 2009. (“The suit accuses Davis Wright Tremaine of facilitating the [Ponzi] scheme by misrepresenting the ‘unitary’ nature of the operation. The suit says Davis Wright Tremaine and [attorney Tim] Dozois prepared numerous documents that misled investors into thinking they were buying into particular properties, including memoranda, disclosure materials, tenancy in common agreements, triple net lease documents, warranty deeds, operating agreements, real property purchase agreements and escrow instructions. The defendants and the [CEO Jon] Harder Enterprise did not tell investors that revenue generated in connection with the property they were investing in could be commingled and used to help fund less profitable properties….”) See also Wendy Culverwell, Sunwest investors sue Davis Wright Tremaine, Portland Business Journal, April 14, 2009. (“Investors were also not told that the Harder Enterprise had engaged extensively in such commingling of funds in the past and intended to continue to do so in the future…”).
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firm drafted documents misrepresenting how investments would be applied.127 While DWT
denied liability that could have run into the hundreds of millions of dollars,128 the firm settled
claims against it for a reported $30 million, which is one of the largest malpractice settlements
ever by a law firm in the Pacific Northwest.129
An interesting question is what DWT’s exposure might have been if claimants had sought
damages under EPDAPA. Here, the firm prepared Sunwest investment offering documents
knowing that elderly investors would rely on DWT’s work product. The investments Sunwest
offered violated Oregon securities law.130 DWT’s work likely materially aided Sunwest in
financially abusing its elderly investors. Therefore, DWT might have had gatekeeper liability
pursuant to EPDAPA for Sunwest’s financial abuse. The extraordinary potential remedies
afforded to elder abuse act claimants could have been staggering, considering the number of
investors and the amounts of money involved. Certainly, EPDAPA claimants should also
consider gatekeeper liability by professionals for aiding and abetting a fraud.
IV. APPLICATION OF EPDAPA TO SECURITIES CLAIMS
A. Introduction.
The Oregon securities law is a robust tool with which to prosecute securities violation
claims. It imposes liability on perpetrators of securities fraud and against certain non-sellers who
participate in or materially aid in the fraud.131 Securities fraud occurs when a sale involves
material untruths or omissions,132 or the sale involves unregistered or unlicensed securities.133
While certain securities or securities transactions are exempt from registration or licensure
127 Id. 128 Id. 129 Brian Baxter, Davis Wright Settles Sunwest Litigation for $30 Million, The American Lawyer, October 26, 2009. 130 See SEC v. Sunwest Management, supra note 98 at 8. 131 See McGaughey, supra note 19 at 131. 132 Id. 133 Id.
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requirements,134 Oregon’s securities law applies to fraud regardless of any available
exemption.135 Common law fraud is not easy to prove – scienter and reliance are particularly
challenging elements to show – however, Oregon’s securities fraud law eliminates the common
law scienter and reliance elements.136 This makes securities fraud much easier to prove in
Oregon than either common law or federal Section 10(b) fraud. In short, the Oregon securities
law is a potent and streamlined weapon against securities fraud.
Oregon’s EPDAPA ups the ante in state securities cases, because the required elements of
proof are easier to meet,137 the statute of limitations for bringing claims is much longer,138 the
available damages are dramatically higher,139 prevailing plaintiffs’ attorney fees are
mandatory,140 and remedies are cumulative.141 Eligible parties bringing Oregon securities law
claims involving elderly investors should consider adding EPDAPA claims where appropriate,
because a successful outcome on the securities claim would likely mean prevailing on an
EPDAPA claim, amplifying the potential recovery for plaintiffs.
1. Elements of proof required for EPDAPA.
There are four required elements of proof in an EPDAPA claim.142 First, there has to be a
taking or appropriation. A taking or appropriation means any act that diminishes the plaintiff’s
interest in money or property.143 Second, the taking or appropriation must be of money or
property. Third, the money or property must belong to an elderly or incapacitated person. Belong
134 Id. 135 Id. 136 Id. at 119. 137 See supra note 116 at 6-3. 138 See supra note 116 at 6-7. 139 See supra note 116 at 6-5. 140 ORS 124.100(2)(c) “The court shall award the following to a plaintiff who prevails in an action under this section * * * * (c) [r]easonable attorney fees incurred by the plaintiff.” 141 See supra note 116 at 6-6. 142 Church v. Woods, 190 Or App at 117. 143 See supra note 116 at 6-2.
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means to be the property of a person or a thing.144 Fourth, the taking must be wrongful. The
Church court held that conduct is wrongful if it is carried out in pursuit of improper motive or by
improper means. Church v. Woods, 190 Or App at 118. The court identified examples of
“improper means” as violence, threats, intimidation, deceit, misrepresentation, bribery,
unfounded litigation, defamation, disparaging falsehood, or undue influence.145 (Emphasis
added).
