Charles Zandford was a stockbroker working for Prudential-Bache Securities in 1987 when he first met William Wood. Mr. Zandford persuaded the elderly Mr. Wood to place over $400,000 in a brokerage account for investment. The money was intended to take care of not only Mr. Wood but also his developmentally disabled daughter, but when Mr. Wood died four years later it was all gone.
When he set up the brokerage account Mr. Zandford secured Mr. Wood’s authority to execute trades on the account directly, without having to get Mr. Wood’s approval on individual transactions. Over the next four years he systematically liquidated most of the account. On at least 25 occasions he transferred money from Mr. Wood’s account to other accounts for his own benefit.
The transfers were uncovered in the course of a routine examination of Prudential-Bache accounts by the National Association of Securities Dealers. Mr. Zandford was indicted on 13 counts of wire fraud, was convicted and sentenced to 52 months imprisonment and $10,800 in restitution.
The federal agency in charge of monitoring stockbroker activity, the Securities and Exchange Commission (the SEC), filed its own action after Mr. Zandford’s criminal charges were instituted. The SEC claimed that Mr. Zandford had violated securities laws as well as criminal laws, and requested that he be ordered to return $343,000 in ill-gotten gains. At the request of the SEC, the trial judge ruled that Mr. Zandford’s criminal conviction settled most of the issues in the securities violation case, and entered judgment against him.
On appeal Mr. Zandford argued that the SEC’s rules were not intended to deal with simple theft. Because the thefts had been properly dealt with as criminal actions, he insisted, there should be no further SEC enforcement proceeding. The Fourth Circuit Court of Appeals agreed and reversed the SEC’s victory.
It is not often that the United States Supreme Court gets involved in elder abuse matters, but the SEC’s petition for review in this case was granted. In a unanimous decision written by Justice Stevens, the high court reinstated Mr. Zandford’s SEC penalties.
The Supreme Court noted that the SEC’s regulations were adopted in the wake of the 1929 stock market crash, as part of a government plan to improve the general reliability and predictability of the markets. Even though Mr. Zandford’s actions really amounted to theft rather than manipulation of securities markets, they were subject to SEC regulation. The fact that the securities sales were conducted in the usual business manner did not deprive the SEC of jurisdiction, since the stockbroker’s purpose was improper. SEC v. Zandford, June 3, 2002.
Fremont Life Insurance Company did a profitable business selling seniors living trusts. They used the usual pitch: avoid probate and the legal system, save on taxes and simplify your estate plan. Oh, and while we’re helping you plan your estate we think you should buy an annuity from our insurance company.
The State of California sued to stop Fremont Life and its parent company, Fremont General Corporation, from engaging in its deceptive business practices. The State alleged that agents of both Fremont Life and its parent practiced law without a license, and misled purchasers selling them insurance products without disclosing that there were substantial surrender charges.
California’s Attorney General argued that Fremont Life and Fremont General together operated an abusive “trust mill.” The practice is widespread throughout the country: seniors are lured to seminars about how to avoid probate and end up buying inappropriate and expensive annuities.
Fremont General acknowledged that it might lose the litigation, and offered to pay the State $2 million to avoid trial. The California Attorney General declined the offer and proceeded with the case. The State ultimately won a $2.5 million judgment against Fremont Life, along with an order that it return money to its annuity purchasers. The State’s claim against the parent company, however, failed; it did not show that Fremont General Corporation was really just another name for Fremont Life, or that Fremont General employees were involved in a conspiracy with Fremont Life agents.
Because the $2 million offer of judgment was more than the State recovered, court procedural rules permitted Fremont General to seek its court costs from the State. The reasoning behind the rules: when a plaintiff refuses what turns out to have been a reasonable offer of settlement the defendant should not be penalized by having to pay for unnecessary litigation. The effect in the Fremont General case was dramatic.
Court costs and expert witness fees incurred by Fremont General in its successful defense totaled over $880,000. The State of California was ordered to pay that amount, despite the fact that it had prevailed in its lawsuit against Fremont Life. The State appealed.
In its appeal the State argued that it would be against public policy to make the government pay for an action in which it sought to enforce rules against the unauthorized practice of law. The State also insisted that it could not have accepted the offer of settlement in any event, since it would not have known how much of the money should be repaid to the customers it alleged had been defrauded. Both arguments were rejected. People v. Fremont General Corp., June 14, 2001.
