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In 1994, Princeton attorney Anne McHugh won $2.5 million for a client who dove down a water slide into a pool only four feet deep and was rendered a quadriplegic when his head hit the bottom. The money was placed in a trust. It was a good time to invest; as the 1990s wore on, the trust ballooned to about $9 million. But, like almost everyone who enjoyed huge gains in the tech boom, McHugh’s client found that what the stock market giveth, it can also taketh away. In the crash of 2000 and 2001, the trust lost about $1 million of its principal, she says. Now, McHugh claims in a suit filed on Feb. 25, the bank must pay for its negligent operation of the trust, which was overly concentrated in just three stocks. In a response last Friday, the bank disagreed with McHugh’s reading of events – and even her math – by alleging that the client withdrew $3 million from the account in 2002 and received an extra $3.7 million in payments over the lifetime of the trust. In addition to the obvious issue of the bank’s fiduciary diligence to the client, the suit raises the more nebulous question of what happens to jackpot settlements and whether attorneys could do more to help their clients preserve them. “If you went around the courthouse and contacted people who won, you’d find an astoundingly high number of people have lost every penny in five years,” says William Gallagher Jr. of Klitzman & Gallagher in Asbury Park, who is not involved in the suit. “It’s misspent. They bought the family Cadillacs. The track records of injured people receiving large sums of money, and holding onto it, is not that good.” Brian Drazin, president of the Association of Trial Lawyers of New Jersey, says that sometimes he will offer no advice to clients leaving his office with life-changing settlement checks. “I typically urge clients to get several options,” Drazin says. “I usually advise them to be very careful. I tell them not to get advice from just one person. Or I don’t give them any advice at all. It’s not within the scope of my obligations. I offer them friendly advice, but it’s not legal advice.” Plunging Into the Market McHugh’s suit, filed with her colleague at Pellettieri, Rabstein & Altman, partner E. Elizabeth Sweetser, is the latest in a line of litigation the swimming pool injury specialist has pursued on behalf of her client. Craig Sklodowski broke his neck in August 1990 during a visit to the Thundering Surf amusement park in Beach Haven. The 22-year-old went head first down a 350-foot water chute, snapping his neck in a shallow pool at the end of the slide. The suit states that he won a settlement of $2.5 million. McHugh then brought a defamation suit against a lobbyist for the amusement park industry, who had urged a change in the law to curtail such suits. The lobbyist had told legislators that Sklodowski was drunk or on drugs when he was injured, and McHugh extracted a $105,000 settlement from him the same year. It all went into a trust operated by First Fidelity, which was ultimately acquired by Wachovia. The bank assigned a “young, inexperienced employee” to manage the trust “because he was about the same age as Craig,” McHugh claims, and the money was invested aggressively: 75 percent in stock, 20 percent in fixed income vehicles and 5 percent in cash. As the stock market swelled with what Federal Reserve Chairman Alan Greenspan called “irrational exuberance,” Sklodowski’s fortune grew accordingly. The value of the trust topped $9 million at its height. By 2000, 89 percent of the money was in stock – a position guaranteeing high returns at an equally high risk. Too risky, as it turned out. Forty percent of the stock was invested in technology equities at one point, the suit states, with three stocks being heavily represented. The suit says $1 million was invested in Cisco alone, and another $1.5 million was in EMC, a marketer of computer storage devices. In 1999, Sklodowski asked the bank for advice about the purchase of a second home in Surf City – one of New Jersey’s hottest real estate markets. Rather than cash out some of the trust, the bank gave him a $2.2 million loan, McHugh claims. The market collapse in 2000 and 2001 eviscerated Sklodowski’s portfolio, leaving him with modest resources to service the debt, McHugh says. McHugh claims the understanding was that the bank would manage Sklodowski’s money – his sole financial support – in such a way that it would maintain him for the rest of his life. The suit says that the bank had “exclusive discretionary power” over the investments and that it had “expressly and impliedly agreed” to ensure that the trust remained healthy. Thus, the client is owed money. Wachovia, of course, describes a different version of events. On Friday, it responded with a complaint in Burlington County’s Probate Part demanding a settlement of the trust’s accounting. (McHugh’s suit is filed in the Law Division.) The papers, filed by Archer & Greiner partner Steven Mignogna, describe a rosier series of events, although they do not specifically counter all McHugh’s allegations. Over the life of the trust, Sklodowski received about $3.7 million in payments from the trust, the court file indicates. In 2002, when Sklodowski terminated the trust, he took another $3 million. In other words, despite the NASDAQ rollercoaster, Sklodowski spun a $2.5 million investment into $6.7 million in cash, Mignogna claims. Mignogna declines comment. Christy Phillips, a Wachovia spokeswoman, says that the bank does not comment on customer relations but its executives “believe we acted appropriately.” No Structure When cases are settled, those payments are often converted into a structure, especially in the case of juveniles who may be tempted to blow their windfall on cars or vacations. A structure – composed of annuities, bonds or a small amount of utility stock holdings – generally provides a conservative but guaranteed rate of return, and a steady stream of income. It is especially attractive for clients like Sklodowski who are unlikely to find work. So why didn’t Sklodowski take such an option? “Anybody with a scintilla of financial wherewithal and knowledge knows it’s better to take the lump sum and purchase your own protection, your own investment in your own future,” McHugh says. “I don’t think from a financial planning perspective it’s a wise move. I said [to Sklodowski] one of the things I insist on is that you have a trust agreement.” McHugh continued, “I don’t purport to have the financial expertise that Wachovia claimed they had. So when I concluded this case the one thing I did suggest was that the money go with a bank rather than a stock broker like Merrill Lynch, and that it be put into a trust and that a trust instrument be drafted so he would have recourse, so the bank did not act irresponsibly.” ATLA’s Drazin bridles at the notion that McHugh should have negotiated a structure from the defendant in settlement of the original suit. “That is so far from the expertise of a lawyer, and the lawyer typically has no control, no legal ability to control what the client does with that money,” he says. He also notes that a structure is only as good as the insurance company that owns it, and that the holding can end up at a less stable or reputable institution if it is sold or acquired in a merger. If successful, McHugh’s unusual claim could open up a new line of secondary actions for personal injury lawyers. “It’s not your red car, blue car case,” she says. “I think you’ll see more of these in the next few years, given what’s happened in the market. Many of these institutions and banks have not acted responsibly.” Lawyers, of course, are not financial planners and are not in a position to monitor their clients’ winnings. But Drazin, McHugh and Gallagher note that the advice of attorneys to their successful clients is fairly patchy. Some invested settlements come with cast-iron guarantees for clients regardless of financial performance, and are only entered into after an outside expert has been retained to review options. With others, the devil takes the hindmost. “In the average settlement, regardless of the size, the client receives a check and a handshake and if he doesn’t require or desire any advice he walks out of the office with the money,” says Asbury Park’s Gallagher. “It would be interesting to compare some of these large settlements with people who won the lottery.”

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