Wave of Finra arbitration claims expected from bad bets on energy

Investors claim brokers put too much of their nest eggs into oil and gas companies

Mar 16, 2016 @ 10:30 am

By Christine Idzelis

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Clint Manzonie, 42, of Parker, Colo., says he lost $1 million, part of the proceeds from the sale of his construction business.

James and Patricia Merritt of St. Augustine, Fla., a couple in their mid-70s, claim they lost about $400,000 of their retirement savings.

And Lee Nelson, who will turn 63 this month, says the $250,000 he lost means he'll never be able to retire.

All of the investors lost their money in oil and gas investments and are part of what is expected to be a wave of arbitration claims this year against advisers. In each case, they claim their advisers put too much of their money in energy investments that cratered as U.S oil prices collapsed.

One law firm alone, the Soreide Law Group, has filed 11 oil- and gas-related arbitration claims with the Financial Industry Regulatory Authority Inc. this year, up from four in all of 2015 and none in 2014, according to Lars Soreide, the lead attorney at the firm. He said more are in the works.

“It'll go on as long as oil is below $50 a barrel,” said Mr. Soreide, who expects his firm will see one new claim a week. “It'll go on for a very long time.”

Even with this year's rally, U.S. crude prices of around $37 a barrel remain about 65% percent below the 2014 peak.

High-yield default rates in the energy sector are expected to spike to 20% this year from about 7% at the end of 2015, and less than 1% percent in December 2014, according to Fitch Ratings. The trailing 12-month default rate among exploration and production companies will jump even higher by the end of 2016, to between 30% and 35%, Fitch estimates.

MORE ON THE WAY

Although it's hard to tell how many arbitration claims could eventually be filed, Mr. Soreide said it's likely more are on the way. Many investors don't become aware of the extent of their losses until they receive their year-end statements from their broker, or around April, when their accountant points them out, according to Mr. Soreide.

Mr. Manzonie had heard of wealthy people living off their investments and after he sold his business in 2013, he wanted to do the same thing. He turned to a broker with Cetera Advisors for help and initially the adviser made him some money in a non-traded real estate investment trust.

According to his claim, Mr. Manzonie's broker then started investing a $1.2 million discretionary account almost exclusively in energy investments. They included oil and gas producer Linn Energy, AmeriGas Partners and British Petroleum, among others. Linn Energy said Tuesday in a Securities and Exchange filing that a Chapter 11 bankruptcy may be “unavoidable.”

As Mr. Manzonie began to express concern about the decline in value of his account, he said his broker argued in favor of the investments. There was another surprise.

“He cashed in my 401(k) without my knowledge to pay off margin loans,” said Mr. Manzonie, explaining that the broker had borrowed against the value of his trade account to make additional bets in energy. The loans had to be repaid after the energy slump dragged down the value of his account, adding to his losses, he said.

“It all caved in on me at once,” said Mr. Manzonie, who is being represented by Soreide Law Group. He is seeking about $1 million in damages.

Joseph Kuo, a spokesperson for Cetera Financial Group, the parent company of Cetera Advisors, declined to comment citing pending legal matters.

Today Mr. Manzonie is back doing construction projects and landscaping work with the few pieces of machinery he kept when he sold the company he'd built. “I was forced back to work,” he said.

James Merritt and Patricia Merritt, a St. Augustine, Fla.-based couple in their mid-70s, also claim to have had their retirement savings hurt by soured energy investments.

In January, Mr. Soreide filed a Finra arbitration claim against brokerage firm Raymond James Financial Inc. to recover about $400,000 of damages on their behalf.

DOWNSIDE PROTECTION

The claim says a broker with Raymond James began to make “large concentrations” of oil-and-gas-related investments in 2012. By 2014, more than 50% of the couple's investments were tied to the sector with no hedging strategy or downside protection, according to the claim.

Amid the declines, the broker advised them to stay in oil and gas as they'd eventually be “pleasantly surprised,” Mrs. Merritt said. But by December of 2015, as she looked over their account and budget for the next year, she said she'd seen enough.

“The surprise was more like a shock,” said Mrs. Merritt, and the couple decided to move their account over to UBS Group AG.

Anthea Penrose, a spokeswoman for Raymond James, declined to comment on the arbitration claim.

Among Soreide Law Group's first energy-related Finra arbitration cases last year was a claim filed in September by Lee Nelson, a resident of Arnold, Mo. who works in trucking services.

Mr. Nelson, who hired a broker at Moloney Securities Co. after hearing a radio advertisement in 2011, wanted to build a conservative portfolio of income-producing investments to sustain him in retirement, according to the claim.

NO PATH TO RETIRE

By 2014, more than 90% of his account was concentrated in oil and gas, costing Mr. Nelson more than $250,000 of his retirement savings, the claim states.

“I'll end up dropping dead on the job,” Mr. Nelson said. “There's no way I'll ever be able to retire.”

Ted Moloney, president of Moloney Securities, said he couldn't comment at this time “given the pending and ongoing nature of this arbitration claim.”

It can take nine to 12 months before a claim filed with Finra goes to an arbitration panel, and another 30 days before any potential award is announced, according to Mr. Soreide.

Soreide Law Group, based in Pompano Beach, Fla., isn't the only law firm seeking to help retired investors recover losses from brokers who exposed them to energy investments.

The White Law Group said March 7 it filed a a Finra arbitration claim against Morgan Stanley on behalf of a retired couple from North Carolina, alleging a broker with the firm failed to adequately disclose risks involved in a proprietary energy-related investment.

VIETNAM VET

The husband, a 67-year-old disabled Vietnam veteran, and his wife, a 64-year-old a retired school teacher, lost more than $100,000 after the broker placed about 70% of their $212,000 account into the Morgan Stanley Cushing MLP High Income ETN — an exchange-traded note tied to master limited partnerships that hold energy and shipping assets, according to D. Daxton White, a managing partner with the law firm.

Mr. White said his firm's evaluating other cases involving oil and gas investments and that he'd expect to see more arbitration claims involving MLPs should the dividends they pay decline.

“MLPs pay a very attractive yield, but they come with very enormous risk,” said Mr. White. “It's not until the income dries up that investors typically start calling lawyers like us. I do think this is going to be a big problem this year.”

Mr. Soreide said there's only so long that investors living off their retirement savings can hold on and wait for a market to recover before they finally pull the trigger and exit a slumping bet. Piling investments into energy subsectors doesn't count as diversification, as some of his clients were told by their brokers, he said.

“When you have all your money into one idea, and it's going off a cliff, you have no choice but to sell,” said Mr. Soreide. “These are irreplaceable, devastating losses.”

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