Legal Question in Investment Law in California

It will depend in part as to how the gift was worded. If it was a gift directly to the children, he would have to inform the children of the gift and what he intended as a a parent to do with it. He would have to act jointly with you as his rights as informal guardian are no greater than yours. If the investment was not a fairly safe one he breached his duty to the children and should be ordered to pay it back to them. The statute of limitations on filing suit as to them is held in abeyance until they reach the age of 18. Whether in a divorce proceedings a judge would order this type of loss back I do not know; it is not really an element of the divorce.

There are at least two possible theories of wrong-doing here. Obviously, one of them is breach of fiduciary duty, and the duty of a minor's custodian is to be prudent and conservative, and the size and abrupness of the loss certainly points in the other direction.

The other aspect to be considered is whether the father had any right to take the money and manage it in the first place. The right to act as custodian of a minor's property often has nothing to do with custodial rights to the minor(s) themselves. Instead, a substantial gift to a minor is usually made under the Uniform Transfers to Minors Act (Probate Code section 3900 et seq.), formerly the Uniform Gifts to Minors Act, and the transferor (giver of the gift) will specify who is to be the custodian of the property for the minor(s). The Act goes on to lay out rules for prudent management, appointment of successor custodians if necessary, turn-over to the minor, what uses benefitting the minor the gift can be used toward, and so on.

One of the aspects of a custodianship is that, when the custodial assets are invested in a brokerage account, the name of the account must reflect that it is a custodial account, e.g., "John Doe Sr., as Custodian for John Doe, Jr. under the California UTMA" or words to that effect. The reasons for this, among other things, are to assure proper tax reporting of dividends and capital gains and losses, and to guide the broker in making sure the investments are appropriate, e.g. no commodities or options. If the childrens' father put the money into an account not bearing the custodial designation, this may be further evidence of careless, reckless or even illegal conduct.