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Who Opened What Type of Account Becomes a Dilemma in E*Trade Federal Court Motion
April 25, 2022
A Trustee opened an E*Trade account by providing his name and his social security number but also checking off the type of account as "Trust." What does that make the account? An Individual account? A Trust account? A failed account? When E*Trade got sued in state court by the customers, the Trustee argued that he had never executed any account agreement in his role as a Trustee but only in a "personal capacity." Will a federal court force the Trust into mandatory FINRA arbitration?
State Your Case?
In today's featured lawsuit, public-customer Plaintiffs Regis Hillow and the Regis Hillow Living Trust filed a Complaint against E*Trade Securities, LLC in Missouri state court. In response to being sued in a state court, E*Trade beat a hasty retreat to the United States District Court for the Eastern District of Missouri ("EDMo") and filed a Motion to Stay the State Court Proceedings and to Compel FINRA Arbitration.
Regis Hillow and the Regis Hillow Living Trust, Plaintiffs, v. E*Trade Securities, LLC, Defendant (Memorandum and Order, 22-CV-145, United States District Court for the Eastern District of Missouri ("EDMo")
https://brokeandbroker.com/PDF/HillowOrdEDMO220420.pdf
$100 Million in Yearly Trades
By way of background, we learn that:
Hillow is a retired businessman and sophisticated securities trader who has traded at high volumes for approximately 15 years. E*Trade is a Financial Industry Regulatory Authority ("FINRA") registered online broker-dealer. Plaintiffs began trading on E*Trade's securities trading platform (the "Platform") in early 2018. Plaintiffs indicate that the account at issue held over $3 million in March 2021, could trade on far more than this amount through margin lending, and the volume of account trading regularly exceeds $100 million per year. (Doc. 4 at ¶¶ 5-6).
at Pages 1 - 2 of the EDMo Memo
The Account
In addition to being depicted as a savvy trader, Regis Hillow was a Trustee of the eponymous Trust. In 2017, Regis Hillow opened two E*Trade brokerage accounts, one of which was closed within a few days (the "Closed Account") and the other account was opened using Hillow's name and under his social security number (the "Account") -- but the "Type" of account was checked off as a "Trust.". After the Account was opened, Hillow changed the title to the "Regis Hillow Living Trust UAD 01/29/98." at Page 2 of the EDMO Memo.
Inaccurate Cost Basis?
As to how things went awry between Hillow and E*Trade, the Court offers this summary:
at Page 2 of the EDMo MemoPlaintiffs claim that the Platform failed to accurately reflect the "cost basis" of Plaintiffs' positions because the Platform did not properly incorporate "wash sale" data. It is unnecessary at this juncture of the case to delve further into Plaintiffs' arguments regarding alleged inaccuracies on the Platform. Plaintiffs bring claims for Fraudulent Misrepresentation (Count I), Negligent Misrepresentation (Count II), Fraud (Count III), Securities Fraud and Violation of 15 U.S.C. § 78j (Count IV), and Negligence (Count V). Plaintiffs seek directly attributable damages of at least $3.5 million and market adjusted damages of over $15 million due to trading on inaccurate cost basis information. . . .
Abracadabra: The Individual Account is a Trust Account -- or is it?
