By Suzanne Barlyn
NEW YORK Sept 26 A $4.3 million arbitration
award to a broker who was encouraged by his former firm to sell
securities that later failed could spawn similar complaints from
The unusual ruling, issued late Wednesday by a Financial
Industry Regulatory Authority arbitration panel, requires Los
Angeles brokerage Wedbush Securities Inc to pay the broker after
nearly a decade of litigation stemming from the securities.
He had alleged that the firm failed to properly disclose the
risks of mortgage-backed securities he sold to his clients. The
clients who bought them later lost money and filed their own
complaints against the firm, which now appear on the broker's
permanent record. He said he lost clients and income, according
to the ruling.
The decision could open the door to cases by other brokers
who have become targets of customer arbitration cases, after the
securities that their firms had promoted as safe later failed,
securities lawyers say.
"I've never heard of anything like that," said Michael
Sullivan, a lawyer in Morristown, New Jersey, who represents
The case means more brokers may seek compensation from their
firms if their businesses are hurt by passing along the
misleading claims of their brokerages to customers, Sullivan
"We wholeheartedly disagree with the ruling and are
currently reviewing our options," said Wesley Long, head of
private client services for Wedbush Securities, in a statement.
The former broker, Michael Farah, now runs a registered
investment advisory firm in Newport Beach, California. He
became entangled in a string of arbitration cases filed by
customers against Wedbush in the mid-2000s, stemming from
mortgage-backed securities they had bought through him.
Among the clients who lost their money: the Sisters of St
Joseph of Carondelet, an organization of nuns in Los Angeles.
The cases include a $3.8 million award to a group of
investors in 2006. Wedbush later settled numerous arbitration
cases with Farah's clients but won at least one case involving
the securities as recently as last year, according to regulatory
Farah was never found liable in the arbitrations, said
Philip Aidikoff, Farah's lawyer in Beverly Hills, California.
The mortgage-backed securities involved were an earlier
version of the types that led to the financial crisis of 2007 to
2009, said Craig McCann, an economist in Fairfax, Virginia, who
testified on behalf of the investors in some of the cases. They
were not backed by major government-sanctioned mortgage issuers,
such as Freddie Mac and Fannie Mae, making them a risky bet that
depended strictly on whether the borrowers whose loans were
bundled into the securities made their payments, he said.
Farah originally filed his case against Wedbush in 2005 and
left the brokerage that year to launch his own firm.
Wedbush responded to Farah's arbitration case with a $9.3
million countersuit, which the panel threw out.
The ruling against Wedbush includes $1.4 million in punitive
damages against Wedbush. Punitive damages, which aim to punish
parties in legal actions for misconduct, are rarely awarded in
securities arbitration cases, lawyers say.
Wedbush must also must reimburse Farah $1.2 million for
legal fees he incurred to defend against the customer
arbitrations, according to the ruling.