Fae Powell had given her nephew Jackie Powell a power of attorney so that he could handle her financial affairs. Mr. Powell used that power of attorney to change over $600,000 worth of bank CDs into “payable on death” status, naming himself and other nephews and nieces as beneficiaries. Ms. Powell’s will, however, left her estate to her sister and others. Did Mr. Powell have the authority to make those changes in his aunt’s estate plan?
The question posed to the Nebraska courts was actually more complicated than that. In most states it is clear that a power of attorney does not give the agent (sometimes also referred to as the “attorney-in-fact”) authority to make gifts unless there is a specific provision in the document. But is changing accounts so that they pass automatically on death to someone else really a gift? After all, no transfer would occur until after Ms. Powell’s death, so it could be argued that her agent had made no gifts.
Ms. Powell’s situation was further complicated by her nephew’s insistence that she had specifically instructed him to make each change, and that he was simply signing her name to actions she was really directing herself. Of course, it would be difficult for him to prove that she gave him such instructions, unless she did so in the presence of neutral observers.
Ms. Powell’s sister Eleine Hampshire did not believe that Mr. Powell was carrying out the decedent’s instructions. She pointed out that if the changes had not been made she would have inherited nearly $80,000 from Ms. Powell’s estate, and so she sued Mr. Powell for fraud.
The Nebraska Court of Appeals threw Ms. Hampshire’s case out of court. The justices decided that the action should have been brought by Ms. Powell’s estate against her attorney-in-fact, and that Ms. Hampshire could not sue directly for the loss to the estate. Never mind that Mr. Powell was named as personal representative of the estate—that problem would have to be solved by someone seeking to disqualify him from serving in the probate court. Ms. Hampshire had simply filed her lawsuit improperly. Hampshire v. Powell, May 8, 2001.
The Nebraska court’s decision, based as it is on procedural grounds, fails to answer the underlying question: does an agent under a power of attorney have the authority to change beneficiary designations on accounts, life insurance and the like? Other cases have decided the question differently, depending on the individual facts in each instance. It would certainly be better to have the change in beneficiary designations signed by the individual herself, rather than by the agent. In Arizona the law is a little clearer: unless the power of attorney gives express authority to make such changes (and the authority is separately initialed on the form), they are probably invalid.
In 1997 a rural Arizona county Public Fiduciary stunned the state’s advocacy community when he acknowledged taking hundreds of thousands of dollars from his ward’s estates (“Mohave Public Fiduciary Pleads Guilty, Faces Certain Jail Time“). Thefts by private fiduciaries (and lawyers representing fiduciaries) are all too common, but everyone blithely assumed that public officials would be more closely monitored, and unlikely to steal.
Now an Arizona Auditor General’s report charges that another Public Fiduciary methodically stole from her wards’ estates. This time the subject of investigation is Rita Riell-Corbin, who served as Gila County Public Fiduciary until December, 1999.
According to the Auditor General’s report Ms. Riell-Corbin began taking money from estates entrusted to her as early as 1994. Over the next six years she converted at least $1,177,884 to her own benefit, the report charges.
Ms. Riell-Corbin was the Public Fiduciary in rural Gila County (county seat Globe, Arizona) from 1986 until her removal from the position. She oversaw a staff of 4 other employees and managed a caseload of something less than 100 wards and decedents. Her financial misdeeds affected at least 40 of her wards. Not surprisingly, she targeted those cases in which there were no family members likely to challenge her expenditures. In some of the decedent’s estates she took money that would otherwise have gone to one of her living wards.
During the six-year period investigated by the Auditor General’s office Ms. Riell-Corbin used her wards’ money to pay for improvement of homes she owned, for her own insurance and telephone bills, and to make monthly payments on credit cards used extensively for personal and family purposes. She personally wrote checks for those types of expenditures in excess of $750,000.
The Auditor General’s report charges that Ms. Riell-Corbin is not the only person culpable in this latest fiduciary abuse. County officials supervising the Public Fiduciary’s office, the attorney representing the office, and the Superior Court (which must approve all fiduciary accountings) also breached their fiduciary duties, according to the report. The report alleges that all “failed to act when they knew, or should have known, of the Public Fiduciary’s improper activities.”
