An arbitration panel shot down a claimant’s request for up to $2.9 million for allegedly botched investments tied to private placements and Ponzi schemes last week, and instead ordered her to pay almost $136,000 in costs and expert witness fees.
The decision from the Financial Industry Regulatory Authority arbitration panel followed a two-year case that began when California resident Jaimie Davis first filed her February 2010 claim against FINRA member firm WFP Securities Corp., registered representative Curtis Jerome Sathre III and WFP President John Evan Schooler.
In the court documents, obtained exclusively by On Wall Street, Davis’s statement of claim details investments allegedly gone awry. Davis cites $350,000 in losses tied to fraudulent investments that are suspected Ponzi schemes.
Those investments include Medical Capital Corp. and Striker Petroleum LLC, which were both put in receiverships and were subject to civil enforcement actions by the Securities and Exchange Commission; and DBSI Inc., which the U.S. Justice Department and Idaho securities regulators accused of violating securities laws and operating as a Ponzi scheme, court documents state. In addition, the claim cites an additional $1.86 million Davis may lose due to risky, illiquid investments in other private placements.
In her claim, Davis asserted breach of fiduciary duty, breach of contract, negligence, failure to supervise and control person liability and violation of California Corporations Code.
“Respondents failed to disclose to claimant that they were selling securities that they knew or should have known were part and parcel of massive frauds,” the claim states. In addition, more than $1 million was invested in “speculative, illiquid real estate and oil and gas interests” without proper disclosure of their risks and lack of liquidity, according to the claim.
The respondents refuted Davis’s claims in the statement of answer submitted by their attorney Brandon S. Reif, managing partner at Los Angeles law firm Winget, Spadafora & Schwartzberg LLP.
The respondents’ statement asserts that Davis is an accredited investor, was given all of the proper disclosures regarding her investments and had personal expertise in two of the sectors she invested in, health care operations and real estate.
The statement also asserts that reasonable due diligence was performed for all of the securities transactions, that Davis really only alleges losses for securities transactions in Med Cap, DBSI Denton and Striker in her claim, and that the U.S. financial crisis caused unprecedented losses and exposure of regulatory issues.
“Claimant routinely inquired about investment terms, assessed historical investment performance and made sure her portfolio was populated with laddered investments with different maturing dates,” the respondents’ statement said.
In addition, Davis was a “satisfied customer for over five years, and then abruptly changed course in the wake of the global financial crisis,” according to the respondents’ statement.
In a decision dated March 1, the FINRA arbitration panel ruled in favor of the respondents.
The FINRA dispute resolution documents said that the panel determined that Davis failed to prove the causes of actions or allegations in her original claim.
Those documents also note that Davis also has filed arbitration claims with the American Arbitration Association; JAMS Arbitration, Mediation and ADR Services; and also has a court case against some of the investments sponsors. Some of those cases have settled and some are ongoing, according to FINRA’s dispute resolution document.
“The panel found it highly likely that Claimant sought double recovery from the claims Claimant filed in this arbitration and in other forums,” FINRA’s document said. “Claimant’s actions protracted the FINRA Dispute Resolution arbitration proceedings and enhanced the costs and fees of Respondents. Claimaint’s actions are in direct violation of FINRA Code Rule 12209.”
With that, the FINRA panel dismissed Davis’ claims and ordered her to pay $135,755.89 plus 10% annual interest, from the date of the award until it is paid, for the respondents’ costs and expert fees.
In addition, the FINRA panel also recommends the expungement of references to the arbitration from both Sathre’s and Schooler’s records.
Davis declined to provide immediate comment on the case. The Irvine, Calif.-based law firm previously representing her, Brown, Wegner & Berliner LLP, submitted a letter withdrawing as counsel in January.
The respondents’ lawyer Reif said the case could have a more wide-reaching impact after it was determined the claims in the case had run beyond the statute of limitation, and that the private placement memorandums and subscription agreements adequately disclosed the investments’ risks.
“I wonder if this signals the end of the claimants’ run for awards in favor of cases with private placements and public non-traded REITs, because not only is this a dismissal, but this is a vindication,” Reif said.
Davis has 30 days to file a motion to vacate the decision with a court of competent jurisdiction.
Lorie Konish writes for On Wall Street.