Despite the Account having initially been opened via Regis Hillow's name and using his social security number, E*Trade asserted that, in fact, Regis Hillow had opened the account for the Trust. E*Trade submitted proof that the Account Application had been checked off as a "Trust" type. In contrast, Regis Hillow argued that he had opened the account in his personal capacity and had never executed any applications as a Trustee for the Trust. As to why it mattered who opened what and in which name, consider this:
E*Trade has offered a Declaration by Erik Renga, its Executive Director of Operations.(Doc. 10-1). Renga's Declaration provides that Hillow opened an account for the Trust on December 12, 2017 and submitted an Account Application in connection with the opening. (Id. at ¶ 7). It appears clear that Hillow selected "Trust" when asked to identify the "[t]ype of account" in the Account Application. (Id. at 5). When individuals submitted an Account Application with E*Trade at this time, they were also required to accept the E*Trade Customer Agreement (the "Agreement"), which E*Trade made available for review via hyperlink. (Id. at ¶ 15). In submitting the Account Application, Hillow was required to "acknowledge that I have received, read, and agree to be bound by the terms and conditions as currently set forth in the [Agreement]." (Id. at 6). This page also included the following language in all capital letters: "I UNDERSTAND THAT THIS ACCOUNT IS GOVERNED BY THE PREDISPUTE ARBITRATION CLAUSE IN SECTION 12 OF THE E*TRADE CUSTOMER AGREEMENT." (Id.). It appears that the term "E*TRADE CUSTOMER AGREEMENT" is hyperlinked to the Agreement.1At the time Hillow completed the Account Application, the Agreement contained § 12 titled "Arbitration Agreement and Disclosures." (Id. at 25). This section of the Agreement included the following bolded language (hereinafter the "Arbitration Agreement"):
The Account Holder agrees to resolve by binding arbitration any controversy that may arise between E*TRADE and the Account Holder relating in any way to the Account Holder's relationship with E*TRADE, any Account held with E*TRADE, or any service provided by E*TRADE to the Account Holder. This arbitration agreement includes any controversy involving transactions of any kind made on the Account Holder's behalf by or through E*TRADE, or the performance, construction, or breach of this Customer Agreement or any other written agreement between E*TRADE and the Account Holder. Such arbitration will be conducted in accordance with the rules then in effect of FINRA unless the rules of another self-regulatory organization to which E*TRADE is subject mandate arbitration before that organization . . . . The Account Holder makes this arbitration agreement on behalf of itself and the Account Holder's heirs, administrators, representatives, executors, successors, assigns and together with all other persons claiming a legal or beneficial interest in the Account.
= = = = =Footnote 1: The Court notes that Plaintiffs have not alleged that the Agreement was not actually accepted by Hillow or properly incorporated into the Account Application. See Foster v. Walmart, Inc., 15 F.4th 860, 863 (8th Cir. 2021) ("[C]ourts rarely find problems with clickwrap agreements."); Major v. McCallister, 302 S.W.3d 227, 229 (Mo. Ct. App. 2009) ("Courts routinely enforce clickwraps."). It appears clear to the Court, and undisputed by Plaintiffs, that Hillow accepted the incorporated Agreement.
at Pages 2 - 3 of the EDMo Memo
A Matter of Trust
In contesting E*Trade's Motion, Plaintiffs asserted two arguments:
[F]irst, Plaintiffs contend that the Arbitration Agreement is unenforceable because E*Trade failed to comply with FINRA rules regarding predispute arbitration provisions. The Court will address this question first because it presents a threshold issue for compelling arbitration against either Hillow or the Trust. Second, the Trust contends that it never accepted the Agreement and therefore did not consent to the Arbitration Agreement.
at Page 6 of the EDMo Memo
It Comes Down to "Authority"
In granting E*Trade's Motion to Stay Proceedings and Compel Arbitration, EDMo offers this rationale:
The undisputed facts demonstrate that E*Trade may compel arbitration of Plaintiffs' claims. Hillow is a Trustee of the Trust with authority to act on its behalf by Plaintiffs' admission. In December 2017, Hillow opened the Account and accepted the Agreement, which contains the Arbitration Agreement. Hillow received multiple conspicuous Arbitration Notices in the course of opening the Account and accepting the Agreement. The Arbitration Agreement, which is located at § 12 of the Agreement, specifically binds "all other persons claiming a legal or beneficial interest in the Account." Hillow proceeded to change the Account name to that of the Trust and executed the Trust Application, which also included bolded references to the Agreement and its arbitration provision. In the Trust Application, Hillow affirmed that he had authority to apply for an account on behalf of the Trust. Plaintiffs, including the Trust, then traded millions of dollars' worth of securities on the Platform, which Plaintiffs could only access because they executed the Agreement.Plaintiffs now insist that the Arbitration Agreement is unenforceable because E*Trade failed to comply with FINRA Rule 2268 and never obtained the Trust's consent. These arguments cannot succeed as a matter of law based upon the undisputed facts before the Court. Plaintiffs have not demonstrated that FINRA Rule 2268 constitutes a contrary congressional command which can overcome the FAA's liberal policy favoring arbitration. As to the Trust, Hillow explicitly consented to the Agreement on behalf of the Trust when completing the Trust Application. The Arbitration Agreement would even be enforceable against the Trust absent the Trust Application because Hillow placed the Account in the Trust's name and the Trust directly benefitted from the Agreement by extensively trading on the Platform. In these circumstances, the Court finds that both Hillow and the Trust are subject to binding arbitration in accordance with the Arbitration Agreement.