Ms. Riell-Corbin has been charged with eight counts of theft, fraudulent schemes, misuse of public money, conflict of interest and perjury. Those charges were finally leveled April 26, 2001, sixteen months after her schemes were first discovered. Sorting through bank records and reviewing account information (Ms. Riell-Corbin apparently routinely destroyed copies of checks issued for her own and her family’s benefit) was a massive and complicated undertaking, substantially slowing the investigation.
Two programs—Medicare and Medicaid—provide the majority of acute medical and long-term nursing care for America’s senior citizens. In fact, those two programs provide over one third of all medical care for Americans of all ages. With the total cost of those two programs approaching $400 billion per year, efforts have intensified to cut the cost of medical care for the poor and elderly.
Health care rhetoric frequently focuses on fraud in the Medicare and Medicaid programs. Estimates of the extent and cost of fraud are difficult to come by, but range as high as $33 billion per year (see, for example, the National Center for Policy Analysis website at www.ncpa.org/health/pdh5.html).
In response to concerns about fraud in federal health care programs, the Administration in 1995 announced the formation of a program to find and eliminate fraud. Named “Operation Restore Trust,” the initiative claimed almost $25 million in returned program dollars in its first year of operation. Originally focused on the five most populous states, the program was soon expanded into smaller states, including Arizona. Other states and agencies have also begun concerted anti-fraud efforts.
The State of New Mexico, for example, recovered almost $2 million over a six-year period from a program focusing on criminal investigations and prosecutions. A single nursing home prosecution in 1997 returned over $100,000.
Much of the fraud uncovered by federal and state investigators is subtle. Earlier this year, for example, federal prosecutors in Florida indicted Jack Campo and five other men for allegedly participating in an illegal “kickback” scheme. Doctors are accused of accepting fees for referring patients for unnecessary tests and procedures; the total loss from the actions of the defendants is alleged to be over $1 million.
Fraud in Medicare and Medicaid is not always subtle. Operation Restore Trust has unearthed instances such as a van service billing $62,000 to transport a single patient 240 times in a sixteen-month period. In another case, a single psychiatrist billed an average of 26 sessions per day, each lasting 45 to 50 minutes.
This year, Operation Restore Trust will turn its focus to fraud in nursing home care. Four years of publicity and prosecutions may have caught some of the most flagrant instances of abuse, and deterred others who now fear the possibility of public exposure and prosecution.
For more information on fraud in the Medicare and Medicaid programs, visit the Health Care Financing Administration’s internet website at www.hcfa.gov/medicaid/mbfraud.htm or the Administration on Aging’s site at pr.aoa.dhhs.gov/ort/ (the AoA is a division of the Department of Health and Human Services).
Thomas Mullen and 28 other defendants were charged with telemarketing fraud in New York federal court. At trial, the jury convicted Mullen on two of four counts, but the trial judge decided that there had been insufficient evidence of Mullen’s intentions and set aside the conviction. The government appealed, arguing that there was sufficient evidence to support the jury’s decision and Mullen should be found guilty.
The Second Circuit Court of Appeals decided this week that Mullen’s conviction on one of the two counts should be upheld, but that the second count should be dismissed. His case was returned to the federal district court judge for sentencing on the one count.
Although the details of Mullen’s conviction and appeal are interesting, what is really revealing is the court’s description of the work of a telemarketer. Since the central legal question was whether Mullen realized he was involved in actually defrauding the (often elderly) customers he contacted by telephone, the appellate court described the practices of Mullen and his coworkers in detail.
Mullen worked for RFG Group, which sold water and air filters, vitamins, fire retardant sprays, cosmetics, cleaning supplies and promotional items such as pens and key chains. RFG salespersons would call a prospective customer and explain that he or she had been selected for a special promotion by the product’s “sponsor.”
Although callers were carefully coached not to ever say that purchase of the firm’s products was necessary to qualify for the promotional prize, the pitch was (as the Court of Appeals described it) “intentionally worded to imply that such a connection existed.” The customer would be assured that he or she would win one of several valuable prizes, to be chosen at random; the prizes supposedly included Hawaiian vacations, valuable art, new automobiles, cash and jewelry.
