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It’s Not Nice to Mess With J.R.

New York Times

When he played the oil tycoon J. R. Ewing Jr., in “Dallas,” the long-running, ’80s-era nighttime soap opera, Larry Hagman didn’t get mad at his adversaries. He got even.

Last week, Mr. Hagman, 79, got even once again. This time it was against his broker.

A securities arbitration panel awarded Mr. Hagman and his wife Maj, 82, a big victory against Citigroup, which had overseen some of the couple’s investment accounts. The three arbitrators who heard the case ordered Citigroup to pay the Hagmans $1.1 million in compensatory damages – slightly less than the $1.345 million they had requested – as well as $439,000 in legal fees.

But the kicker was the punitive damages award in the case, which accused Citigroup’s brokerage unit, Smith Barney, of fraud, breach of fiduciary duty and failure to supervise the broker overseeing the Hagmans’ funds. The panel ordered Citigroup to pay $10 million to charities chosen by Mr. Hagman.

The award was the largest given to an individual this year, according to the Financial Industry Regulatory Authority, which oversaw the arbitration. The Hagman award was also the only one in which a panel ordered that punitive damages go to charity, Finra said.

Finra has been recording arbitration awards for 21 years, and Mr. Hagman snared the ninth-largest amount ever awarded. A spokesman for Citigroup said that “we are disappointed and disagree with the panel’s finding and we are reviewing our options.”

That suggests that Citigroup – which said in its own defense that it wasn’t responsible for the losses – might seek to overturn the award. But arbitrations are rarely reversed. Moreover, it’s hard to imagine an award destined for charitable organizations being overturned.

So here’s what happened to the Hagmans: In 2005, they moved their account from a registered investment adviser to Lisa Ann Detanna, a broker at what is now Morgan Stanley Smith Barney. (When the couple first invested with Smith Barney, Citigroup still owned it; Citigroup sold a controlling stake in the brokerage to Morgan Stanley in 2009.)

According to documents produced in the Hagmans’ case, Ms. Detanna quickly began upending the couple’s portfolio, taking it from a conservative blend of 25 percent stocks and 75 percent fixed income and cash to the opposite: 75 percent stocks and the rest cash and bonds.

Never mind that when the Hagmans first sat down with Ms. Detanna, they told her they needed income-producing investments that would preserve their principal, according to the documents.

Ms. Detanna also sold Mr. Hagman a $4 million life insurance policy that required onerous annual premium payments of $168,000.

PHILIP M. AIDIKOFF, a lawyer at Aidikoff, Uhl & Bakhtiari in Los Angeles, represented the Hagmans in the case.

“Like most retail customers, Mr. Hagman trusted Morgan Stanley Smith Barney to do what they said they would do,” he said. “He told the broker that he and his wife were conservative and did not need to take any significant risk with the assets they were transferring. This knowledge of the conservative risk tolerance was confirmed over and over to my clients.”

When the market fell, Mr. Hagman’s lawyer argued, the account’s losses were far larger than they would have been had Ms. Detanna maintained the conservative portfolio. And the life insurance policy, which Mr. Hagman did not need and was therefore unsuitable according to his lawyer, generated losses of almost $437,000 when sold. The losses included an exit fee of $168,610, which Citigroup extracted when Mr. Hagman sold the policy.

Mr. Hagman, who recently returned from Europe, where he made personal appearances for “Dallas” fans, said he was surprised by the award but felt it was justified. “I hire people to take care of these things for me,” he said in an interview. “I felt a little bit taken advantage of.”

Documents produced in the case by Morgan Stanley Smith Barney confirmed that the firm had been advised repeatedly of the conservative nature of the Hagmans’ investment preferences. The firm also produced materials indicating that a portfolio mix dominated by equities, as the Hagmans’ portfolio was, does not qualify as conservative.

Nevertheless, Ms. Detanna piled the couple into stocks.

Much back and forth in the case focused on whether Don T. Davis, her manager in a Beverly Hills office, failed to supervise her properly. A broker who generates significant commissions for her firm, Ms. Detanna was named in June by Barron’s as one of the top 100 Women Financial Advisers in America.

A spokeswoman for the firm said that neither Mr. Davis nor Ms. Detanna would comment for this article and noted that the problems occurred when Citigroup controlled Smith Barney.

“The investment activity that was the subject of this arbitration occurred before Morgan Stanley Smith Barney came into existence,” she said.

A look at Ms. Detanna’s full regulatory record, however, shows nine customer complaints in addition to Mr. Hagman’s between 2000 and 2010. Of these 10 complaints, four resulted in awards or settlements, four were dismissed, one was withdrawn and one is pending. Regardless of their disposition, the sheer number of complaints should have raised flags for Ms. Detanna’s manager if he had followed his firm’s compliance rules, Mr. Aidikoff told the arbitrators.

Mr. Davis’s branch office manager compliance handbook, dated June 2006, states that a broker may require special supervision “if he/she has received three or more complaints and/or arbitrations in a rolling 12-month period or two complaints/arbitrations in a rolling six-month period.”

But in testimony during the arbitration, Mr. Davis conceded that he had never placed Ms. Detanna under increased supervision, even though her record indicated four complaints within a 12-month period in 2002 and 2003.

Notices to member firms published by Finra over the years also warned that managers should increase their oversight of brokers who are subjects of numerous complaints. And the number of complaints on Ms. Detanna’s record makes her a rarity in an industry where a tiny fraction of brokers receive even five. Mr. Aidikoff said he had never seen a compliance history as riddled with complaints as that of Ms. Detanna.

Such complaints are recorded in a C.R.D., or central registration depository. The arbitration panel overseeing the Hagman matter rejected Citigroup’s request that the decision in the actor’s case be removed from Ms. Detanna’s regulatory record.

Of course, there’s an obvious reason that some branch managers prefer not to admonish their big producers: They receive a portion of the hefty commissions that star brokers generate. Mr. Davis, the manager charged with overseeing Ms. Detanna, had such an arrangement, Mr. Aidikoff said.

Mr. Hagman said he was not sure which charities he’d designate as recipients of the $10 million award. Because his wife has Alzheimer’s, he said he would earmark some money to those working on a cure. “It’s an opportunity to do some good,” he said.

Mr. Aidikoff said he thought the unusual award reflected the panel’s view that the firm “refused to accept that broker supervision is really at the heart of the retail stock market.

“The message the panel is sending is, ‘You guys have to take your supervisory obligations seriously,’ ” he added. “And the only way to remind them of how important this is, is to hit them over with a punitive damage award.”

Or, as Mr. Hagman used to say in character on “Dallas”: “The world is littered with the bodies of people that tried to stick it to ole J. R. Ewing!”