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Balta v. Ayco Company

May 19, 2009


The opinion of the court was delivered by: Charles J. Siragusa United States District Judge



Plaintiffs in this diversity action are suing their former financial advisors for money damages that they sustained following a series losses in the stock market. Now before the Court is Ayco Company, LP's motion for partial summary judgment [#54].*fn1 For the reasons that follow, the application is granted in part and denied in part.


Unless otherwise indicated, for purposes of ruling on the instant application only, the following are the facts of the case viewed in the light most-favorable to Plaintiffs. At all relevant times, plaintiff Marjorie Balta ("Mrs. Balta") and her two adult children, James Balta ("James") and Julia Balta ("Julia"), resided together in Pittsford, New York. At all relevant times, defendant The Ayco Company, LP ("Defendant") provided investment advisory services. Jeffrey Konya ("Konya") was employed as a staff attorney by Defendant during the period November 1998 through November 5, 1999.

In the Summer of 1998, the Balta's collectively owned over $4 million in assets that were invested with the offices of Salomon Smith Barney ("SSB").*fn2 The investments consisted mainly of "highly appreciated" stock in Paychex, Inc. Each of the Baltas had an investment account, and Mrs. Balta also had an IRA account, making a total of four accounts at SSB. Mrs. Balta and Julia authorized James to handle their investments, making him the "de facto trustee" of their assets. James's role as de facto trustee included the responsibility of relaying investment advice, that he received from paid advisors, to his mother and sister. (James's Deposition at 316).

James and Konya were friends and former high-school classmates. In the Fall of 1998, Konya notified James that he had become employed at Defendant, and that Defendant could provide the Baltas with investment advice, estate planning and other financial matters. Konya was employed at Defendant as a staff attorney, and not as an investment advisor. Konya put James in contact with Tom McMahon ("McMahon"), an investment advisor employed by Defendant. In late 1998, McMahon spoke with James by telephone, and described Defendant's services. Subsequently, in January 1999, James met with Konya and McMahon at Defendant's offices near Albany, New York, to further discuss Defendant's services. Subsequently, James provided McMahon with various information concerning Plaintiffs' financial condition and goals.*fn3 On June 21, 1999, McMahon wrote to James, indicating that Defendant "would be pleased" to provide Plaintiffs with "a financial counseling arrangement," involving estate planning, investment advice, and income tax services, and that the fee for such an arrangement would be $9,000 for the first year. McMahon's letter further stated, in relevant part: "If you decide to go forward with our service, please give me a call and we can formally present you with a contract." At his deposition, when asked how he understood this statement by McMahon, James stated: "I believe he wanted something in writing." (James Deposition at 119).

On or about June 25, 1999, in response to McMahon's letter, James telephoned McMahon and indicated that the $9,000 fee was acceptable, and that Plaintiffs wanted to use Defendant's services. Subsequently, on or about June 28, 1999, McMahon sent James a written agreement, which stated, in relevant part:

Dear Jim:

The Ayco Company, L.P. is pleased to provide personal financial counseling for you. We ask that you sign and return the enclosed copy of this letter to denote your acceptance of the terms and provisions provided herein.

Our annual fee for personal financial counseling services rendered shall be $9,000. This fee will be billed 50% upon engagement and the remaining 50% six months later. Upon renewal of this arrangement, the fee shall be paid semiannually in advance. Travel costs, including transportation, living expenses and specific disbursements, will be charged as applicable and billed on a quarterly basis.

The term of this arrangement shall be one year. This arrangement shall renew annually for subsequent periods of one year each. You will be advised of your fee for subsequent year's services in advance. You may terminate this arrangement at any time by providing written notice to The Ayco Company, L.P. This termination will be considered effective immediately upon receipt of your notice. All fees billed shall be prorated to the date of our receipt of your termination notice, and we shall refund to you the proportional part of any fees already paid, but unearned.

The above fee does include any charges for preparation of annual income tax returns. The Securities and Exchange Commission requires The Ayco Company, L.P., as a registered investment advisor, to provide you with the enclosed copy of our Form ADV-Part II which contains information relating to the Ayco Company, L.P.'s advisory services.*fn4 You shall have the right to terminate this agreement, without penalty, for a period of five days after your first receipt of Ayco's Form ADV-Part II.

