Opinion ID: 1207872
Heading Depth: 1
Heading Rank: 7

Heading: Law Applicable on Remand

Text: In hindsight, of course, the proposition that no one can predict the market is eminently unexceptionable, and had the Consolidated Investment Fund been managed by members of America's old-monied élite, where children are taught from the cradle the two cardinal rules for preserving fortunes(1) never spend principal; and, (2) never attempt to predict the marketnone of these losses would have occurred. But the people who were managing the Consolidated Investment Fund had neither the benefit of hindsight nor did they come from old money. To be specific, the record reveals that both Mr. Margolin and Ms. Lester were upwardly mobile, middle class working persons in their mid 30's. Like so many other enthusiastic and ambitious persons before them, they tended to confuse profits in a bull market with intelligence. (Again, see, supra, note 8.) A great deal of harsh law has grown up to terrorize fiduciaries into honesty and prudence. Morgan Stanley points out that notwithstanding the circuit court's conclusion that the State was speculating (a conclusion to which old money would immediately jump) Morgan Stanley is nonetheless entitled to a jury determination of whether Morgan Stanley knowingly aided and abetted the Treasury staff in violating W.Va.Code 12-6-12 [1978] under the facts of this case. And, although it is a close issue, we agree. W.Va. Code 12-6-12 [1978] defines speculation in terms of what a prudent man would do with his own portfolio; a West Virginia jury might look more like the salesmen at Morgan Stanley than the members of this Court, so the jury might conclude that Morgan Stanley and the staff of the Treasurer's office behaved reasonably at the time. [24] The people at Morgan Stanley made a lot of money helping the staff of the Treasurer's office play the bond market, but only a jury can apportion Morgan's salesmen's actions between genuine enthusiasm and simple cupidity. Certainly the record reveals that everyone in the bond trading process at issue in this case was enthralled by his or her overall success until the bottom fell out. Young persons who have grown up in prosperous times don't expect catastrophe, which is why Wall Street's most successful blue sky salesmen are young, upwardly mobile persons who honestly believe that blind hogs can consistently find acorns. At least since Sparf v. United States, supra , the American rule has generally been that juries have the power to nullify, but do not have the right to do so. [25] But this precious academic distinction is simply a recognition that the laws of men cannot be applied with the same consistency or precision as the laws of physics. In the words of Morris Cohen in the 1916 issue of The Harvard Law Review: [26] We urge our horse down hill and yet put the brake on the wheelclearly a contradictory process to a logic too proud to learn from experience. But a genuinely scientific logic would see in this humble illustration a symbol of that measured straining in opposite directions which is the essence of that homely wisdom which makes life livable. Consequently, we would suggest that when a civil case involves law that is sufficiently obscure, tenuous and convoluted that a reasonable person could find it surprising, a court may submit the matter to a jury in order to guarantee that the judgment accords with the community's sense of moral probity. This seems to us to be a proper compromise between outright recognition of the propriety of jury nullification (such that a defendant would be entitled to an instruction on the subject) and a mechanistic approach to law that applies Rule 50, WVRCP principles with insufficient flexibility. [27] Morgan Stanley also assigns error to the trial court's failure to allow Morgan Stanley to offset any losses that might have occurred because of Morgan's aiding and abetting the aggressive trading strategy of the Treasurer's office with profits that were made using the same strategy. (The profits, of course, would need to come from the same type of speculation, if speculation it were.) Here we agree, and to the extent that we appear to depart from existing law in other jurisdictions, we do so intentionally and in full recognition that we are, perhaps, breaking new ground. [28] Just as the law of property makes a distinction between innocent and willful trespassers in terms of the measure of damages that may be recovered, [29] we hold today that it is appropriate in fiduciary matters to make a distinction between innocent and willful fiduciary violations. Morgan Stanley is a major financial institution that employs thousands of honest, decent, working-class people whose call on our solicitude is in no way attenuated by the fact that they live in New York. The record strongly suggests that Morgan Stanley never intentionally set out to injure the State of West Virginia, the State's political subdivisions, the State's citizens or the State's taxpayers. Nonetheless, the record also strongly suggests that Morgan Stanley did know that the people who were running the Investment Division of the West Virginia State Treasurer's office were not potential nominees for the Nobel Prize in Economics and that, from time to time, by almost anyone's standard, the West Virginia traders were engaged in rather more risky dealings than was appropriate for fiduciaries. It is for the jury to determine what effect the trading discipline ( see, supra, note 12) that Ms. Lester told Morgan Stanley the State maintained had on Morgan Stanley's knowing aiding and abetting and on Morgan Stanley's overall culpability. The record shows that Associate Treasurer Margolin told Morgan Stanley in no uncertain terms that there were lots of dealers available to trade with the State of West Virginia, and that if Morgan Stanley had scruples about what the Treasurer's office was doing, the Treasurer's office would take its business elsewhere. Morgan Stanley has families to feed and expenses to meet. To say that Morgan Stanley is a regular business suffering all the competitive pressures that are prominent in a global economy is hardly derogatory, and Morgan Stanley's seeking new customers in an aggressive manner to stay solvent is not per se grounds for punishing it. Certainly Morgan Stanley never undertook the duties of an insurer. Consequently, we hold today that the law in West Virginia is that when a fiduciary (or aider and abetter) is attempting in good faith to maximize the trust estate for his, her or its beneficiary, yet innocently violates traditional fiduciary principles, losses that occur through innocent violation may, nonetheless, be offset by gains achieved at roughly the same time by the same type of violations. Essentially, we are simply reformulating Restatement (Second) Trusts § 213, Comment d in a slightly more candid and comprehensive manner. In this regard, the jury must determine that the fiduciary, or any person who aided and abetted the fiduciary, acted out of honorable motives and did not intentionally violate his, her or its fiduciary duty or intentionally and knowingly aid and abet such violation. If, therefore, the jury concludes that the fiduciary and/or any aider and abetter is entirely innocent of intentional wrongdoing, then the jury may offset losses that arose from speculation with gains that arose as a direct result of the same type of speculation. Finally, Morgan Stanley argues that Morgan Stanley is not the proximate cause of the State's loss. Simply put, Morgan Stanley asserts that if Morgan Stanley had not traded with the State of West Virginia, numerous other dealers would have done so. We are not inclined to accede to this proposition because strict liability in fiduciary law is designed to discourage all third parties from knowingly cooperating with a fiduciary in the breach of a trust. It is true that if Morgan had withdrawn from trading with the State, other houses probably would have continued to trade, but the point to be made is that no one who was an experienced investment executive should have cooperated with the State or aided and abetted the State if, indeed, the State was speculating rather than investing.