Finally, after 17 years, Scott Sargent's client was ready to make his first withdrawal from his brokerage account. The problem was it was for the worst possible reason.
The elderly client, then 81-years-old, was convinced that he'd won $5 million in a "Costa Rican lottery" and wanted to withdraw $15,000 to cover "the rest of the taxes" on his windfall, he told Sargent, a financial advisor with Wells Fargo Advisors in Newport Beach, Calif. The senior investor had already wired $20,000 to a sweepstakes outfit and was determined to send more.
"I know you're going to tell me that I'm being ripped off, but I've done a lot of research and it's completely legitimate," the client insisted. "I've already been on the phone with the Federal Reserve."
As hard as he tried, Sargent couldn't convince the client that he really hadn't won $5 million and that the whole thing was indeed a scam. Sargent tried to dissuade him from sending the organization more money, urging him to at least wait a few days, but the client only grew agitated. "I need the money," he said. "It's my money."
Thus began Sargent's 10-month odyssey with the client and later his family. Unable to reason with him, Sargent reluctantly reached out to his children and discovered that they were fully aware of the situation and were at their wit's end trying to convince their father that he was being robbed. He had exhausted all his other bank accounts, sending some $150,000 to multiple people around the globe. His Wells Fargo account was all he had left.
Through it all, Wells Fargo Advisors stood by its guns and refused to release the funds.
It seems like an open-and-shut case, but a complicating factor made the situation very tricky for the firm. A doctor and a lawyer brought in to assess the client's mental capacity determined that he was fine mentally, leaving Wells Fargo in a very awkward spot.
Legally financial institutions are required to honor their clients' instructions unless they have reason to believe the clients lack capacity and especially if they suspect that someone is taking advantage of that diminished capacity, said Robert Freedman, a partner in the New York office of law firm Schiff Hardin.
Since a doctor determined that there was nothing wrong with Sargent's client, Wells Fargo faced a legal dilemma as it tried to balance its duty to follow the client's instruction with its desire to protect him from financial predators.
Such legal dilemmas are likely to become more commonplace as the nation's 76 million baby boomers retire and begin developing cognitive issues, which increase with age, say experts. Some 10 million Americans are estimated to have dementia or suffer from some level of cognitive impairment, according to research by David Laibson, a professor of economics at Harvard University.
"Kudos to Wells Fargo for having a backbone and doing the right thing," said Bernard Krooks, a founding partner of Littman Krooks, a New York law firm that specializes in elder law. "Not only did they do the smart thing, the morally, ethically right thing, they did the legally conservative thing as well."
Krooks explained that the bank likely wouldn't be exposed if it had disbursed the funds, given the doctor's assessment of the client's mental capacity, but it wouldnt be exposed by refusing to disburse the funds either. The more conservative approach, he said, was the better way to go because "you're not subjecting yourself to disbursing the funds inappropriately."
Freedman also applauded the bank's decision. "I'm impressed they got a doctor and a lawyer," he said. "I think they did everything right."
Freedman criticized the legal and medical assessment, saying the doctor and lawyer should have been aware of frontal-lobe dementia, a type of dementia that is harder to pin down and hasn't gotten too much attention. "It's not straight dementia," with the characteristic forgetfulness and loss of memory, he said. Frontal-lobe dementia involves difficulty with judgment and executive functioning, Freedman explained.
"The problem with the medical and legal diagnosis is there's no real standard to determine whether or not somebody has the capacity to enter into these kinds of transactions on their own," said Krooks. "People are allowed to do things that you and I would agree are not so smart but that doesn't necessarily mean they're incapacitated and need to have a guardian."
In the end, banks need to use common sense to guide their decisions. "This story would certainly not pass the smell test," Krooks said. "Who pays taxes on lottery winnings before they get the winnings?"