A trust fiduciary's duty to implement capital preservation strategies using financial derivative techniques

Real Property, Probate and Trust Journal, Spring 2001 by Borkus, Randall H

Unfortunately, a "blame-the-product" attitude occurs when a specific financial instrument fails to fulfill an alleged purpose.132 The problem is that when focusing solely on a specific financial instrument, and not on the implementation of that instrument, the possibility of misinterpreting the real problem exists; moreover, basing a regulation on the same potential misinterpretation lacks logic and reasoning.133

Notwithstanding, some regulation is needed to police numerous "[p]roblems that demand regulatory attention in financial markets."'34 But a blame-the-product mentality is as impractical as wanting to eliminate motor vehicles because they cause too much personal and property damage. Rarely is the product the problem; instead, regulatory requirements should focus on the implementation of the derivatives strategy.135

The concept of risk management is more than a bank or corporation buying hedges; it is the idea of protecting the dollar value of the business.136 Corporate fiduciaries have a general duty to understand how to protect the dollar value of the business.137 The positive impact that risk management disclosure has had upon a company's net cash flows further evidences this point.138 Therefore, implicit in a corporate fiduciary's duty to protect the dollar value of the business is the duty to hedge insurable risks.139

Analogously, a trust fiduciary also has an implicit duty to hedge against insurable risks, especially given the availability of information regarding modern financial management techniques.140 A trustee also has a duty to protect trust corpus and the beneficiaries' entitlements,141 which is similar to a corporate duty to protect the dollar value of a business.142 This duty implicitly requires that a trustee be informed of risk management tools and hedging techniques.143

V. THE MODERN TRUSTEE'S DUTIES

A. A Duty to Hedge: The Changing Landscape

Levy v. Bessemer Trust Co.144 is a good example of a trustee's need to be informed of risk management tools and hedging techniques. In that case, Levy brought an action against Bessemer Trust Company ("BTC") seeking millions of dollars in compensatory damages "for negligence, gross negligence, negligent misrepresentation, breach of fiduciary duty, breach of the duty to supervise, breach of contract, and fraud."145 The Levy court found that the plaintiff adequately pled all causes of action but breach of contract, dismissing that claim for lack of specificity in the pleadings but granting Levy leave to replead that allegation.146

Originally, Levy approached BTC with a large equity position he received in consideration for his business in a merger transaction with Coming Incorporated.147 BTC specifically represented to Levy that the company had "special expertise in providing financial services and investment advice to high net-worth individuals" and managing equity positions.148

In numerous conversations with BTC account representatives, Levy stressed the importance of protecting his position in Corning from price depreciation.149 BTC explained to Levy that no immediate means were available for protecting against a downward move in the stock price.150 Levy, unsatisfied with BTC's response, sought further advice and eventually closed his account with BTC and reopened it with Paine Webber.151 Unfortunately, Corning stock had experienced substantial price depreciation by the time Levy's position was hedged.152