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Maybank v. BB&T Corp.

Supreme Court of South Carolina

June 3, 2016

Francis P. Maybank and Jane H.P. Maybank, as trustee for the Francis P. Maybank Family Insurance Trust, Plaintiffs,
v.
BB&T Corporation, Branch Banking and Trust Company, Successor in merger to Branch Banking and Trust Company of SC, and Sterling Capital Management, LLC, Successor in merger to BB&T Asset Management, LLC, Appellants/Respondents. Of whom Francis P. Maybank is the Respondent/Appellant, Appellate Case No. 2014-002638

          Heard November 3, 2015

         Appeal from Greenville County The Honorable Edward W. Miller, Circuit Court Judge

          C. Mitchell Brown, D. Larry Kristinik, Brian P. Crotty, Michael J. Anzelmo, all of Columbia, and William S. Brown, of Greenville, all of Nelson Mullins Riley and Scarborough, LLP, for Appellants/Respondents.

          Mitchell Willoughby, John M.S. Hoefer, Tracey C. Green, Chad N. Johnston, all of Willoughby and Hoefer, P.A., of Columbia, and Bruce W. Bannister, of Bannister, Wyatt and Stalvey, LLC, of Greenville, for Respondent/Appellant.

          HEARN, ACTING CHIEF JUSTICE

         This appeal arises from a total verdict of $17, 199, 306 rendered in favor of Francis P. Maybank for claims sounding in contract, tort, and the South Carolina Unfair Trade Practices Act (UTPA). Maybank brought this action alleging he received faulty investment advice from Branch Banking and Trust (BB&T) Company (the Bank) through BB&T Wealth Management (Wealth Management) and BB&T Asset Management (Asset Management), all operating under the corporate umbrella of BB&T Corporation (collectively, Appellants). Appellants appeal on numerous grounds, and Maybank appeals the trial court's denial of prejudgment interest. We affirm in part and reverse in part.

         FACTUAL/PROCEDURAL BACKGROUND

         I. BACKGROUND

         Because of the numerous BB&T entities involved and their intertwined relationships, we begin by briefly highlighting the role of each Appellant. The Bank is a subsidiary of BB&T Corporation and is its largest asset-comprising ninety-eight percent of the corporation's holdings. The Bank offers traditional banking services along with insurance, trust, and wealth management services. Wealth Management oversees financial portfolios, keeping abreast of clients' financial situations, needs, and risks. Asset Management, an independent corporate entity, through investment advisors or brokers, makes recommendations about investment strategies and products as well as assists clients in entering investments with third parties.

         In 1999, the Bank offered well-established commercial middle-market lending, investment counseling, insurance, and trust services. As part of an effort to offer increasingly sophisticated and diversified financial products, it acquired Scott & Stringfellow brokerage firm, which specialized in corporate finance, equity underwriting and distribution, and advisory services.

         The Bank continued to follow an expansion strategy, and in 2001, it became interested in acquiring Southeastern Trust Company (Southeastern), an independent investment firm with offices in Greenville, Columbia, Charleston, and Anderson, which had been founded by Maybank. Southeastern served as the trustee or personal representative for clients' wills and trusts in addition to acting as investment manager and advisor to individuals, companies, and profit-sharing trusts.

         Raised in South Carolina, Maybank graduated from Harvard University and moved to New York City in 1957 to work for Fiduciary Trust Company. He later operated his own trust firm on Wall Street for many years, returning to South Carolina in 1989 to found Southeastern. In November 2001, Maybank sold his interest in Southeastern to the Bank, receiving 246, 000 shares of BB&T Corporation stock in exchange. As a result of the acquisition, all of Southeastern's employees began working for the Bank, including Maybank, who became a senior vice president in the Trust Department with a five-year employment contract and an annual salary of $100, 000. His duties included promoting the Bank's services to Southeastern's existing customers and overseeing client transition to the Bank. This was a shift from his previous work experience as a trust officer. In order to avoid substantial capital gains taxes due to the high value of the BB&T Corporation stock, Maybank placed his newly acquired stock in his brokerage account with Scott & Stringfellow. This allowed him to defer the tax liability and to enjoy annual dividends of approximately $400, 000.