Oregon EPDAPA claims have a distinct advantage for plaintiffs over a securities law
claim in that there is no required element of intent. Whereas securities law claims require that a
speaker intend that a representation be acted on by a party in a manner reasonably
contemplated,146 an elder abuse act claim has no such requirement. This difference simplifies the
proof required and makes it easier to prove an EPDAPA claim.
2. Statute of limitations is much longer for EPDAPA claims.
Whereas Oregon securities law claimants have a three-year period in which to assert
claims arising out of the sale of the security at issue or two years after the claimant discovered or
should have discovered materially untrue statements or omissions,147 EPDAPA claimants have
seven years from the date of discovery to bring an EPDAPA claim.148
3. Available EPDAPA claims are substantial.
Available damages in Oregon securities law claims are limited to the difference between
the price paid at the time of the illegal sale and the value of the security either at the time of
144 Webster’s Third New International Dictionary 201 (3d ed. 1976). Under this definition, a “thing” could certainly be an LLC, meaning the statute could apply. 145 Undue influence was treated by the Oregon courts in Smith v. Ellison, 171 Or App 289 (2000) and Penn v. Barrett, 273 Or 471 (1975). Undue influence has been defined as “unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that the person will not act in a manner inconsistent with his welfare. Restatement (Second) of Contracts §177(1) (1981) (other citations omitted) Smith at 293. 146 See McGaughey, supra note 19 at 141. 147 See Id. at 146. 148 See supra note 116 at 6-7, quoting ORS 124.130.
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tender back to the seller or when sold prior to judgment,149 interest at the statutory rate on the
amount paid for the security from the date of purchase,150 court costs,151 and reasonable attorney
fees in some cases. On the other hand, available remedies in EPDAPA claims include treble
economic damages of objectively verifiable monetary losses,152 treble non-economic damages
such as mental suffering, anxiety, distress,153 reasonable attorney fees,154 and reasonable
conservator or guardian ad litem fees.155 Oddly, court costs are not provided for in the act, but
such costs would likely be awarded under Oregon’s prevailing party statutes.
4. Attorney fees award is mandatory, but not reciprocal.
While both the Oregon securities law and EPDAPA provide for attorney fees, the
securities law attorney fees provision is permissive156 (“the court may award reasonably attorney
fees to the prevailing party”), whereas attorney fees in EPDAPA claims are required (“the court
shall award the following to a plaintiff who prevails * * * * (c) [r]easonable attorney fees.”157
(Emphasis added).
5. Cumulative remedies available in EPDAPA claims.
Adding to the force of EPDAPA remedies, such remedies under the act are cumulative
under ORS 124.135, and are thus in addition to any other remedy, civil or criminal, that may be
available under any other provision of the law.
B. Limitations of EPDAPA.
The complex nature of how an elderly person’s investments may be structured poses
obstacles to bringing EPDAPA claims because of the issue of who has standing to bring claims. 149 See McGaughey, supra note 19 at 149. 150 Id. 151 Id. 152 See supra note 116 at 6-5. 153 Id. 154 Id. 155 Id. 156 ORS 59.115(10) 157 ORS 124.100(2)(c).
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Standing is a construct of statutory law, which determines who may invoke one or another form
of relief against actions taken against them.158 ORS 124.100(2) provides a private right of action
for elderly persons to bring suit for financial abuse; however it does not explicitly provide for
suit by investment vehicles like trusts and LLCs holding a senior’s assets. While lack of standing
has been raised as a defense to EPDAPA claims in Oregon,159 the Oregon courts have not yet
considered who properly has standing in such claims. Therefore, it is unresolved in Oregon
whether an owner of an LLC may successfully bring EPDAPA claims when the LLC has
become the owner of the asset being sold.
Another EPDAPA limitation is that it exempts from elder financial abuse actions health
care facilities like nursing and adult residential care homes, financial institutions like banks and
credit unions, and licensed broker-dealers.160 While the exemption is eliminated for those parties
convicted of crimes against the elderly or criminally liable for direct financial abuse of the
elderly, these exemptions largely eliminate direct EPDAPA liability on the part of these
particularly deep pockets. These institutions successfully sought exemption through the
legislative process when EPDAPA was adopted. On the other hand, the ORS 124.115
exemptions do not apply to employee perpetrators of elder financial abuse. There is no
exemption for bank tellers, stockbrokers, credit union underwriters, or other securities
salespeople under the statute. These parties remain individually liable under EPDAPA for elderly
financial abuse.
C. Potential EPDAPA claims for securities law violations.
1. Background
158 Benton County v. Friends of Benton County, 294 Or 79, 81-83 (1982). 159 Bolens v. Schrag, 2009 WL 7446724 (2009). 160 See ORS 124.115.
