Broker who sold troubled securities awarded $4.3 million in arbitration
A $4.3 million arbitration award to a broker who was encouraged by his former firm to sell securities that later failed could spawn similar complaints from other brokers.
The unusual ruling, issued late Wednesday by a Financial Industry Regulatory Authority arbitration panel, requires Los Angeles brokerage Wedbush Securities Inc to pay the broker after nearly a decade of litigation stemming from the securities.
He had alleged that the firm failed to properly disclose the risks of mortgage-backed securities he sold to his clients. The clients who bought them later lost money and filed their own complaints against the firm, which now appear on the broker’s permanent record. He said he lost clients and income, according to the ruling.
The decision could open the door to cases by other brokers who have become targets of customer arbitration cases, after the securities that their firms had promoted as safe later failed, securities lawyers say.
“I’ve never heard of anything like that,” said Michael Sullivan, a lawyer in Morristown, New Jersey, who represents brokers.
The case means more brokers may seek compensation from their firms if their businesses are hurt by passing along the misleading claims of their brokerages to customers, Sullivan said.
“We wholeheartedly disagree with the ruling and are currently reviewing our options,” said Wesley Long, head of private client services for Wedbush Securities, in a statement.
The former broker, Michael Farah, now runs a registered investment advisory firm in Newport Beach, California. He became entangled in a string of arbitration cases filed by customers against Wedbush in the mid-2000s, stemming from mortgage-backed securities they had bought through him.
Among the clients who lost their money: the Sisters of St Joseph of Carondelet, an organization of nuns in Los Angeles.
The cases include a $3.8 million award to a group of investors in 2006. Wedbush later settled numerous arbitration cases with Farah’s clients but won at least one case involving the securities as recently as last year, according to regulatory filings.
Farah was never found liable in the arbitrations, said Philip Aidikoff, Farah’s lawyer in Beverly Hills, California.
The mortgage-backed securities involved were an earlier version of the types that led to the financial crisis of 2007 to 2009, said Craig McCann, an economist in Fairfax, Virginia, who testified on behalf of the investors in some of the cases. They were not backed by major government-sanctioned mortgage issuers, such as Freddie Mac and Fannie Mae, making them a risky bet that depended strictly on whether the borrowers whose loans were bundled into the securities made their payments, he said.
Farah originally filed his case against Wedbush in 2005 and left the brokerage that year to launch his own firm.
Wedbush responded to Farah’s arbitration case with a $9.3 million countersuit, which the panel threw out.
The ruling against Wedbush includes $1.4 million in punitive damages against Wedbush. Punitive damages, which aim to punish parties in legal actions for misconduct, are rarely awarded in securities arbitration cases, lawyers say.
Wedbush must also must reimburse Farah $1.2 million for legal fees he incurred to defend against the customer arbitrations, according to the ruling.