         In 2004, the Bank created Wealth Management, which included the Trust Department in which Maybank worked. The former Southeastern clients who transferred to the Bank's Trust Department became Wealth Management clients. Around the same time, the Bank, through Asset Management, began to market "alternative investment strategies" to clients with substantial net worth and highly concentrated stock positions.

         In order to effectuate these alternative investment strategies, clients executed a wealth management agreement (WMA), establishing a contractual relationship between the Bank and Asset Management. Under the WMA, the Bank served as the advisor for the designated assets and thereby had the ability to advise and provide professional guidance on available BB&T products. Wealth Management portfolio advisors served as liaisons between clients and Asset Management. Specifically, Wealth Management oversaw the portfolio account, serving as its custodian. By signing the WMA, a client hired Asset Management to handle the discretionary account and serve as the account's investment advisor. Under its terms, the Bank had total discretion to invest in securities from the Wealth Management portfolio.[1]

          One of the new strategies touted by the Bank and Asset Management included a variable prepaid forward contract (Prepaid) that was directed at customers with concentrated stock positions. A Prepaid is an investment contract by which a stock is sold to an investment bank for an upfront payment of approximately seventy-five to ninety percent of its value. Significantly, title to the stock is not transferred for two to three years, thereby deferring capital gains taxes and allowing the customer to receive dividends and the benefit of appreciation. A Prepaid provides four meaningful benefits for its holder: (1) protection against a collapse of the stock, (2) immediate liquidity, (3) an opportunity to partially participate in future gains, and (4) an opportunity to receive dividends.[2]

         In mid-2006, Maybank attended a meeting between a long-time client of his and representatives from Wealth Management and Asset Management. The purpose of the meeting was to discuss the client's concentrated position in a particular stock and the advisability of Prepaids. Kristopher Kapoor attended the meeting as a portfolio manager for Asset Management to address proceeds in the event the client decided to purchase a Prepaid. Anthony Mahfood, a Wealth Management advisor, was also present. Although Maybank had previous knowledge about Prepaids through written presentations circulated within BB&T, it was this meeting that piqued Maybank's personal interest in this alternative investment product.

         In light of his concentrated position in BB&T Corporation stock, Maybank spoke with Kapoor following the meeting about his interest in entering into a Prepaid, along with his investment objectives and risk tolerance.[3] As of 2006, the 246, 000 shares of BB&T stock he had received in 2001 remained in his brokerage account with Scott & Stringfellow. At Kapoor's recommendation, Maybank communicated with Mahfood, who then asked Shawn Gibson, a member of Asset Management's alternative investment team, to prepare illustrations of the anticipated Prepaid's terms.

         In July 2006, Maybank was given a Concentrated Stock Risk Management Addendum (Addendum), which outlined a general description of the strategies of various single-stock products, including a Prepaid. Also included within the Addendum was the fee schedule to use the services of "BB&T professionals, " which explained a "one-time-upfront advisory fee from your Account, based upon the principal value of the investments." The Addendum stated it was an addition to the WMA between the Bank, the advisor, and Maybank, even though Maybank had not yet executed a WMA with the Bank and Asset Management.

         On August 11, 2006, Wealth Management presented Maybank with a letter (Approval Letter), which approved Maybank entering into a Prepaid with BB&T.[4]The Approval Letter was written by Mahfood to Patricia Oliver, the Executive Vice President, Secretary, and General Counsel for BB&T Corporation, but signed by both Mahfood and Oliver. Express authorization by BB&T Corporation was necessary because the BB&T Code of Ethics prohibited BB&T employees from using BB&T Corporation stock in any transaction deemed to be speculative, including Prepaids. The letter stated "a [Prepaid] may allow Mr. Maybank to reduce the risk of his concentrated position in BB&T, while raising cash to create a diversified portfolio." It further stated "implementation of this [Prepaid] will protect Mr. Maybank from an extraordinary reduction in the overall value of his investment portfolio and resulting net worth. It will also help him achieve important diversification goals we have discussed throughout the financial planning process." Oliver signed the Approval Letter as Executive Vice President, Secretary, and General Counsel for BB&T Corporation. A handwritten note under Oliver's signature stated: "This approval by General Counsel is conditioned on Mr. Maybank not purchasing additional shares of BB&T Corporation under proceeds from the [Prepaid]."

