An Orange County couple’s marriage was already in trouble when the wife learned that her husband’s high-risk options trading had resulted in their investment account plummeting from $16 million to barely $400,000 in just five months.

Was the angry wife correct in arguing that her husband’s trading activity had violated his fiduciary duty to her? That was the issue that recently confronted the California Court of Appeal (In re Marriage of Fred and Moira Kamgar).

Both spouses were highly educated. Moira had a law degree and masters in tax, while Fred was trained in Electrical Engineering and Computer Science, and had an MBA.

They married in 1990, and had four children.  By the time the couple separated in late January 2013, Moira had not worked for over 20 years, though she had previously worked at the Depository Trust Company, and then a law firm, before she became a full-time homemaker.   Fred ran several successful businesses, the sale of which accumulated enough wealth to allow him to stop working during the last ten years of their marriage.

Initially, the parties’ liquid assets were managed by JP Morgan, Merrill Lynch, and then Bessemer Trust.  Moira did not have much involvement in the family’s finances, leaving their management and control in Fred’s hands. She didn’t see their bank statements, financial documents, or even review their joint tax returns after 2003. 

In 2010, Fred became interested in options trading. With Moira’s consent, he opened an options trading account at TD Ameritrade. The account required the consent of both spouses to transfer or withdraw funds.

Moira agreed that Fred could deposit $2.5 million  in Apple stock, just under a quarter of their net worth, in the Ameritrade account. She even testified in court that this would enable Fred to “try his hand at something that he would find interesting or amusing,”  conceding that a loss of the entire sum would not affect their lifestyle.

Fred then applied for a TD Ameritrade account that allowed trading on margin, which involved higher potential returns but greater risk of loss. Ameritrade required both parties to take a test demonstrating their financial knowledge. Unbeknownst to Moira, Fred took the test for both of them, signing her name on the application, representing that he and Moira had extensive experience in trading options. 

He later modified the Ameritrade account so he no longer needed Moira’s signature for transactions.

Over the next 13 months, without informing Maria, Fred deposited another $8.2 million of the couple’s community funds into the Ameritrade account, and replaced their professional financial managers, bringing the total community investment in the Ameritrade account to over $10.6 million.

By the end of August 2012, the account’s value peaked to over $16 million, even after Fred had withdrawn $3.8 million during the month.

Unfortunately for the Kamgars, market fluctuations led to a tragic decrease in value in the months to follow; it plunged to $409,000 in January of 2013.  By mid-January 2013, the parties had already been residing in separate residences when Fred sent Moira text messages saying they had to sell one of their three homes, because “unfortunately, [they were] running out of money.” This was the first time, Moira testified, that she understood the state of their finances.

The trial court determined, and the Court of Appeal affirmed, that Fred had  breached his fiduciary duty of disclosure to Moira when he unilaterally decided to invest, and lose in options trading, an additional $8.2 million in community funds which Moira never agreed to risk. Moira had only agreed to invest the initial $2.5 million in the Ameritrade account, and the additional $8.2 million was invested by Fred, unbeknownst to Moira.

The Court of Appeal explained that, under California family law, either spouse has the right to exercise “management and control of the community personal property,” but each is obliged to do so “in accordance with the general rules governing fiduciary relationships.”

It further noted that the marital relationship “imposes a duty of the highest good faith and fair dealing on each spouse,” and that each must provide the other “without demand, any information concerning the management and control of the community property.”

Moira had agreed that Fred could risk the initial $2.5 million, it said. Absent disclosure of his intention to invest an addtional $8.2 million of their community funds, the Court found that "Fred interfered with Moira's equal right of management and control over those funds."

The Court of Appeal affirmed the trial court's award of $1.9 million to Moira as one-half of the community property  Fred had lost in high-risk options trading without her knowledge. It also awarded Moira her costs on appeal.

By Nitasha Khanna