The opinion of the court was delivered by: Hon. Roger T. Benitez United States District Judge
ORDER DENYING PETITION TO VACATE ARBITRATION AWARD; DENYING CROSS PETITION TO CONFIRM ARBITRATION AWARD AND REMANDING WITH INSTRUCTIONS
Now before the Court is the Petition to Vacate Arbitration Award filed by Ernestine F. Strobel Individually and as Trustee of the Strobel Charitable Remainder Unitrust Dated 11/29/00 (hereinafter "Plaintiff") and the cross Petition to Confirm the Arbitration Award filed by Morgan Stanley Dean Witter and Suzanne LaTour (hereinafter "Defendants"). Plaintiff's Petition to Vacate was filed May 27, 2004. On July 7, 2004, the case was transferred to the undersigned. On July 14, 2004, Defendants filed a cross Petition to Confirm.
Plaintiff-Petitioner, Ernestine F. Strobel, is a single woman in her mid-80's. Born in 1919, Strobel went to work for the U.S. Army Corps of Engineers as a secretary in 1944. (Notice of Lodgment in Support of Petition to Vacate Arbitration Award ("Pl. NOL"), Ex. 29 at 419). Strobel eventually did drafting work for the U.S. Navy and obtained a college degree from the University of Hawaii in educational communications by attending evening classes. (Id. at 420). After surviving a bout with cancer in 1976, Strobel retired in 1979. (Id. at 421). She has also been an astute investor in rental real estate, using an approach of buying multi-unit dwellings, living in one unit, while renting the rest. (Id. at 422-26). Preferring the climate, Strobel moved to San Diego, California in 1990. (Id. at 423). In 1990, she bought a four-plex in Ocean Beach where she lived until 1999. (Id. at 424-25). She also bought a four-plex in Pacific Beach in 1994 and a single family residence at a county auction in 1999. (Id.).
After moving to San Diego, in 1992, Strobel opened a brokerage account with the firm of Morgan Stanley Dean Witter ("Morgan Stanley"). In 1996, she left Morgan Stanley because her broker had engaged in buying stocks in her account on margin without obtaining her authorization. (Id. at 572). She went to the firm of Merrill Lynch.
In 1998, Strobel brought her investments back to Morgan Stanley because the Morgan Stanley office was more conveniently located. (Id. at 450-52). There she was introduced to two brokers who would handle her accounts from 1998 to 2002. The brokers were Defendant Suzanne LaTour and Susan Harding. (Id. at 452). Strobel had two accounts at Morgan Stanley. The first was the individual account from 1992, "reactivated" in 1998. The second was a charitable remainder trust account opened in the year 2000, with Strobel as the Trustee.
Between the years 1998 and 2002, Strobel put into the individual Morgan Stanley account cash and securities valued at $645,213. She paid $14,432 in account fees to Morgan Stanley. By the end of the period, however, Strobel's account had lost $160,375 in value from trading activities. (Petitioner's Supplemental Notice of Lodgment in Support of Petitioner's Reply ("Pl. Sup. NOL"), Ex. 2).
Moreover, in the year 2000, her brokers suggested that Strobel sell her rental properties. Strobel sold her Pacific Beach four-plex and put the proceeds into a Charitable Remainder Trust and opened the second trust account with $472,246 in cash and 500 shares of Celestica, Inc. for a total opening value of $498,621. By 2002, however, the value of her investments in that account had also declined -- by $106,920. (Pl. Sup. NOL, Ex. 3).
In other words, while in the hands of Morgan Stanley and its stockbrokers LaTour and Harding, Strobel's investments in the two accounts lost a total of approximately $281,000 in value. (Pl. NOL, Ex. 29 at 645). During that time Strobel's individual account was heavily invested in volatile technology stocks and load-bearing Morgan Stanley mutual funds. At one point in June 2000, approximately 99% of the value of her account was invested in equities, and only 1% was invested in cash or cash equivalents. (Id. at 641). For purposes of context, during the same time frame, had Strobel's investment mix in her individual account been more conservative with 15% invested in securities and 85% invested in bond funds, her individual account would have increased approximately $11,000, rather than decreased $180,000. (Id. at 646).
Strobel claims the losses are due to the failure of Defendants Morgan Stanley and LaTour to understand her investment objectives, risk tolerance, and lack of sophistication, and their failure to recommend appropriate investments. Defendants remonstrate that Strobel was a sophisticated investor who wanted to invest "very aggressively" and who (despite her advanced age) had a 10-year investing time horizon. The dispute went to arbitration. The arbitrators heard testimony for five days. (Id. at 1-833).
The arbitration award held Morgan Stanley liable to pay Strobel $5,000 in compensatory damages, dismissed the claim against LaTour individually and recommended expungement of all references to the arbitration in her NASD records, denied Strobel's request for punitive damages, ordered the parties bear their own attorney's fees, and ordered Strobel to pay $10,350 in arbitration forum fees and Morgan Stanley to pay $6,900 in arbitration forum fees. The arbitration award contained no explanation for its findings. (Pl. NOL, Ex. 6).