         After being presented with the Approval Letter, Maybank executed a Prepaid with Bear Stearns-a three-year contract in which Maybank pledged 220, 000 shares of BB&T Corporation stock with a value of $9, 318, 364 in exchange for upfront proceeds of $7, 120, 000. The Bank charged Maybank $32, 614 for the advice and recommendation to enter into the first Prepaid. Of the $7, 120, 000 in upfront proceeds derived from the Prepaid, $2, 470, 000 was applied by BB&T to Maybank's margin debts from Southeastern. The remaining $4, 650, 000 was placed into a Wealth Management portfolio account, notwithstanding the fact that at this point in time the account was still not subject to any WMA.

         Subsequently, on August 23, 2006, Maybank entered into a WMA with the Bank and Asset Management. The WMA served as the umbrella for the various services BB&T was offering to Maybank through Wealth Management and Asset Management. The WMA established the Bank would (1) gather information about the client's investment objectives, risk, financial situation, and needs; (2) make a recommendation to the client; and (3) coordinate and supervise the account. The WMA stated the Bank will do what is in the "best interest" of the client. Further, the WMA also governed the portfolio account with the $4, 650, 000 in proceeds from the Prepaid after Maybank's margin debt had been paid.

         By the end of 2008, the value of BB&T Corporation stock had dropped precipitously as a result of the national financial crisis. Due to his concentrated stock position, Maybank suffered a considerable loss. Accordingly, Maybank was concerned about his income stream, which had been supplied by the rather substantial dividends paid by BB&T Corporation stock and tied to the Prepaid. This concern was further fueled by the fact that the initial Prepaid would expire in August 2009. Maybank therefore discussed the expiration of the first Prepaid with Mahfood and Gibson, primarily focusing on whether he should roll the first Prepaid into a second one.

         In January 2009, Appellants assisted Maybank in the execution of a second Prepaid with Deutsche Bank, a global investment bank and securities trading and brokerage firm. When the transaction was completed, Maybank discovered he had incurred costs and fees of nearly $1, 300, 000 from the roll-over. Thereafter, during the second quarter of 2009, BB&T Corporation decreased its dividend significantly. As a result, Maybank received an annual dividend of $230, 000, in contrast to the approximately $400, 000 annual dividend he had been receiving previously.

         In August 2010, Maybank requested a meeting with personnel of the Bank to discuss the significant losses he sustained, which he believed were the result of mismanagement and a failed investment strategy. He met with Fisher, the head of Wealth Management, and Ross Walters of the Greenville division. At that time, he believed he had been damaged by Appellants' mismanagement in the amount of $3, 500, 000. Dissatisfied with Appellants' response, Maybank decided to pursue legal action.

         II. LITIGATION

         In December 2011, Maybank filed this lawsuit against Appellants, alleging numerous causes of action arising from Appellants' financial investment advice, including breach of fiduciary duty, breach of contract, negligence, breach of contract accompanied by a fraudulent act, constructive fraud, violations of the South Carolina Uniform Securities Act of 2005 (Securities Act), and violations of the UTPA. Maybank asserted that in preparation for his retirement, he engaged Appellants to develop an investment plan that reflected his goals of diversification, steady income, tax sheltering, and the ability to protect his wealth for his grandchildren through the Francis P. Maybank Family Life Insurance Trust (the Trust), established in 1993. He contended Appellants' investment plans were aggressive, risky, and involved a complex system of derivative trading with BB&T Corporation stock-which he characterized as an uncommon investment approach for someone seeking financial advice for retirement. Maybank alleged he lost substantial sums of money because of this faulty investment advice.

         Following the removal of this action to federal district court by Appellants and the subsequent remand, the parties jointly moved for the case to be assigned to the Greenville Business Court (then) Pilot Program. Maybank filed an amended complaint, which added the Trust as a plaintiff.[5]

         In November 2012, Maybank received a letter from Wealth Management stating he was being refunded for the one-time advisory fee that was charged in connection with the services Asset Management had provided for the Prepaids. The letter (Refund Letter) stated, "Recently, as part of a review of client accounts we discovered that a fee was charged to your account that we wish to refund to you. While we are not required to rebate these fees, we choose to do so as a reflection of our corporate values." It also explained, "This fee would not have been charged under our current billing practices." Maybank was returned fees in the total amount of $79, 682.19.[6]

         The Refund Letter did not disclose that the refund of fees was actually motivated by an inquiry by the Securities and Exchange Commission (the SEC) into Asset Management's fee practices. At the time of the refund, the SEC expressed concerns over the upfront charges and associated fees for selling alternative investments. This investigation was qualified both as "out of the bounds" of the SEC and in a "gray area" of regulation. According to Fisher, the investigation was prompted because the fees charged were "broker-esque." Maybank's refund was part of approximately $1, 000, 000 in fees refunded by Wealth Management.

