A broker-dealer that has said it will shut down has lost a multimillion-dollar arbitration award, this time stemming from the sale of real estate securities known as tenant-in-common exchanges, or TICs.
A three-person
Financial Industry Regulatory Authority Inc. arbitration panel this month awarded $2.1 million to a former client of a broker affiliated with Pacific West Securities Inc.
In December, Pacific West chief executive Tony Pizelo announced 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 the Cetera Financial Group.
When investors win arbitration claims against a broker-dealer that is out of business, they are not likely to see any money from the awards, securities attorneys routinely note.
In its filings with Finra for the approval of the transfer of the reps to Multi-Financial, Pacific West budgeted for payments of arbitration awards, said Chris Youtz, the attorney for the claimants. However, the details of that document were redacted in the copy that he saw, so Mr. Youtz said he had no idea the exact amount the firm budgeted.
“I don't know how all this fits in with [Pacific West's] budget, he said. “They may not have budgeted enough. The claim is significant. You don't see many seven-figure awards.”
The claimants, Joseph and Marilyn Lightfoot, alleged that the TICs were not suitable for them, “given their age, financial condition, cash flow needs, risk tolerance, over concentration in real estate and for other reason,” according to the award, which was issued March 6.
Included in the award were $200,000 in legal fees and interest.
“We intend to pay, even with this judgment, we have sufficient reserves to pay,” Mr. Pizelo said. “It may be a stretch.”
When asked whether the firm had money on hand to pay other potential legal claims, he said that he had been advised by his attorney not to comment further.
Pacific West's profile on BrokerCheck indicates it has not 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 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 is not affiliated with the Cetera broker-dealer, Multi-Financial.
Pacific West is based in Reston, Wash. Mr. Swayne could not be reached for comment on Tuesday.
As broker-dealers continue to shut down, drowned by the weight of legal claims, attorneys recently have said that it is growing increasingly difficult — if not impossible — to get money to pay for arbitration awards or legal settlements.
Last week, attorney John Chapman said that a broker-dealer in the middle of selling its assets — namely access to its representatives — 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.
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 agency 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 insurance carrier Western & Southern Financial Group. Jose Marques, a spokesman for the carrier, said last week that the sale of Capital Analysts assets “has no bearing whatsoever on any funding needed to address the claims of Mr. Chapman's clients.”