at Pages 17 - 18 of the EDMo Memo
Bill Singer's Comment
Excellent job by EDMo in parsing through the content and context of this thorny law-school-like problem.
We have a brokerage account opened by Regis Hillow -- that much is not in dispute. Where the parties diverge is whether the Account was a so-called "personal" account (as Regis Hillow seems to argue) or if it was a "Trust' account. When the Account was first set up, it appears that the intention was to create an account for the Trust; however, intentions aside, a dispute subsequently developed as to whether E*Trade's paperwork clearly demonstrated that Regis Hillow was an authorized Trustee requesting that the Account be titled in the Trust's name, and that the Trust was aware of and had approved of the account opening. Much of the confusion appears to have been prompted by Regis Hillow's responses on the Account Application, but some of the confusion was prompted by E*Trade's compliance practices. From my perspective, E*Trade should have:
- rejected the Account Application, and
- required that a new, clean application be submitted in the Trust's name with confirmation by the Trust that Regis Hillow was a Trustee, who was authorized to open brokerage accounts for the Trust, and that he was, indeed, acting in full compliance of the Trust's authorization to open an account at E*Trade, which the Trust ratified.
It does not appear that the Trust directly submitted to E*Trade a New Account Agreement seeking to title a brokerage account in the Trust's name. Regis Hillow opened an account by providing his name and his social security number but also having checked off the type of account as "Trust." Further, Regis Hillow alleged that he had only executed the Account application in a personal capacity. At times, it appears that E*Trade had initially opened the Account as an "Individual" account in Regis Hillow's name; however, at other times, it appears that E*Trade opened the Account as a "Trust" account (but temporarily categorized as "Individual") that required further conforming documents as part of the New Account process.
It appears that E*Trade viewed the Account as "intended" to be a Trust but initially opened as an Individual account; however, there seems to have been an understanding (which, of course is now disputed) that the Trust account was processed, on an interim basis, as an Individual account subject to the submission of conforming Trust documentation and authorization. Frankly, I think that E*Trade should have been more diligent in processing the new account paperwork in order to ensure that the nature of the new account was clear and self-evident. In retrospect, E*Trade fostered some of the confusion.
EDMo determined that Regis Hillow, a Trustee of the Trust, had signed an agreement containing a pre-dispute arbitration agreement and, accordingly, the "Trust should be considered a signatory to the Agreement and associated Arbitration Agreement." at Page 12 of the EDMo Memo. In plainer terms, the Court found that as a Trustee, Regis Hillow had actual authority to bind the Trust as its authorized agent, and, in fact, he did. Notably, the Court noted that "[H]illow admits that he changed the name of the Account to be in that of the Trust, and E*Trade has provided a Trust Application which includes multiple representations by Hillow that he had authority to bind the Trust. . . ." at Page 13 of the EDMo Memo. Still . . . there's that nagging fact that the Trust itself never submitted anything to E*Trade per a formal new account application -- the submissions were made by a purported Trustee. Just as an authorized agent binds a principal when acting within the terms of an authorized agency, an authorized trustee binds a trust when acting within the terms of the authorized trustee role. Of course once this case gets dumped into the laps of a FINRA Arbitration Panel, the arbitrators will then have to wrestle with the issue as to whether the Trust was notified in accordance with FINRA Rule 2268 that it would be subject to mandatory arbitration.
I will be curious to see if Plaintiffs appeal to the United States Court of Appeals for the Eighth Circuit.