More than a decade after bonds he sold started going bad, former Wedbush Securities Inc. broker Michael Farah finally cashed in, winning more than $4 million from his former employer last month.
It’s a rare case, not only because of the size of the award and the years it took to win it, but also because of Farah’s claim: that his erstwhile employer should compensate him for income he lost when clients who invested in the bad bonds dropped him as their money manager.
But it’s a type of case likely to become much more common as brokerages continue to carry exotic investment products that aren’t easily understood by investors or even by the average broker, said Sam Edwards, a partner at Houston securities law firm Shepherd Smith Edwards & Kantas.
“This is a relatively novel concept and one I think you’re going to see a lot more of,” Edwards said. “You’ll see a wave of cases with brokers suing firms when one of their products blows up.”
Last month, a panel of arbitrators at private watchdog organization Financial Industry Regulatory Authority, or Finra, ordered Wedbush to pay Farah $1.3 million for loss of income, plus attorney fees and punitive damages that came to a total of $4.3 million.
Wesley Long, Wedbush’s head of private client services, disputed Finra’s decision.
“We wholeheartedly disagree with the ruling and are currently reviewing our options,” Long said in an emailed statement. The firm declined further comment.
Farah’s claim against Wedbush, first brought in 2005, was that the firm told him that certain mortgage-backed bonds – some backed by loans on mobile homes – were among the safest investments, said Farah’s attorney, Philip Aidikoff at Beverly Hills law firm Aidikoff Uhl & Bakhtiara.
“Mike was told these were good, stable, fixed-income investments,” Aidikoff said. “This is an example of a broker relying on what he’s told about a product by his firm.”
The bonds Farah sold started to lose value as early as 2003. At that time, Farah said he managed client assets of $100 million. But as the bonds soured, clients lost or pulled out $60 million, leaving Farah with fewer clients and less income. He left Wedbush in 2005 and sued the company for lost income. Many of his clients and former clients did the same, on Farah’s advice.
In his claim to Finra, Farah alleged the company misrepresented and omitted important information about the bonds and that his clients and he lost money as a result.
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