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There are those who argue that society should not treat elderly people like children; that
elders should be held accountable for their money blunders.161 Younger Americans must live
with their mistakes, so why should older Americans, simply because they crossed an arbitrary
age threshold, get a free pass on bad investments? The problem with this argument is that it
underestimates the extent to which elders are targets for financial predators. The reality is that
elders are a uniquely vulnerable population,162 one which is repeatedly subjected to deceptive or
unfair practices by investment promoters trying to separate elders from their money.163
Moreover, changes in physical and mental functioning, including declines in cognitive abilities
can make it very difficult for the elderly to understand complex financial transactions.164 Elderly
living independently lose 60% of the $60 billion lost annually to fraud and scams.165
The extraordinary remedy of treble damages for elder financial abuse claims is necessary
to protect elders and deter future fraudulent acts. The difference between states that have elder
abuse acts and states that do not are readily apparent; in unprotected states, unscrupulous firms
swoop in to victimize seniors by the hundreds166 with bogus or totally inappropriate investment
proposals. Often, the modus operandi of these promoters is to “scare the beegeezus out of senior
citizens” by claiming that seniors will not be able to pass their life savings on to relatives without
staggering penalties unless the elderly person invests their money in certain ways.167 Some
161 Charles Duhigg, Shielding Money Clashes With Elders’ Free Will, N.Y. Times, December 24, 2007. 162 Donna S. Harkness, Packaged and Sold: Subjecting Elder Law Practice to Consumer Protection Laws, 11 J. of L. and Policy 2, 537 (2003). 163 Fraud Against Seniors: Prepare Statement of the Federal Trade Commission Before the Special Committee on Aging, United States Senate (August 10, 2000) (statement of Rolando Berrelez, Assistant Regional Director). 164 See supra note 9. 165 Shelby A.D. Moore and Jeanette Schaeffer, Remembering the Forgotten Ones: Protecting the Elderly from Financial Abuse, 41 San Diego L. Rev. 505, 517 (2004). 166 See Fant, supra note 7. 167 Lisa Nerenberg, Prevent Elder Abuse Blog, (October 30, 2007) (accessed February 8, 2011), http://preventelderabuse.blogspot.com/2007_10_01_archive.html.
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agents are trained to discourage elderly prospects from consulting their children or financial
advisors about the investments or insurance policies they are considering.168
2. Ripe avenues for Oregon EPDAPA claims.
There are myriad securities transactions that may implicate EPDAPA claims. “Free
lunch” seminars are some of the most popular ways investment promoters target seniors. These
seminars are pitched as “educational” opportunities during which seniors are invited to hear
about investment options while enjoying a free lunch. However, one-hundred percent of the
seminars are set up to sell investments.169 Seventy-eight percent of seniors have received a free
lunch seminar invitation and sixty percent have received six or more in the past three years.170
The seminars themselves are filled with trouble; many salespeople are weakly supervised; fifty
percent of the seminars exaggerate or advance misleading claims; twenty-three percent involve
possibly unsuitable investments; and thirteen percent are outright fraudulent.171
Other popular scams against elderly people involve insurance products, annuities, and
more recently, reverse mortgages. The gravamen of these actions is generally centered around
investments that are clearly unsuitable for the specific investor. Whether reverse mortgages are
pitched to tap into an elderly investor’s home equity to fund unsuitable annuities,172 or an
insurance advisor pitches an inappropriate first-to-die insurance policy to an insured couple to
book new commissions,173 or an investment salesperson depletes a senior’s portfolio through
168 Id. 169 “Free Lunch” Investment Seminar Examinations Uncover Widespread Problems, Peril for Older Investors, U.S. Securities and Exchange Commission, 2007-179 (September 10, 2007). 170 Id. 171 Id. 172 For an explanation of an unsuitable annuity, see Popular indexed annuities called ‘terrible ideas’ for seniors, Bloomberg, January 30, 2011. The article describes a broker selling a 92 year old client annuities that did not mature for 60-plus years. 173 Meyer v. Jenson, et al., No. 6:10-CV-6102, Reply to the Agency Defendants Opposition to Plaintiff’s Motion for Summary Judgment on the Sixth Claim for Relief of Elder Abuse (D. Or. Feb. 1, 2011).
