Mid Atlantic Capital Corp., an independent broker-dealer, lost a $922,000 arbitration award on Tuesday to a couple who sued the company over sales of illiquid real estate private placements and nontraded real estate investment trusts.
The claimants, married couple Beverly Bien and David Wellman, claimed negligence, negligent representation, omissions and other allegations in the matter, which was decided by a three-member panel of Finra Office of Dispute Resolution arbitrators.
According to the award, the claimants' invested in a real estate private placement, Sonoma Ridge Partners, as well as nontraded REITs sponsored by KBS. They also bought oil and gas securities and silver and gold exchange-traded funds.
“We're very disappointed by, and disagree with, the decision,” said Erin Fischer, vice president and general counsel of Mid Atlantic
Capital Group. “We're considering our options regarding the matter.”
Mid Atlantic Capital is part of a wider group of financial services companies that operate under the Mid Atlantic brand.
Ms. Fischer declined to answer questions about the firm's advisers managing the private placement in question.
“We've never done significant illiquid investment business,” she said, adding that revenues from such investments did not make up 1% of the firm's total fees and commissions in a given year.
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The claimants' attorney, Bruce Oakes, said one issue that stood out in the claim was that two brokers from Mid Atlantic were managing the private placement while other brokers at the firm marketed and sold it to clients, creating a clear conflict of interest.
The real estate investments were holdovers from before the 2008 credit crisis, Mr. Oakes noted.
Sonoma Ridge Partners, originally called the Jadda Secured Senior Mortgage Fund, raised about $30 million from investors, was supposed to yield 9% to 11% annually and was marketed as an alternative to the volatility of the stock market as well as low-yielding certificates of deposit, Mr. Oakes said. His clients invested in the fund in 2007 and soon thereafter bought the KBS REITs, he said.
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Ms. Bien bought the majority of the illiquid real estate investments, Mr. Oakes said, adding that she did not have the required net worth to be considered an accredited investor, which is necessary under industry rules to buy private placements.
“At the time of investing, my clients were nearing retirement,” Mr. Oakes said. “The arbitration panel was thinking we really need to make her whole.”
In a multilayered award, the arbitration panel ordered Mid Atlantic Capital to pay Ms. Bien $240,000 for an initial investment loss and $437,000 in compensatory damages, as well as $47,000 to Mr. Wellman in compensatory damages. The panel also ordered the firm to pay both Ms. Bien and Mr. Wellman $52,000 for an initial investment loss, attorneys' fees of $119,000 and unspecified costs to the couple of $27,000.