“Such extensive effort,” wrote the Court of Appeals, “might not normally be necessary to sell cosmetics or cleaning products…. However, RFG Group was at a competitive disadvantage, as its products were sold at an enormous mark-up from their wholesale cost. For example, RFG sold a six-month supply of vitamins for between $259 and $399, even though the vitamins cost RFG less than $12.” Similar mark-ups were made on water filters (from a cost of $56 to a sales price of $799) and cosmetics (a one-year supply cost RFG Group $81, but was sold for up to $899).
The prizes, of course, were not as described by the callers. The Hawaiian vacation, for example, was actually a certificate for lodging at a motel in Hawaii, and was worth about $45, and the “valuable art” a $47 lithograph or a ceramic dolphin statue. “Only once was a new car awarded, and it was purposely given to an elderly man who made a small purchase so as to negate criticism that RFG targeted the elderly or gave substantial awards only in return for even more substantial purchases.”
RFG’s outrageous practices hardly stopped there, however. Once a buyer had been induced to purchase vitamins or cleaning supplies the first time, his or her name was moved into a different category. Thereafter, he or she would hear regularly from a special corps of RFG salespeople, known as “reloaders.” This elite group of telemarketers, chosen for their ability to close sales, made repeat calls to former clients, since the company found that subsequent purchases tended to be for larger amounts than the first sales. U.S. v. Guadagna, July 6, 1999.
Mullen, along with 24 of his 27 codefendants, was ultimately convicted of wire fraud in the federal court. Unfortunately, the practices described in the Court of Appeals opinion are far too common, in spite of the efforts of law enforcement.
Last week in Phoenix, the Maricopa Elder Abuse Prevention Alliance hosted a two-day seminar on prevention of abuse, neglect and exploitation of the elderly. Speakers ranged from nationally-known advocacy leaders to local social service and legal practitioners.
Jeff Calvert, coordinator of the Alliance, listed some of the warning signs of abuse, distinguishing between physical signs (burns, bruises, decubiti, malnutrition, etc.) and behavioral signs. Calvert noted that many behavioral conditions may exist in elders not subjected to abuse, but that they may also indicate something is amiss. His list included:
Agitation, anxiety
Withdrawal
Isolation
Confusion
Fear
Depression
Anger
Disorientation
Resignation
Hesitation to talk openly
Implausible stories
Non-responsiveness
Donna M. Reulbach, director of a Massachusetts program to prevent financial exploitation by involving bank tellers and officers, described her agency’s efforts with banks. She also listed some of the indicators that financial professionals can use to recognize exploitation. The elder customer may be:
accompanied by a stranger who urges large cash withdrawals
in the company of family members who appear to speak for the elder and make all decisions
nervous or afraid of the person accompanying them
giving implausible explanations about financial matters
unable to remember transactions
fearful that they will be evicted (or sued) if money is not given to a caregiver
isolated from family or supports (or isolated from family other than the relative accompanying them to the bank)
Lori Stiegel, Associate Staff Director of the American Bar Association’s Commission on Legal Problems of the Elderly, described national trends in prevention and punishment of abuse, neglect and exploitation. She noted that Arizona’s recent inclusion of “emotional abuse” in its criminal statute, coupled with the broad definition of “vulnerable adults” as the group entitled to special protection, made Arizona one of the more progressive states in dealing with problems of abuse, neglect and exploitation.
Phoenix prosecutors Terri Clarke and Pamela Svoboda, together with Phoenix Police Lieutenant Ken Tims, described the goals of and problems encountered by a concerted program to prosecute abusers. Their most notable concern: the difficult in prosecuting cases where the victim may be incapacitated, ill, or deceased, or may now be denying any abuse took place. They noted that abused elder women may commonly suffer from low self-esteem, come from traditionalist backgrounds, demonstrate “learned helplessness” and see their own role as keeping the peace between the abuser and the rest of the family (or society).
Phoenix Doctor Walter J. Nieri noted that many instances of abuse and neglect (as well as some examples of financial exploitation) come from long-term care settings. While nursing homes are closely regulated, and the possibility of undetected abuse is consequently lower, adult care homes are much more numerous and subjected to less state monitoring. He also pointed out that much abuse and neglect can be traced to caregiver stress, and provided a checklist for assessment of the level of stress in individual cases.
