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Panel Awards $8.8M to SLO-based WealthWise Clients

3/24/2009

San Luis Obispo Tribune

SLO County investors put money in risky hedge fund promoted as safe by adviser, regulator says

More than $8.8 million has been awarded to a group of San Luis Obispo County investors – clients of Jeffrey Forrest of WealthWise LLC in San Luis Obispo – who lost millions in what amounted to a risky hedge fund that Forrest claimed was safe.

A panel of the Financial Industry Regulatory Authority (an independent regulator of U.S. securities firms) found that Forrest, who had been a broker with El Segundo-based Associated Securities, steered customers to the APEX Equity Options Fund. That was a highly speculative investment that he promoted as providing safety, security and liquidity of investor principal, according to attorneys representing 16 local households.

The fund, worth more than $40 million, was wiped out in 2007 with massive losses after making speculative investments.

Forrest’s representations to his clients about the “safety and liquidity of their investments in APEX, in light of what Forrest knew and understood from the written offering documents constitutes fraud or deceit within the meaning of California law,” said Phil Aidikoff, an attorney for Beverly Hills law firm Aidikoff, Uhl & Bakhtiari, which represented the investors.

But Forrest told The Tribune Monday that he was “greatly disappointed with the findings of the panel,” saying that its decision was not “based on the evidence but was determined by the irrational business climate of today.”

“I am considering my options, including an appeal to the state courts to set the award aside, as it is flawed,” Forrest said.

He also noted that he was pleased that the panel “fully exonerated me on claims that I was wrong in advising my clients to buy Florida Capital, San Luis Trust Bank, Kennedy Clubs and Estate Financial.” Forrest had recommended those investments to clients, and only a small percentage of them chose to participate. The panel denied requests for damages in those instances.

Kennedy Clubs refers to the group of health clubs operating in San Luis Obispo County. Estate Financial Inc. was a Paso Robles-based lender who took investors’ money and lent it to developers, with the promise that the investments would generate double-digit interest. The principals of that firm are now in County Jail awaiting trial on charges of defrauding investors. The company’s future is being determined in U.S. Bankruptcy Court.

In the APEX investment, the panel said that Forrest, who earned undisclosed fees of more than $800,000 in the two years that he promoted the APEX fund, touted his expertise with options trading, saying to one client that she should ignore the disclaimers about APEX’s risk because it was “legalese.”

“Forrest then went on to tell her that he rated the risk of investing in APEX on a scale of 1 to 10 (with one being the “safest”) as a two or three notwithstanding that options trading, especially naked options trading, as was done here, is probably a nine or 10 on that same 10-point scale,” according to the panel. Forrest also encouraged some of his clients to borrow money against their homes to invest in APEX, the panel said.

As well, the arbitration panel found that Associated Securities was also jointly and severally liable (plaintiffs may collect their entire judgment from Forrest or Associated Securities) for Forrest’s conduct because it had a responsibility to supervise his conduct and failed to do so, Aidikoff said.

Aidikoff said the award represents 100 percent of the money the firm’s clients had invested in the APEX fund, and that it’s unusual for a panel to offer full damages.

Forrest and Associated Securities could file a petition to vacate in state court, and if so, it could result in a 90-day delay.

“The panel gave them 100 percent of their money back,” said Aidikoff. “A fraud is a fraud. Regardless of their financial savvy, the panel understood that you’re not permitted to defraud any customer irrespective of their experience or education about the markets.”

Forrest declined to say whether he had the money on hand to pay the judgment.

He had a different view of the panel’s conclusions, noting that it found that “the claimants were sophisticated, experienced investors who heard from the APEX fund managers directly that their investments would be safe.”

“I am faulted for repeating what the fund managers told me and my clients,” Forrest said. “The panel also correctly notes that theft of the money by APEX fund managers caused the losses, but then blames me for recommending that the investments be made.”

Two additional arbitration hearings have been scheduled, one April 13 and another May 5, Aidikoff said. The remaining client losses amount to about $5.1 million. Another arbitration case was settled for an undisclosed amount last year.

A civil trial against Forrest by a Huntington Beach property developer is also pending in federal court. The Securities and Exchange Commission also has charged WealthWise and Forrest with fraud.


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