Wedbush Securities Inc. must pay a former broker $4.3 million in damages and legal fees for business he said he lost because of collateralized mortgage obligations he sold that went bad on clients.
While many mortgage-backed securities plummeted in value after the 2008 financial crisis, those involved in this case soured years earlier, in 2003. Broker Michael Farah left Wedbush in 2005, the same year he filed an arbitration case against the firm over the CDOs.
In a decision Wednesday, the Financial Industry Regulatory Authority panel that heard the case said Farah is owed $1.3 million in compensation for the loss of clients. It also ordered $1.4 million in punitive damages and around $1.5 million in legal fees. Wedbush also must pay for expenses covering Mr. Farah’s witness and his court reporting costs.
Punitive damages are unusual in securities arbitration cases. Philip Aidikoff, of Aidikoff, Uhl & Bakhtiari, who represented Mr. Farah, said, “It’s as complete a victory as he can get.”
Also somewhat unusual is a broker seeking damages from his firm over business lost because of bad investments recommended by the firm. Claims are typically filed by the clients who suffered direct losses, although occasionally brokers will testify for them in those disputes against the brokerage.
Wedbush has had to pay more than $8 million in compensation to more than 40 clients who filed loss claims over CMO investments that went sour when interest rates rose in 2003. According to Mr. Aidikoff, Wedbush misled both clients and Mr. Farah in presenting the investments as safe. Mr. Farah quit Wedbush over its handling of the investments and the subsequent losses, his lawyer said, and now runs his own independent investment advisory firm in Newport Beach, Calif.
As is routine, the arbitration panel did not explain the reasoning for its decision. Mr. Aidikoff attributed it to what he called the “outrageous” conduct of the firm, which filed counterclaims against Mr. Farah and would not pay his legal fees despite California laws that supposedly required it. The arbitration panel, in its decision, cited California state law in requiring payment of the legal fees.
Wesley Long, the head of private client services at Wedbush, said in a an email, “We wholeheartedly disagree with the ruling and are currently reviewing our options.”