Martha Capps, a Wake County woman who suffered from dementia and little financial savvy, died four years ago after being bilked by a financial adviser.
Her case, which came to a close last month after a protracted legal battle, offers lessons for Baby Boomers turning to money managers in their sunset years.
“The wealth of this country is aging, as Baby Boomers move into their retirement years, and many of them are fair game,” said Robert Zaytoun, one of the Raleigh attorneys who helped Capps’ son, Bruce, win a $10-million award for his mother’s estate. “This case is widely known, not only in Raleigh but throughout the brokerage industry. You’ve got to know who you’re trusting with your financial affairs. You have to do due diligence and this case is a reminder of that.”
The case has taken a tortuous legal path. Its seven-year journey has gone from the N.C. Business Court to the U.S. Fourth Circuit Court of Appeals and back to the business court for the March verdict. Along the way, Harold “Hal” Blondeau, a former financial adviser with Morgan Keegan who handled Martha Capps’ finances, was convicted in July 2009 of investor advisement fraud and filing a false tax return. He was sentenced to three years in federal prison in 2010, served his time and has been released.
The U.S. District Court judge who sentenced Blondeau ordered him to pay $425,694 in restitution for what was described as an elaborate scheme to bilk Capps of nearly $3 million.
But Zaytoun, one of a team of lawyers representing Bruce Capps and his mother’s estate, thought it was necessary to pursue the case further in civil and business court to send a strong message to investment brokers at a time when federal regulators are trying to take a stiffer stand against the financial advisers industry, too.
Earlier this month, the U.S. Department of Labor proposed regulations for investment professionals that lay out tougher standards for protecting retirees’ savings.
With roughly $7 trillion held in individual retirement accounts, the proposed rules would expand fiduciary requirements for financial advisers. As Baby Boomers retire and start to think about rolling over savings in their 401(k)-type retirement accounts to other accounts, investment advisers have sometimes pushed products that bring them higher commissions and other incentives that might not be best for the customer.
The Labor Department regulations, which were four years in the making, would require investment advisers to enter a contract with customers stating they are putting the investors’ interests first. They also would be required to disclose any conflicts that might prevent them from putting the investors’ interests first.
In announcing the proposal, the Labor Department cited a White House Council of Economic Advisers analysis that found such conflicts of interest resulted in annual losses of about 1 percentage point for affected investors, or a total of about $17 billion per year for all.
Some say investors, dissatisfied with their advisers, would have greater recourse if the proposed regulations are added to the Employee Retirement Income Security Act, or Erisa. Federal regulators will gather comments for nearly two more months.
Disputes, even under the proposed rules, still would most likely be resolved through arbitration since most investment firms require investors to agree to take that route.
The Labor Department proposal applies only to retirement money. The Dodd-Frank regulatory law that went into effect in 2010 gave the Securities and Exchange Commission power to propose a similar rule that could universally apply to brokers even if they were not handling retirement money.
But there has not been majority support on the commission for such a move.
Long legal journey
In the Capps case, her son not only went after Blondeau, he also tried to recoup money from the brokerage firm, Morgan Keegan.
Blondeau, a former N.C. State University basketball player, was fired from Morgan Keegan in March 2007 for failing to disclose a loan taken from a customer, according to records with the N.C. Secretary of State’s Securities Division.
By then, the Capps family contends, Blondeau had swindled Martha Capps out of millions of dollars she had inherited from an aunt.
Blondeau, according to court documents and estate attorneys, had been given power of attorney over Capps’ accounts, allowing him to handle her finances after she began to show the early stages of Alzheimer’s disease.
Capps had received a $4 million inheritance from her aunt in 1989, and turned to Blondeau to invest it and keep it away from her husband, with whom she had a contentious relationship, according to court documents.
Capps, a frugal woman, worried that her husband would inherit a large share of the inheritance if he divorced her, according to court documents.
Blondeau talked Capps into setting up accounts and foundations that he could dip into to pay for things such as a $350,000 beach house near Morehead City. The house was in Capps’ name but would have been given to Blondeau upon her death, according to court records.
Bruce Capps found out about his mother’s tangled finances in 2006 when he investigated the purchase of the beach house.
Through a deeper look, attorneys contended that Blondeau had set up a foundation that seemed legitimate but was a front for moving Capps’ money out of North Carolina, where it could be hidden, controlled and “eventually pilfered.”
Martha Capps, who was diagnosed with dementia in 2001, died in March 2011.
That same year, Blondeau wrote a letter to U.S. District Judge Malcolm Howard in which he claimed to be guilty only of “trying to help Mrs. Capps get answers and solve problems.”
But his legal troubles didn’t go away.
Last month, a judge in N.C. Business Court found that Blondeau had engaged in unfair or deceptive trade practices and breached his fiduciary duty.
The court awarded the Capps estate $10.3 million in damages and $2.9 million in attorneys fees.
Morgan Keegan and Regions Bank reached a confidential settlement with the Capps estate.
Zaytoun, who said the family wants to spread the news as a cautionary tale for others, said it might be difficult to recover the millions from Blondeau. But they intend to try.
“You never know,” Zaytoun said. “Hal Blondeau is a smart man and he may be able to reengineer himself and come into something. He could win the lottery or something. We’re not going to stop looking.”