         Essentially, Maybank's theory of the case was that Appellants' recommendation of alternative investment strategies and products like Prepaids, which generated fees and profit for the Bank and BB&T Corporation, caused grave financial damage to clients like Maybank. He contended he relied on Appellants to advise him in their capacity as fiduciaries. Maybank alleged Appellants willfully and wantonly deceived him. He specifically claimed he relied on two key documents in trusting Appellants: the Approval Letter and the WMA.

         Conversely, Appellants characterized the case as one involving a sophisticated businessman with fifty years in the investment advisory industry who fully appreciated the risks involved in his investments. They claimed it was Maybank who ultimately decided a Prepaid was an ideal solution to his retirement needs. Appellants pointed to the fact that Maybank went on to unwind and roll over his Prepaid three more times himself-without any involvement by BB&T. Moreover, according to Appellants, Maybank received $1, 500, 000 in dividends during the six years the Prepaids were in effect, monies he would never have received had he sold his BB&T Corporation stock in 2006.

         III. EVIDENCE PRESENTED

         At trial, Maybank testified that based on his employment with the Bank, he believed Appellants were responsible and knowledgeable on both financial matters and fiduciary interests, and consequently, he sought their advice and services. He testified he expressly told Appellants about his financial concerns and he wanted to secure his assets. Maybank contended Appellants represented they had special expertise in alternative investment strategies, and they recommended he enter into a Prepaid as a way to avoid risk, protect his dividends from his BB&T Corporation stock, address his debt issues, defer his tax liability, and generate cash proceeds. Maybank testified he had no prior experience with or real knowledge of Prepaids. He further testified he relied on the advice of Appellants as his fiduciaries because his prior experience had been in the limited capacity of managing trusts and investments like stocks and bonds, not in the areas of options or other derivative products.

         Maybank also presented the video deposition testimony of Walters, head of Greenville's Wealth Management division, who stated that while he held a Series 7 broker license and Series 24 broker license, and although he had general knowledge as an investment broker, he did not have the training or expertise to provide advice or make recommendations about any particular investment strategy. Walters further agreed he did not know how to advise a client with a concentrated stock position. Moreover, he admitted he did not have the knowledge or experience to inform a client how to assemble a well-managed and balanced portfolio.

         Maybank introduced the Approval Letter to demonstrate the selling points used by BB&T for the strategies and representations made to him. Maybank testified he relied on the Approval Letter in deciding to enter into the first Prepaid in 2006. He further stated he believed Appellants had thoroughly researched the financial products and determined a Prepaid was best for his specific situation, as outlined in the Approval Letter. Maybank testified that based on the language of the Approval Letter, he assumed it was specifically tailored to him and his needs; however, he later learned it was merely a form letter. Maybank submitted into evidence the form letter that was used for all customers in Maybank's situation, which stated analysis and review had been done for the customer whose name was then filled into a blank.

          Maybank also submitted the WMA as evidence of the expansion of the Bank's fiduciary role with Maybank through Wealth Management and Asset Management. Maybank put forth evidence Wealth Management never intended to fulfill-and could not fulfill-the duties and obligations outlined in the WMA. For example, Walters's deposition testimony revealed that Wealth Management did not gather the information required under the WMA. Further, he testified Wealth Management did not advise; rather, that service was provided by Asset Management based on the Bank's policies and procedures. Walters also testified he believed someone within the Bank or Asset Management would have addressed the duties and obligations outlined in the WMA.

