A broker-dealer that has said it will shut down has lost a multimillion-dollar arbitration, this time stemming from the sale of real estate securities known as tenant-in-common exchanges.
A three-person Financial Industry Regulatory Authority Inc. arbitration panel March 6 awarded $2.1 million to a former client of a broker affiliated with Pacific West Securities Inc. of Reston, Wash.
In December, Pacific West chief executive Tony Pizelo said that the firm would close this month and that it had entered into a recruiting deal to move its brokers to Multi-Financial Securities Corp., one of the broker-dealers owned by Cetera Financial Group.
When investors win arbitration claims against a broker-dealer that is out of business, they aren't likely to see any money from the awards, securities attorneys note routinely.
In its filings with Finra for the approval of the transfer of the representatives to Multi-Financial, Pacific West budgeted for payments of arbitration awards, said Chris Youtz, the attorney for the claimants at Sirianni Youtz Meier & Spoonemore.
However, the details of that document were redacted in the copy that he saw, so Mr. Youtz said that he has no idea the exact amount the firm budgeted.
“I don't know how all this fits in with [Pacific West's] budget. They may not have budgeted enough,” Mr. Youtz said.
“The claim is significant,” he said. “You don't see many seven-figure awards.”
The claimants, Joseph and Marilyn Lightfoot, alleged that the TICs weren't suitable for them, “given their age, financial condition, cash flow needs, risk tolerance, over concentration in real estate and for other reasons,” according to the award.
$200,000 IN FEES
Included in the award were $200,000 in legal fees and interest.
“We intend to pay. Even with this judgment, we have sufficient re-serves to pay,” Mr. Pizelo said.
But “it may be a stretch,” he said.
When asked whether the firm had money on hand to pay other potential legal claims, Mr. Pizelo said that he had been advised by his attorney not to comment further.
Pacific West's profile on BrokerCheck indicates that it hasn't yet filed papers with Finra to close or withdraw from the securities industry.
“Given that this is a recruiting deal only, the litigation has nothing to do with us,” said Shayna Inman, a spokeswoman for Cetera Financial Group. “There was no purchase of the assets of the company.”
The Finra arbitration panel had a stiff assessment of Pacific West and its broker's sale of the TICs, particularly the lack of a suitability analysis.
“Among other evidence of a violation of a standard of care under the Securities Act of Washington [state] was the disavowal by [Pacific West and its broker, William Swayne II] of any obligation to conduct a suitability analysis for the sale of TICs in the circumstances of a Section 1031 like-kind-assets exchange for tax deferral purposes,” according to the award. The arbitrators “determined that the sale of these securities to [the Lightfoots] violated the duty of reasonable care.”
Mr. Swayne isn't affiliated with the Cetera broker-dealer, Multi-Financial.
Mr. Swayne couldn't be reached for comment last Tuesday.
As broker-dealers continue to shut down, drowned by the weight of legal claims, attorneys have said that it is growing increasingly difficult — if not impossible — to get money to pay for arbitration awards or legal settlements.
This month, attorney John Chapman said that a broker-dealer in the middle of selling its assets — namely access to its reps — has yet to pony up a penny toward the millions of dollars that it agreed to pay to settle with fraud victims who are mostly federal law enforcement personnel and their beneficiaries.SETTLEMENT REACHED
Capital Analysts Inc. in December reached a settlement with Mr. Chapman, attorney for 140 victims of a Ponzi scheme operated by Kenneth Wayne McLeod, who committed suicide in June 2010 after admitting to SEC investigators that he had orchestrated the $34 million scam.
Most of Mr. McLeod's victims are current or retired federal employees, and many are stationed abroad, including in Afghanistan, Mr. Chapman said.
Capital Analysts said last month that Lincoln Investment Planning Inc. would buy the firm's assets. Capital Analysts is owned by insurer Western & Southern Financial Group.
Jose Marques, a spokesman for the insurer, said this month that the sale of Capital Analysts assets “has no bearing whatsoever on any funding needed to address the claims of Mr. Chapman's clients.”
bkelly@investmentnews.com
