Citigroup Global Markets Inc. last Monday was hit with a hefty $3.1 million arbitration award after two investors claimed that their broker directed them into real estate developments that went bad.
The three-member Financial Industry Regulatory Authority Inc. panel signed off on the award. The plaintiffs, Dr. Nasirdin Madhany, 66, and Zeenat Madhany, 63, originally filed their claim in 2010.
Citigroup Global Markets, formerly known as Smith Barney, “is liable for breach of fiduciary duty as financial adviser to claimants, as well as negligent supervision,” according to the award.
“We disagree with the award, which was not supported by the facts or law,” Citigroup spokesman Mark Costiglio wrote in an e-mail.
TWO PARTS
The award is split in two parts. In the first, Citigroup is on the hook for $1.04 million in compensatory damages to the claimants for investments in two developments in the Florida Panhandle. The second states that Citigroup is liable to pay the Madhanys $2.1 million as part of a settlement from a separate lawsuit stemming from a loan guarantee they signed for one of the failed real estate projects.
In 2003, the Madhanys' Smith Barney broker, Scott Andrew King, referred his clients to Lawton “Bud” Chiles III, the developer of the two real estate developments, according to the Madhanys' 2010 amended statement of claim. Mr. Chiles is the son of former Florida Gov. Lawton Chiles.
Mr. King left Smith Barney in 2005 to join Wachovia Securities LLC.
Mr. Chiles did not respond to a request for comment; nor did Mr. King, who was not named as liable in the Finra arbitration award.
In alleged violation of Finra rules, Mr. King arranged and/or participated in meetings between the Madhanys and Mr. Chiles by holding events designed to introduce potential investors to him, according to the investors' complaint.
By recommending that the Madhanys invest in Mr. Chiles' real estate projects while registered with Citigroup Global Markets, Mr. King allegedly violated Finra rules that prohibit an adviser from engaging in outside business activities or private securities transactions, according to the complaint.
The two condominium developments went into foreclosure in 2010, and that's when the Madhanys realized their losses in the two developments, said Jeffrey Sonn, their attorney.
The Madhanys and several other investors signed personal-loan guarantees in connection with a $12 million loan to one of the projects by the former Wachovia Bank, which later sued the guarantors. Citigroup also must reimburse the couple up to $10 million if they are required to pay the entire judgment amount in that case, according to the ruling.