         Maybank also established, through the deposition testimony of Walters, that the Bank knew at the time Maybank entered into the WMA that the contract contained errors, misstatements, and deliberate misrepresentations. Walters testified he knew wealth advisors were using the inaccurate WMA, but he did not review the WMA signed by Maybank and therefore did not question it. Walters testified because Maybank was a wealth advisor, he would have known Asset Management handled that portion of the advising and the transaction. He stated it was Maybank's job to know such information and if he did not, he was "incompetent." Walters testified he believed the contract was fulfilled in principle. He claimed the errors in the WMA were the result of an "oversight on our attorneys' part."

         Maybank entered the Refund Letter into evidence to further his theory Appellants engaged in unfair and deceptive business practices. Appellants' representatives testified repeatedly the Refund Letter was indicative of their corporate values, and it chose to refund the fees because they were inconsistent with the 2012 billing practices.

         Three expert witnesses also testified for Maybank: Professor John Freeman, Dr. Craig McCann, and Dr. Oliver Wood. Their testimony covered the topics of fiduciary relationships, securities, and damages.

         In their defense, Appellants painted a markedly different picture. They concentrated on Maybank's professional experience, the fact he was informed and aware of the contracts he was entering, and their theory that Prepaids were the only option for Maybank based on his financial circumstances. Appellants also focused extensively on the role Wealth Management and Asset Management employees played in the execution of the services rendered.

         Testimony by the Bank's employees suggested Maybank was not open to advice and was set in his ways. For example, Kapoor explained that during his meeting to discuss Maybank's goals and overall financial situation, he realized Maybank was a "100 percent equity guy" who preferred stocks. Kapoor acknowledged that a more diversified portfolio would have been a better option for Maybank, and they discussed the importance of diversification multiple times. A personal trust specialist for Wealth Management and a former employee of Southeastern testified that Maybank's financial philosophy over the years was "all equities." Gibson testified he generally remembered Maybank being involved in conversations about how to guide the transaction and how it would be structured. He also stated Maybank never indicated he was giving complete discretion to Appellants to determine how best to handle his concentrated stock position.

         Appellants additionally put forth evidence and testimony Maybank was fully informed about the contracts he entered. They submitted into evidence extensive documentation provided to Maybank in his capacity as a client and in his role as a wealth management advisor. For example, Appellants entered into evidence sales presentations and materials on alternative investments and Prepaids given to Wealth Management and Asset Management employees. This evidence was used by Appellants to support their argument of Maybank's knowledge, but on cross-examination, Maybank's counsel used the evidence to support Maybank's contention the advisors possessed inadequate information on Prepaids. The jury also heard from multiple employees who testified they were not allowed to provide investment advice. Additionally, Appellants presented testimony that Gibson insisted Maybank seek advice from a tax lawyer before entering into the first Prepaid, and that Maybank proceeded to unwind and roll over his Prepaid three additional times without any assistance from BB&T.

         To refute Maybank's reliance on the Approval Letter, Mahfood testified he believed the letter was a necessary part of the paperwork required to execute the recommended strategy because Maybank was an employee of the Bank and held concentrated stock in BB&T Corporation. Mahfood acknowledged he did not conduct any analysis to confirm any of the promises or representations made in the letter even though he signed it. This was supported by Kapoor's testimony that wealth advisors were not authorized to make any recommendations to Maybank. Mahfood explained he would have spoken up if something appeared "out of whack." Subsequently, Mahfood testified he did not analyze or formally review Maybank's file. Similarly, Walters explained at trial he could not provide investment advice.

         In addressing the obligations of the WMA, Walters testified at trial that the Bank had the responsibility of gathering information about a client's investment objective and risk tolerance, making a recommendation to the client regarding an investment program, and supervising the services of the investment advisor. He stated that each obligation of the WMA was fulfilled by either the Bank or Kapoor of Asset Management. On cross-examination, however, Walters conceded the WMA stated "the [B]ank shall" perform the three responsibilities outlined in the WMA, not Asset Management. Further, he agreed the responsibilities were not completed by the Bank nor could they be completed by the Bank.

         Appellants suggested Maybank's only viable option was to enter into a Prepaid because he was living beyond his means. They emphasized that rather than cutting expenses, Maybank chose to borrow on the margin. By July 2006, Maybank had a margin debt of $2, 700, 000 secured by his BB&T Corporation stock, which was invested at Scott & Stringfellow.[7] Because Gibson admitted he did not have an independent recollection of his ...


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