A former star Wedbush Securities broker wins a $4.2 million award against the firm in a case over pre-crisis sales of risky CMOs. It's the second big case the firm has lost in as many years. Bruce Kelly has the story.
A former star Wedbush Securities Inc. broker Wednesday won a stunning $4.2 million arbitration award against his old firm in a case that dated back to sales of risky collateralized mortgage obligations before the credit crisis.
At the heart of the claim by former Wedbush broker Michael Farah is the allegation that “Wedbush made misrepresentations and omitted material facts in connection with the collateralized-mortgage-obligation investments that he recommended to his clients, causing Farah to lose clients and annual income,” according to the award, which was issued yesterday by a three-person Financial Industry Regulatory Authority Inc. panel.
“We wholeheartedly disagree with the ruling and are currently reviewing our options,” Wesley Long, executive vice president and head of private-client services for Wedbush Securities, wrote in an e-mailed statement to InvestmentNews.
The case pitting Mr. Farah against Wedbush Securities, formerly known as Wedbush Morgan Securities Inc., has been years in the making. Mr. Farah filed his initial claim against Wedbush Securities in 2005 and an amended claim in 2012.
The panel broke the award into several parts, including $1.3 million to Mr. Farah from Wedbush for loss of income and $1.4 million in punitive damages. The award also included $1.5 million to Mr. Farah in legal fees in this claim and other arbitration proceedings.
It was the second significant, million-dollar arbitration award to a former Wedbush Securities employee in as many years. In 2011, a Finra arbitration panel awarded an ex Wedbush municipal sale trader $3.5 million for failing to give him years' worth of incentive-based compensation. In that award, the Finra panel cited the firm's “morally reprehensible failure and refusal to compensate.”
Punitive-damage awards are highly unusual in most Finra arbitration awards, which typically pit a broker-dealer against a disgruntled client. Such damages are even more unusual in a Finra arbitration claim involving a former star broker against a broker-dealer, said Philip Aidikoff, Mr. Farah's attorney.
Mr. Farah was with Wedbush Securities from 1995 to 2005. He now runs a registered investment adviser.
He was the “longtime No. 1 producer at the firm,” Mr. Aidikoff said, adding that Mr. Farah counted such institutions as the Sisters of Saint Joseph in Los Angeles among his clients.
Mr. Aidikoff said that Mr. Farah realized there were problems with the CMOs in 2003.
“He sold a lot [of the CMOs], in the millions,” Mr. Aidikoff said. “He was told they were a replacement for bonds. In January 2003, the price [of the CMOs] started dropping, and that was inconsistent with what bond desk told him about the volatility.”
