Wedbush To Pay Former Broker $4.3M Over Sour CMOs
Wedbush Securities Inc. has to pay one of its former brokers nearly $4.3 million in lost income and attorneys’ fees after an arbitration panel ruled Wednesday that the broker lost clients due to the California firm’s misrepresentation of certain mortgage-backed securities.
Ex-Wedbush broker Michael Farah won a lengthy battle on Wednesday against his former employer over risky collateralized mortgage obligations, which the firm allegedly touted as safe investments and encouraged him to sell but eventually tanked, according to arbitration filings.
A Financial Industry Regulatory Authority arbitration panel ordered Wedbush to cover the costs of Farah’s lost income as a result of the failed CMOs, as well as attorneys’ fee racked up during the various arbitration proceedings launched by clients over alleged misrepresentations of the securities.
An attorney for Farah, Philip Aidikoff, said the scope of the victory was unusual, but not surprising.
“It is unusual, but the facts in the case were very compelling,” he told Law360 on Thursday. “The panel listened to the evidence that the firm had engaged in bad behavior.”
Wedbush has denied the claims and voiced disappointment at Wednesday’s decision.
“We wholeheartedly disagree with the ruling and are currently reviewing our options,” Wesley Long, executive vice president and head of private client services at Wedbush, said in a statement.
Trouble began in 2001, when Wedbush’s bond desk started pushing CMOs as safe, bank-qualified investments, Aidikoff said. Following his employer’s advice, Farah started selling the securities, repeating the firm’s blessing to clients.
But in 2003, Farah started to see a significant drops in prices — a phenomena counter to the low volatility espoused by the firm, Aidikoff said. The broker started losing clients, and in September 2004, clients started filing actions against the firm. Farah resigned in February 2005, believing the firm would attempt to blame him for its misrepresentations, Aidikoff said.
Farah was involved in several client-led arbitrations but was never held liable for the soured CMOs, Aidikoff said. Farah now has his own advisory firm in Newport Beach.
In May 2005, Farah filed claims with FINRA alleging Wedbush made misrepresentations and omitted material facts in connection with the investments that he recommended to his clients, which ultimately caused him to lose clients and annual income, according to FINRA filings. The firm fired back with counterclaims, including interference with contractual relations and intentional misrepresentation.
The panel on Wednesday denied all of the firm’s counterclaims and awarded Farah in full, according to the award filing. Farah will receive $1.3 million in lost income, $1.4 million in punitive damages, more than $1.2 million in attorneys’ fees for this case, and the client-led proceedings and additional fees.
Farah is represented by Philip Aidikoff of Aidikoff, Uhl & Bakhtiari and David Harrison.
Wedbush is represented by Charles LaChaussee and John Erikson of Wedbush Securities.
The case is Michael Farah v. Wedbush Securities Inc., case number 12-02469.