Susan Aziz and Chayo Reyes described the Los Angeles Fiduciary Abuse Specialist Team, a multi-agency task force established to combat the “crime of the nineties:” elder financial abuse. The three-year-old program involves Police, Public Guardian, Adult Protective Service and Probate Court representatives, among others. The Team conducts training sessions and focuses on fiduciary abuse.
In February, 1983, Minnesotan Georgia Hoppe signed a durable power of attorney. She trusted Paul Bengston, an employee of the Green Lake State Bank where she kept her accounts, and so named him as her agent in the power of attorney. Although Mr. Bengston left the bank’s employment a few years later, Ms. Hoppe continued to name him as her agent.
Six years later, Ms. Hoppe was hospitalized and then released to a nursing home. Almost immediately, Mr. Bengston began to take advantage of her trust. In the nine months after her institutionalization, Mr. Bengston took about $100,000 from her accounts.
Finally a bank employee became suspicious. Allen Struck contacted Ms. Hoppe at the nursing home, hoping to ask her about the transfers. Ms. Hoppe was reluctant to discuss her finances with him, and pronounced her complete confidence in Mr. Bengston’s handling of her accounts.
Minnesota’s “Vulnerable Adults Reporting Act” (similar in most respects to Arizona’s law requiring reporting of abuse, neglect and exploitation) required bank employees to report their suspicions of financial exploitation, and so Mr. Struck did what the law required. He first contacted an intake worker at the County Family Services Department (the equivalent of Arizona’s Adult Protective Services); the intake worker in turn contacted the local Sheriff’s office, the County Attorney and the state Department of Health Facilities. All agreed that an investigation should be undertaken, and that Ms. Hoppe should be evaluated to determine whether she was competent to make financial decisions.
What happened next was complete failure of the system to investigate the charges against Mr. Bengston. For over seven months, no case worker visited Ms. Hoppe, interviewed Mr. Bengston or followed up on Mr. Struck’s report in any way. Meanwhile, Mr. Bengston took an additional $64,500 of Ms. Hoppe’s money, and the ever-vigilant Mr. Struck made another report to the Family Services Department.
Finally, in October, 1990, the protective agency lumbered into action. A special guardian was appointed for Ms. Hoppe, the power of attorney revoked, and proceedings begun to recover the misappropriated funds. When Mr. Bengston proved to have few remaining assets, the special guardian sought recovery from the bank and the County Family Services Department.
The County asked the judge to dismiss Hoppe’s suit, claiming that nothing in the Vulnerable Adults Reporting Act required the County to actually conduct an investigation. The judge agreed, and so dismissed the suit. Minnesota’s Supreme Court ultimately agreed with the District Court decision.
According to the Minnesota Supreme Court, the failure to report abuse, neglect or exploitation is a crime and subjects the person failing to make reports to civil liability. But the protective services agency is under no obligation to act in a timely fashion on the allegations. Ms. Hoppe’s estate (she died while legal proceedings were pending) recovered nothing from the County for its failure to investigate Mr. Bengston’s wrongdoing. Hoppe v. Kandiyohi County, Feb. 16, 1996.
Evelyn Gruber was an elderly widow, living in Florida. In 1992, she had executed a will leaving most of her $5 million estate to Estelle, who she viewed as her “real family” despite the fact that Estelle was a step-daughter. Evelyn’s mental status was deteriorating, and shortly after signing the will she came under the control of her and nephew.
Over the next two years, Evelyn’s sister and nephew engaged in what the trial court later called a “reprehensible conspiracy” to divert her estate into their own names and control. They took her to a lawyer of the nephew’s choosing and had her sign a power of attorney (giving the nephew authority over her estate) and, over the course of time, two new wills.
So far, Evelyn Gruber’s story is sadly commonplace. The distinguishing element of the story is the involvement of a local Florida bank in the scenario. After Ms. Gruber’s death, Estelle moved to invalidate the later wills and sought return of $1,325,000 taken from Evelyn by her nephew. Estelle also made a claim against Ms. Gruber’s bank, alleging that it had been involved in the conspiracy to transfer Ms. Gruber’s estate.
