QA3 Financial Corp., already enmeshed in a dispute with its insurance company, has lost a $1.6 million arbitration claim to an elderly couple who invested in real estate deals that went bust.
The three-member Financial Industry Regulatory Authority Inc. panel said that QA3 “did not adequately supervise” James R. Files, the broker who sold the deals. It also said that the firm “had limited direct contact with Mr. Files and did not show that it had provided him any specific training on the sale of TICs,” or tenant-in-common exchanges, a popular real estate investment in the past decade.
The plaintiffs, Arthur and Mary- ann Cargill of Wilton, Calif., are in their 70s. When they bought the TICs, they were “in less-than-perfect health and had very limited investment experience and limited financial reserves,” the Finra award panel said.
The panel took aim at how QA3 sold the real estate product.
“QA3 provided substantial evidence and testimony that it had a comprehensive set of practices and procedures concerning the internal approval and marketing of products it approved for sale by its representatives,” the panel wrote. “However, there is also substantial evidence that its marketing and sales approval practices and procedures were routinely ignored.”
The award stems from sales of limited partnerships packaged by DBSI Inc., one of the biggest creators and distributors of TICs until it defaulted on payments to investors. DBSI filed for Chapter 11 bankruptcy protection in November 2008.
The Finra panel rescinded two real estate transactions between Mr. Files and the clients, and ruled that QA3 would have to buy back the deals for $1.38 million. It also ruled that QA3 was liable for $212,000.
Mr. Files, who worked out of a QA3 branch in Rosedale, Calif., was held liable for $87,000. He couldn't be reached for comment.
TICs gained in popularity after a favorable Internal Revenue Service ruling in 2002 that allowed investors to defer capital gains on commercial real estate transactions involving the exchange of properties.
“This is the largest DBSI arbitration award issued to date,” Kalju Nekvasil, the Cargills' attorney, said in a statement. He added that “the evidence at the hearing showed that QA3 approved some DBSI transactions before a due-diligence review was completed.”
But Greg Bolton, QA3's general counsel, disputes that claim. “Opposing counsel made that allegation at the hearing, but the panel never ruled on it,” he wrote in an e-mail.
The Finra panel's decision is an “interim” award, meaning that it retains jurisdiction over the parties while they unwind the transaction, said Rick Ryder, president of Securities Arbitration Commentator Inc., which publishes industry newsletters.
According to the award, the Finra panel retains jurisdiction in the matter for 180 days.
“The award in the Cargill case is an interim award calling for rescission of a 1031 exchange based upon suitability and supervision at the point of sale,” Mr. Bolton said.
“QA3's due-diligence procedures were not a factor in the award. QA3 is continuing to analyze its options,” Mr. Bolton said.
Meanwhile, QA3 Financial indicated in a lawsuit in September that it was facing bankruptcy because of a dispute with its insurance carrier. The two parties disagree over the amount of money the insurer owes QA3 to help cover legal costs stemming from the B-D's sale of high-risk private placements.
In a statement last week, Stephen Wild, QA3's chief executive and owner, said that the firm faces bankruptcy because Catlin Specialty Insurance Co. has refused to pay legal invoices sent to QA3 by the broker-dealer's lead law firm. An attorney for the insurer didn't return a request for comment about the suit.
E-mail Bruce Kelly at [email protected].
