Wells Advisors Found Liable for Punitive Damages in Customer Fraud Complaint
(Adds comment from broker’s lawyer, and other details throughout.)
A woman who followed her former financial advisor from A.G. Edwards to Wells Fargo Advisors and then to a small regional firm was awarded more than $360,000 by an arbitration panel this week after alleging that the former broker unsuitably concentrated about 35% of her investments in high-yield notes from now-bankrupt energy companies.
The award that Wells Fargo is liable for included the $172,000 of compensatory damages that Kathryn A. Schmierer, a former North Dakota resident, requested at the close of 12 hearing sessions and, more unusually, punitive damages of $100,000 and attorneys’ fees of $68,800, according to her lawyer. Wells also was ordered to pay her arbitration costs of $20,000, according to the award posting on a Financial Industry Regulatory Authority webpage.
The three arbitrators in Tampa, Florida, cited “common law fraud” along with breach of fiduciary duty and gross negligence in explaining the punitive damages.
“Punitives are rare, and getting common law fraud is pretty stout,” said Kalju Nekvasil, the Clearwater lawyer who represented Schmierer.
A Wells Fargo Advisors spokeswoman and the in-house lawyer who represented the broker-dealer in the arbitration did not immediately respond to requests for comment on the award or on Nekvasil’s observations.
The plaintiffs’ lawyer also represented another Wells customer, Robert J. Anderson, who in late September was awarded almost $76,000 over similar claims of unsuitability against the firm and former advisor Raymond Kvalvog—the same broker who worked with Schmierer.
Nekvasil declined to discuss why Kvalvog, who he said was formerly a Wells Fargo Private Client Group branch manager in Fargo, N.D., was not named as a respondent in the Schmierer complaint.
“Mr. Kvalvog was not a party to the [Schmierer] arbitration and had no opportunity to defend himself as a result of that,” said Michael Rowe, a Minneapolis lawyer with Dorsey & Whitney who represented Kvalvog in the Anderson case. “The Anderson case involved very different circumstances, and the award did not include punitive damages nor attorneys’ fees.”
Wells Fargo argued in prehearing sessions that Schmierer’s complaint should be considered “frivolous” because she made a net profit of about $290,000 over the course of her years investing with Kvalvog at Edwards, Wells and Dougherty & Co., and because the losses on her “junk” portfolio occurred after he had left Wells for Dougherty, according to Nekvasil.
“Netting is a standard broker-dealer argument, but you always worry that a panel could subscribe to it,” he said.
The argument that another firm should be liable for damages is a “significant” one, Nekvasil said, without elaborating on why his client’s complaint named only Wells.
The fraud findings appeared to have been aided by evidence that Kvalvog overstated Schmierer’s net worth on a new account firm he completed for her after leaving Wells, the lawyer said.
Kvalvog, whose brokerage career began in 1984 at E.F. Hutton and ended in October 2015 at Dougherty, accumulated one other customer complaint over his 30-year history, according to his BrokerCheck record. The complaint was closed a decade ago without action.
In summarizing Schmierer’s complaint against Wells in the award document, the arbitrators said it was based on “numerous investments” ranging from Oasis Petroleum to TCF Financial Corp and Monsanto Co. (New).
Her lawyer said he narrowed the investments at issue in the arbitration hearings to notes of Quicksilver Resources, Edison Mission Energy, Arch Coal, and Patriot Coal Corp., which represented about 35% of the two accounts she depended on to finance her retirement.
Schmierer, 67, is a divorcee who has retired to Florida from North Dakota, he said.