Estelle’s claim against the bank was based on two transactions. In the first, an officer of the bank had honored the disputed power of attorney and permitted Ms. Gruber’s nephew to withdraw large sums of money in his own name and also to purchase nearly a half-million dollars worth of securities using Ms. Gruber’s funds. In the second, a trust officer for the bank went with Ms. Gruber and her nephew to the lawyer’s office to act as a third witness to the will.
According to Estelle, both bank officers had been warned that Ms. Gruber was incompetent, and that she was subject to the undue influence of her nephew. Both officers became willing participants in the conspiracy, she argued, because the new will named the bank as co-Personal Representative of Ms. Gruber’s estate and co-Trustee of the trust established by that will.
After trial, the Florida Circuit Court found that Ms. Gruber had in fact been subjected to undue influence and invalidated the will. It also entered judgment against the nephew for funds taken from Ms. Gruber prior to her death. Neither result is terribly surprising, based on the facts as found by the court.
More surprisingly, the court entered judgment against the bank for $1,325,000 in loss, plus $208,000 of lost interest. It also imposed punitive damages of $4,500,000 against the bank.
This case has not yet reached the Florida Court of Appeals (where it is apparently headed). It is still a striking example of how liability can be imposed against not only the primary wrongdoers, but also those who do not act to prevent loss. Estate of Gruber, Feb 13, 1996.
Oregon residents Edward and Patricia Hagan did what many older adults do; they gave their son Gerry a general, durable power of attorney so that someone would be able to handle financial matters for them. As too often happens, their son misused the power.
Gerry borrowed $100,000 from a third party, Jay Shore. Later, he borrowed another $95,000 from Lorraine Hall. He used the money in both cases for his own purposes. Unfortunately for Mr. and Mrs. Hagan, in both cases he secured the loans by giving a deed of trust against his parents’ home. He signed both deeds as his parents’ attorney-in-fact.
Mrs. Hagan slowly lost her ability to handle financial affairs, but the encumbrances remained a concern for Mr. Hagan. In 1994, acting for both himself and his wife, Mr. Hagan brought an action to declare them invalid. His attorney argued that Gerry clearly exceeded his authority in signing the deeds, since the loans were for his own benefit and not his parents’.
Mr. Shore and Ms. Hall, through their attorneys, argued that Gerry had the authority to place encumbrances on his parents’ property. They pointed to a provision in the power of attorney which released all third persons from “responsibility for the acts and omissions” of Gerry.
The Oregon Court of Appeals ruled that Gerry exceeded his authority when he used the powers of attorney to encumber the property. This is so because the loans clearly did not benefit Mr. and Mrs. Hagan (despite the argument by the lenders that they may have derived some emotional benefit from permitting loans to be made to their son). Consequently, the trust deeds are invalid, and the court declared that the encumbrances were unenforceable. Hagan v. Shore, Oregon Court of Appeals, April 17, 1996.
The Hagans’ dilemma suggests two further concerns. First, even though they were successful, the legal proceedings were time-consuming and expensive. Mrs. Hagan was apparently already losing her capacity at the beginning of the proceedings, and the psychic and emotional toll on Mr. Hagan was presumably immense.
Furthermore, it should be clearly understood that the Hagans might have experienced a different result in only slightly different circumstances. If, for instance, any portion of the loan proceeds had been used for their benefit, or if Gerry had testified that he discussed the matter with either or both of them, or if the power of attorney had conveyed the power to make gifts to Gerry, the Hagans might have lost their home.
Both lenders would have their first recourse to Gerry, so that every encumbrance of property would not necessarily result in loss of the property. Nonetheless, the potential for loss and abuse is substantial. Most local practitioners can tell more than one story like the Hagans’.
How can concerned seniors plan for circumstances such as the Hagans”? There are several things which might have been suggested to Mr. and Mrs. Hagan to head off the kind of trouble they experienced:
Someone other than Gerry should have been considered as a potential agent. Family members are not the only available choices. It is likely that Gerry’s tendencies were known to his parents, and they should have known him to be unsuitable.
Specific limitations can be placed on agents. The power of attorney might have precluded the ability to encumber the home, for example.
Not everyone should have a power of attorney. If the Hagans were at all uncertain, they should have been advised that they could simply rely on the conservatorship process within the courts. While this would have increased expenses and administrative difficulties, it would have prevented the costs incurred by Mr. and Mrs. Hagan.
