As chairman and majority stockholder of Houston-based Keystone International,
Floyd Cailloux amassed a fortune of more than $130 million. Upon his death in
1997, Cailloux left an estate of $65.5 million in trust for his widow, Kathleen,
and his family. Within three months, however, the family’s estate attorney, S.
Stacy Eastland, had convinced the Cailloux heirs that the only way to avoid a
$32 million death tax penalty was to transfer their inheritance to the Cailloux
Family Foundation, the family charity. Faced with the grim choice of having to
give their money to the government or to charity, the Cailloux heirs—acting on
the advice of their lawyer—chose charity.
 They did not realize that Eastland,
then a partner in the Texas law firm Baker Botts, worked for more than one party
in this scenario. In addition to representing the Cailloux family, he
represented the family foundation. Also, the executive director of the
foundation, Bill Goertz, was a regional vice president at Wells Fargo Bank.
Wells Fargo, in turn, served as the executor of Floyd Cailloux’s estate.
In
2003, the Cailloux family filed suit against Eastland and Wells Fargo charging
substantial conflict of interest and breach of fiduciary duties. According to
Rick Harrison, an attorney with Fritz, Byrne, Head & Harrison in Austin who
represented the Cailloux family, Eastland and Goertz spun a web of self-dealing.
As Harrison explains it, Eastland helped Goertz increase the foundation’s
endowment from approximately $6 million to more than $70 million by persuading
the Cailloux heirs to relinquish their inheritance. In turn, Goertz ensured that
Wells Fargo referred clients to Eastland’s law firm.
Weaving Tangled Webs
While business or personal ties may not result in
conflicts of interest as overt as these, they can and do often taint the advice
offered by lawyers, investment advisors, brokers and accountants to their
clients. Professional ethics require that advisors disclose potential conflicts
to their clients, but ultimately the clients bear the burden of protecting
themselves from biased financial and legal guidance.
TOP VIEW
Recognizing potential conflicts of interest can present a challenge to affluent
investors who often work closely with numerous, well-connected advisors. While
the business or personal ties that financial and legal professionals possess do
not always color the advice they provide, their clients should always be on the
lookout for potential problems and, if they arise, be prepared to manage them. |
According to Sara
Hamilton, CEO of the Family Office Exchange (FOX), a Chicago-based consulting
and advisory group, the potential for conflicts of interest among the myriad
advisors and financial services professionals that families may employ is
ever-present. In April 2004, FOX convened a roundtable in New York for financial
planners, wealth advisors, lawyers and academics to discuss the topic. Attendees
arrived at a simple consensus: Conflicts of interest are everywhere, and
investors must learn to recognize and work around them.
“I think you manage
conflicts—you can never avoid them,” says Doug Freeman, national managing
partner of the Institute for Family Foundations (IFF) in Irvine, Calif., and a
speaker at FOX’s roundtable. While financial advisors are not necessarily trying
to cheat their clients, their loyalties are often divided between clients
looking for advice and securities dealers offering a commission. “As a client, I
want to know what is affecting my advisor’s recommendations: his judgment about
what is most appropriate for me, or his own economic interest in my decisions,”
Freeman says.
Unfortunately, the only available statistical data on this
topic does not necessarily reflect the prevalence of the problem. Every three to
four years, the American Bar Association (ABA) issues a voluntary survey on
legal malpractice claims to insurance companies. The last survey, covering 1996
through 1999, recorded 1,602 conflicts of interest, 5.12 percent of all
malpractice claims.
Publicly, the ABA maintains that conflicts of interest
involving trust and estate lawyers are rare. “Nothing has come to us that would
suggest there is a crisis,” says Ed Koren, chair of the ABA’s committee for Real
Property, Probate and Trust Law. “Do you get a few bad apples here and there?
Obviously the answer is yes. But I don’t think there’s a trend in this
direction. In fact, I think there’s a trend against it.”
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