Schwab paying damages in lawsuits linked to RIA that sold structured notes

A three-person FINRA arbitration panel this month found Charles Schwab & Co. liable for damages to investors in a claim that involved complex products and a registered investment advisor that used Schwab to custody its assets. 

Schwab on September 15 was ordered to pay $165,440 in compensatory damages to Timothy Washburn, the client of Vora Wealth Management, a defunct RIA in Arizona whose founder, Dharmesh Vora, made big bets on structured notes tied to four NASDAQ-listed stocks and lost millions of dollars of client money along the way.

It was the second such decision to go against Schwab this year.

In March, the giant discount brokerage and leading RIA custodian was found liable by a three-person FINRA arbitration panel to pay compensatory damages of $167,950 to Linda and Jay Despain, who were also clients of Vora Wealth Management, according to an attorney representing both plaintiffs against Schwab.

The investors in both claims made a variety of allegations against Schwab, including negligence and a breach of fiduciary duty. 

Investors and plaintiff attorneys have been arguing for years that RIA custodians like Schwab and Fidelity should be sued via FINRA Dispute Resolution Services in such disputes because those firms have obligations when involved in sales of structured products – or other complex investments – to vet those products.

FINRA Dispute Resolution Services is a private industry forum through which most clients file lawsuits and complaints against firms and individual financial advisors.  

Both clients sought more in damages against Schwab.

“We disagree with the panels' decisions in these matters,” a Schwab spokesperson wrote in an email Wednesday morning. “These nominal awards were made despite overwhelming legal authority to the contrary, and we continue to evaluate our next steps.”

An attorney for the plaintiffs, Matt Thibault, declined to comment.  

Dharmesh Vora, who the Securities and Exchange Commission (SEC) barred from the securities industry last year, was not named in either investor complaint, with Schwab the sole respondent, although Vora was never registered as a broker at Schwab. 

Broker-dealers are regulated by FINRA and RIAs are overseen by the SEC and states.

There have three such cases so far brought against Schwab involving Vora, and plaintiffs have two and lost one. All the investor claims involve structured products; more claims are likely pending. 

Vora sold the structured notes from November 2020 to November 2021 and he did not inform clients that he bought the securities, often with money from sales of annuities, until the transactions appeared on client accounts, according to the SEC. All told, Vora used $124 million of clients’ $139.5 million in assets to make those transactions.

It all began to go bad in November 2021, when one of the four stocks in the structured notes' basket fell below the 50% downside protection level, which terminated the coupon payments to clients, and that stock never recovered, according to the SEC.

As of July 2024, most of the structured notes have reached maturity, and Vora Wealth's clients' accounts have a collective realized loss of their principal of over $89 million.

“Additionally, during this same period, Vora Wealth and Vora received undisclosed benefits from one of the brokers through which they purchased most of the notes, including a wine tasting, as well as payments to subsidize a Vora Wealth client event,” according to the SEC.