As a registered investment adviser, The Ayco Company, L.P. receives fees for financial counseling services. In the course of providing such services, The Ayco Company, L.P. or its subsidiaries or affiliates may offer additional services and/or products for which additional fees or commissions are charged. These offerings create a conflict of interest, within The Ayco Company, L.P., between our business interests and our fiduciary responsibility to our clients.

The Ayco Company, L.P. places great emphasis on the integrity of its fiduciary responsibility to clients. Clients will be advised by letter whenever fees or commissions paid to The Ayco Company, L.P. or its affiliates for supplemental products or services constitute a conflict of interests. Clients will be asked to approve payment with full understanding of the specific conflict disclosed in the letter.

This agreement may not be assigned, in whole or in part, without prior consent of the other party. This agreement may be modified only in writing, signed by both parties hereto. The Ayco Company, L.P. will notify you of any change in its general partner and, to the extent required by applicable law, of any changes in its limited partners, in each case within a reasonable time after such change.

If you have any questions, please feel free to contact me. Once again, on behalf of The Ayco Company, L.P., we are very pleased that you have selected our services. (Reidy Declaration Exhibit R). The letter agreement was signed by McMahon, and provided a line for James to sign, indicating that he "accepted." (Id.). James signed the agreement and returned it to Defendant, along with a check in the amount of nine thousand dollars. Although James did not sign the agreement and disclosure forms until some time after July 28, 1999, Defendant subsequently billed the Baltas for "tax and investment counseling and advice . . . for the period July 1, 1999 through December 31, 1999." (Eaton Declaration, Exhibit 13).

At McMahon's request, James had copies of his monthly account statements and trade confirmation slips from Plaintiffs' SSB investment accounts sent to McMahon. (McMahon Dep. at 153, 201). Sometimes McMahon reviewed the statements when they were received, but generally he used them to prepare for his quarterly meetings with James. Id. at 155, 201-202.

Although Konya was not an investment advisor, he nevertheless made various investment recommendations to James. In that regard, Konya urged James to sell Plaintiffs' Paychex stock, purportedly because it was too risky, and recommended that James instead buy Philip Morris stock. James took Konya's advice, and in July 1999, he sold approximately $1.2 million of Paychex stock from Julia's and his accounts, and used the proceeds to purchase Philip Morris stock. McMahon did not advise James to take such action, nor did he learn about the trade until some time later. However, according to James, when he told McMahon about the trade and Konya's advice, McMahon responded by saying "Fine." (James Balta Deposition at 178). According to James, Konya continued to pressure him to sell the rest of the Paychex stock, which he did. However, Konya subsequently changed his mind about Philip Morris, and urged James to buy AT&T stock instead. Based on Konya's recommendation, between July 21, 1999 and October 5, 1999, James sold the rest of Plaintiffs' stock in Paychex, Inc., and, between August 1999 and September 1999, purchased 35,000 shares of AT&T stock for Plaintiffs' accounts. Konya advised James that buying large amounts of Philip Morris and AT&T would ensure proper diversification of his portfolio, since those companies themselves owned many other companies in various sectors of the economy.

At Konya's suggestion, in August 1999, James also purchased 1,400 shares of Worldcom stock for Plaintiffs' accounts. James maintains that, at some point, he discussed Worldcom's stock with McMahon, and that McMahon responded that Worldcom "was a good stock," and that Defendant was "very bullish on Worldcom, that they liked the fundamentals of the stock." (James' Deposition at 254; see also Id. at 310). On March 21, 2000, McMahon noted, in a memo to Plaintiffs' file, that James "indicated that he still likes MCI Worldcom and will add to his position if he has additional cash or liquidates other positions." (Williams Declaration, Exhibit BB).

Konya left his employment at Defendant in November 1999. Subsequently, James sold Plaintiffs' Philip Morris stock at a loss, and continued to buy stock in AT&T. James also bought 13,555 additional shares of Worldcom stock . Konya did not continue to advise James after he left Defendant's employ. Nevertheless, James continued to buy stocks based, at least in part, on the advice that Konya had given him while Konya was employed by Defendant. (James's Deposition at 350-353).

In December 1999, McMahon and James spoke by telephone, and discussed James's recent trades. On January 6, 2000, McMahon wrote a letter to James, expressing his concern over the amount of AT&T stock in ...

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