A Boston investment advisory firm and its managing partner have been ordered to pay a $48 million arbitration award to clients over a series of private investments in a company that owned a Polish tobacco company and patents on a cigarette filter that it claimed would revolutionize the tobacco industry.
According to the arbitration award, which was decided by one arbitrator, Philip Cottone, and issued Tuesday by the American Arbitration Association, Family Endowment Partners and its managing partner, Lee Weiss, breached their fiduciary duty when advising the clients, James and Jane Sutow.
The Sutows brought their claim against Family Endowment Partners, which has $334.6 million in assets under management, and Mr. Weiss in July 2013 regarding over $20 million in investments recommended by the firm and Mr. Weiss. The Sutows alleged that the investment recommendations were grossly negligent and unsuitable, and involved the sale of unregistered securities based on fraudulent and material misstatements, as well as the failure by the firm and Mr. Weiss to disclose their interests in the recommendations, according to the award.
“It is overwhelmingly clear to me, from listening to the testimony in this case, largely from Mr. Weiss himself, from reading the exhibits, and listening to the testimony of three qualified and credible experts that [the firm and Mr. Weiss] did breach those [fiduciary] duties, in almost every way,” according to the award.
Family Endowment Partners and Mr. Weiss initially recommended investments related to a Polish state tobacco distribution company that had been privatized and offered for sale three times by the government before it was bought by Biosyntec Polska, the company in which the Sutows invested $9 million from 2010 to 2012, according to the award.
The head of the group that bought Biosyntec Polska, Iman Emami, was “a longtime acquaintance of Mr. Weiss” and “held patents on a cigarette filter that was supposed to revolutionize the tobacco business by using extract of rosemary to eliminate 80% of the free radicals in cigarette smoke,” according to the award. Investments were made in companies related to Biosyntec, according to the award. “None of these investments were backed by offering documents or information that gave (the Sutows) full and fair disclosure of all material facts, or anything close to that.”
According to the award, Mr. Weiss testified in the arbitration hearing that he believed in Biosyntec and its future and told the Sutows he did so. However, he was uncertain as to what information he gave them about the cigarette investments because he kept no record, testifying that he told them orally what they needed to know.
The Polish tobacco distribution company was said to be "technically insolvent" by one of the Sutows' expert witnesses, according to the award.
“An additional glaring breach of fiduciary duty was the failure by the respondents to tell (the Sutows) anywhere in writing that Mr. Weiss personally had what he characterized as a 'performance interest' in the success of Biosyntec prior to the time of the first investment” in the company by Sutows, according to the award. Mr. Weiss “estimated the value of that interest on forms to his banker in January 2011 to be in the range of $14 million to $25 million,” according to the award.
Along with the investments in Biosyntec, in 2012 and 2013, the Sutows invested another $9.7 million in two funds created and managed by Family Endowment Partners and Mr. Weiss. They made a redemption request on one fund at the end of 2013 and had 90% of that $5.1 million investment returned, according to the award.
The Sutows were awarded $17.4 million actual damages, almost $1 million in legal fees and treble damages of $30 million, which were awarded under Pennsylvania law, according to the award.Family Endowment Partners had an office in Pennsylvania that worked with the Sutows, and the Sutows sought damages under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.
Mr. Weiss did not return phone calls Wednesday afternoon and Thursday morning seeking comment.
Prior to founding Family Endowment Partners in 2007, Mr. Weiss worked at
Fidelity Investments, according to his BrokerCheck profile with the Financial Industry Regulatory Authority Inc.
