When Michael Rhinehimer got fired from U.S. Bancorp Investments for trying to protect an elderly client, he decided to get even. He took his former employer to court, and he won.
In May, he was awarded $250,000 in damages. In his lawsuit, Rhinehimer claimed that he was fired in retaliation for complaining about another financial advisor who he felt made unsuitable investments for Rhinehimer's 94-year-old client while Rhinehimer was away on medical leave.
Rhinehimer, an advisor and a certified financial planner in the bank's Newport, Ky., branch, had known and worked with the client for 10 years and had developed an estate plan that reflected the client's wishes to leave the bulk of his estate to the American Cancer Society and his alma mater, Notre Dame, according to his lawyer, Lynn Pundzak of Cincinnati.
Rhinehimer testified that he told Patrick Harrigan, the financial advisor who was to look after some of his accounts while he was away, not to engage in any trading activity on the elderly client's behalf or change the client's account in any way due to the client's advanced age and declining mental faculties.
The client's estate plan, he explained to Harrigan, was "long-standing" and shouldn't be touched, despite branch efforts to get the client to invest the money so as to generate revenue for the bank.
"The bank was forever trying to get him to take his money out of his cash account and put it into a fee account," Rhinehimer said.
Rhinehimer's instructions to Harrigan were ignored. Within days of their conversation, Harrigan did what he was told not to do. He convinced the elderly client to invest a total of $900,000 in two mutual funds that quickly lost money and resulted in substantial penalties for the client. The two transactions, however, generated significant commissions for the advisor.
"The way that Harrigan invested the money was designed to make the most commission for Harrigan rather than designed with the client's best interest at heart," Pundzak said.
According to court testimony, the money was taken out of the trust and into a brokerage account that Rhinehimer had set up for the client to provide a modest inheritance for his niece and nephew. The brokerage account had roughly $465,000, which was invested in a low-cost, short-term bond fund that used A shares.
Rather than invest the additional $900,000 in the same fund family to take advantage of A-share pricing, Harrigan instead put the money into higher-cost funds of a different family, buying the more expensive C shares. He also invested a big chunk of the money—$650,000—in a more aggressive fund that included stocks.
"A 94-year-old man doesn't need millions of dollars in the stock market," Rhinehimer said.
The two transactions were not only unsuitable and "an egregious violation of securities law" but also blew up the client's estate plan, Rhinehimer said. The intended beneficiaries of the trust—namely the American Cancer Society and Notre Dame – were cheated out of $900,000 and the family members who were to receive a relatively small amount of money wound up more than $1 million.
Worse, there were severe tax consequences. As a result of the transactions, the client's estate went from having "a zero to minimal tax bill to a potential seven-figure tax bill," Rhinehimer said.
"I made it as clear at a layman's level as I could that you can't take one from A and put it in B because it destroys the structure of the estate," he said.
When Rhinehimer caught wind of the transactions, he called his supervisor to voice his concerns, requesting that he refuse to approve the trades. The supervisor told him that he was on leave and that he "should stay out of it," Rhinehimer testified.
Upset, Rhinehimer took the matter further up the chain of command, sending a strongly worded email to the bank's internal compliance officer, which triggered a FINRA investigation.
"Those trades should have never been placed, let alone approved," he said in the email.
Feeling the Heat
Shortly after returning from medical leave in August 2010, Rhinehimer was given a written warning, saying that his email had prompted a FINRA investigation and that anybody associated with the handling of the client's account was "really feeling the heat," according to court testimony.
A month later, Rhinehimer was called into his supervisor's office, where he was asked if he had consulted an attorney. When he said that he had, he was told that his career with U.S. Bancorp Investments was over and that if he sued the bank his career in the city would be over, Rhinehimer said.
Shortly afterwards, Rhinehimer was placed on a performance improvement plan that required him to increase his revenue to $40,000 a month from approximately $29,215 a month. Rhinehimer failed to meet the goal and was officially fired in January 2011.
Robin Francis, a spokesperson for U.S. Bank, declined to comment on the matter, as did Patrick Harrigan, who continues to work for U.S. Bancorp Investments in in Fort Wright, Ky.
While FINRA investigated the case, it elected not to take any action either against the bank or the individuals involved, Pundzak said. FINRA did not have any information to share publicly on the matter.
Nevertheless, it's significant that Rhinehimer was able to get FINRA's attention, according to observers. "Even if FINRA decided not to take action, it's still noteworthy that FINRA would review it," said Linda Riefberg, an attorney with law firm Cozen O'Connor and a former chief counsel in FINRA's Enforcement Department. "It's a good thing for investor protection when an individual raises something like that."
Rhinehimer filed the lawsuit in Covington, Ky., in July 2011, seven months after being fired. When the case went to trial in 2013, the jury sided with Rhinehimer and awarded him $250,000 for economic loss and emotional damages. U.S. Bancorp Investments appealed the decision to the United States Court of Appeals for the Sixth Circuit, but was unsuccessful. The Sixth Circuit Court upheld the jury's decision in May 2015.
One Whistleblower, One 94-Year-Old Man
From a legal perspective, the appellate court's opinion was significant because it clarified the standard that is to be applied in whistleblower cases brought under the Sarbanes-Oxley Act, said Pundzak. The Sarbanes-Oxley Act was enacted in 2002 in the wake of corporate and accounting scandals at Enron, Worldcom and other major corporations.
The court's ruling showed that whistleblowers need only prove that they had a reasonable belief that securities laws were violated to gain protection under Sarbanes-Oxley, Pundzak explained. They need not prove that the laws were indeed breached.
It is also notable that the whistleblower protection was applied in a new way, Pundzak added. For the first time, Sarbanes-Oxley was used to protect a whistleblower who wasn't "tattling on" employees for making unreliable or inaccurate corporate disclosures that impact large numbers of shareholders. Rather it protected a whistleblower who complained about conduct affecting just one elderly man.
"It's significant because of the way this massive piece of legislation designed to protect all of us who invest in massive companies can be used to make companies and their financial advisors accountable to one little 94-year-old man," she said.
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