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churning of the investor’s account,174 these are all securities violations. They also violate
EPDAPA because they are also wrongful takings of money from the protected class. Other forms
of fraud involve securities and investment fraud, financial planning fraud, asset protection scams,
tax avoidance schemes, offshore scams, real estate fraud, misrepresentation, defective
documentation, insurance sales fraud, charity, or non-profit fraud.175
D. Notable successful elder abuse act claims.
A FINRA arbitration panel recently applied California’s Elder Abuse and Civil
Protection Act176 in finding financial abuse in a 2009 claim of a ninety-six year old investor by a
discount brokerage house and two of its salespeople.177 The plaintiff, retired airline pilot David
Wolfson,178 had been a client of StockCross Financial Services almost for twenty years.179 The
salespeople invited and encouraged the plaintiff to leverage the equity in his home through a
reverse-mortgage transaction to capitalize an investment account, which they ultimately churned,
along with nearly all of the plaintiffs other assets – cash reserves, emergency medical reserves,
and automobile insurance settlement proceeds – until plaintiff’s resources had been depleted and
there was nothing left to churn.180 The arbitration panel found defendants liable for securities
violations181 and applied California’s elder abuse act to treble economic damages,182 resulting in
$1.6 million award for the plaintiff.183 While the FINRA award is not precedential,184 it is
instructive as a model for securities violations cases in Oregon.
174 See Wolfson, supra note 29. 175 See supra note 116 at 5-3, 5-4. 176 Cal. Welf. & Inst. Code §§ 15600 et seq., “Elder Abuse and Civil Protection Act.” 177 FINRA Panel Awards Elderly Investor Treble Damages Under Financial Elder Abuse Law, 65 APR Disp. Resol. J. 8 (2010). 178 See Wolfson, supra note 29. 179 Bruce Kelly, Finra slaps discount broker with triple damages in rare elder-abuse award, InvestmentNews, January 4, 2010. 180 Id. 181 See Wolfson, supra note 29 at 8. 182 Id. 183 See Kelly, supra note 178.
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V. TWO OREGON LEGISLATIVE PROPOSALS
Two legislative changes to the Oregon elder abuse act statute could have profound
benefits in fulfilling the legislative intent to protect vulnerable Oregonians. First, clarifying that
investment vehicles like LLCs controlled by a protected party have standing to prosecute
EPDAPA claims is essential to claimants. Second, including banks, health care facilities, and
broker-dealers in the elder abuse act would add parties that who regularly provide the underlying
support for illegal securities sales.
A. Standing to bring EPDAPA claims. There is an unresolved question as to whether or not an elderly financial abuse victim
may bring a claim under EPDAPA if the defrauded party is not the elderly person himself, but
rather an investment vehicle like an LLC owned by the elderly person. Where an elderly person’s
investment is made via an LLC, the investor may not have standing to bring EPDAPA claims.
The Oregon Legislature may resolve this blind spot in EPDAPA by amending the statute to
include LLCs and other investment vehicles in ORS 124.100.
B. Including financial institutions and broker-dealers as liable parties. Pursuant to ORS 124.115, financial institutions like banks, health care facilities,
residential care facilities, and licensed broker-dealers are exempt from EPDAPA claims. These
industries succeeded in removing themselves from EPDAPA in the late 1990s. While employees
in the industry are still liable under EPDAPA, for the reasons discussed in Section 3 supra,
employee liability is not enough because the likelihood of actual recovery against employees is
slim. Without the threat of EPDAPA liability, exempted employers have little incentive to
protect elderly customers from employee financial abuse. The Oregon Legislature should sunset
184 See Wolfson, supra note 29.
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EPDAPA exemptions for financial institutions, health care facilities, residential care facilities,
and licensed broker-dealers. At a minimum, EPDAPA should be amended to eliminate the
financial institution and broker-dealer exemption for fraud, as the Oregon securities law has.
VI. CONCLUSION
This paper studies the application of Oregon EPDAPA to securities violation cases
involving elderly investors. The financial abuse of elders is an old story, but the schemes
employed by abusers are new and ever-changing. Whether an elderly citizen is wealthy or living
with more modest means, they are daily targets for financial predators. Society has a duty to
protect the elderly from the looting of their personal and real property. Public policy efforts
nationally have arisen, albeit in piecemeal fashion state-by-state, to meet the challenge of elder
financial abuse. However, the federal government lacks a private right of action and few states
have advanced state laws aimed at curbing the abuses.
Oregon was, as she is in many ways, an early leader in adopting an elder financial abuse
law, and it is a powerful one. Across the country and in Oregon as well, well-developed
securities laws offer investor protection and deter fraud. However, the securities laws may not be
enough to protect elderly investors from financial abuse. Coupling securities claims with
EPDAPA claims is a knock-out punch combination that should help elder financial abuse victims
recover lost investments and deliver a powerful blow to would-be fraudsters. Elderly financial
fraud claimants should consider adding EPDAPA claims to securities violations claims, and the
Oregon Legislature should help elderly investors by clarifying the standing of elderly investment
vehicles and broadening the scope of gatekeeper liability to include all parties likely to be
complicit in financial abuse schemes. While the elder financial abuse litigation field is still
31
emerging, hopefully this paper will spark an interest on the part of litigators to better develop
EPDAPA claims.
