Thursday, October 24, 2013

Brokerage Firm Fined for Misrepresentations Made to Former Broker

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

When brokers sell unsuitable investments to their clients, it is often the case that those clients will sue the broker and the brokerage firm, a process known as 'broker-customer disputes.'  What is less common is for brokers to sue the brokerage firm -- their own employer -- for encouraging them to sell risky investments that caused losses for their clients.

In a recent, closely-watched FINRA arbitration, Michael Farah of Newport Beach, California won approximately $4.3 million from his former employer, Wedbush Securities, for misrepresenting the riskiness of collateralized mortgage obligations (CMOs) he sold to clients.  The award included $1.4 million in punitive damages.  Our own Dr. Craig McCann testified on behalf of Mr. Farah, and has testified on behalf of the clients in arbitrations that resulted from the sales.  You can find the recent award here, and a related customer dispute here.  The result has been picked up by both Reuters and, more recently, the Wall Street Journal.

CMOs are mortgage-backed securities similar to those that have been implicated in the 2008 financial crisis.  You can learn more about CMOs from our 2008 primer (PDF).  These securities have very complex interest rate and credit risk factors that are difficult for most unsophisticated investors to understand.

This result could lead to other similar disputes between brokers and their current or former employers.  Many brokers have faced waves of customer complaints from selling risky securities both before and after the financial crisis, which could impact their standing with current or potential customers.  It will be interesting to see if the risks of those securities was misrepresented to brokers as they often are misrepresented to customers.

No comments:

Post a Comment

Please keep comments appropriate. Malicious comments or solicitations will be removed.