Daily Business Review

Arbitration Claim Alleges Brokers Lost $100,000 in Worthless Investment
By Angela Thomas


Bernadette Waisome invested $100,000 of her late husband's $250,000 life insurance payout in a mortgage-backed security a year ago. In an arbitration claim, she claims her money evaporated in a high-risk leveraged transaction even before she sent a check to the brokers, and she blames them for the loss.

Waisome contends her brokers inappropriately put her money into volatile collateralized mortgage obligations, or CMOs, without fully explaining the risks and defrauded her with falsified records as the investment quickly became worthless.

"If the broker doesn't discuss all of the risks, then the novice investor may not understand all those risks," said lawyer Mark Tepper, a Fort Lauderdale, Fla., solo practitioner representing Waisome on her arbitration claim. "A broker's duty is to explain the information about an investment product sufficiently so the customer has information to make an educated decision."

A hearing held June 25 set a timeline for review of the Davie, Fla., woman's claim filed in January with the National Association of Securities Dealers.

Waisome is seeking $117,954 in statutory damages, punitive damages of $319,013, plus attorney fees and other expenses.

The claim was filed against brokerage SAMCO Financial Services, SAMCO brokers Jamie Solow and Bruce Tucker, clearing broker Penson Financial Services and Penson chairman Roger Engemoen Jr. SAMCO and Penson had substantial overlapping ownership but operated independently.

The arbitration stems from the CMO investment by the 51-year-old widow last year. It was four months after her husband, director of the pathology lab at Delray Medical Center in Delray Beach, Fla., died and the same month Penson went public and discontinued SAMCO operations.

On the advice of a friend, Waisome called Tucker, a SAMCO broker, about using some of the life insurance money to pay down the mortgage on her house.

Tucker instead persuaded her to invest with SAMCO, according to the arbitration claim. Waisome said she agreed but wanted a low-risk investment.

Tucker turned to Solow, who marketed CMOs with sophisticated inverse floaters betting against the movement of interest rates.

CMOs are pooled securities that split mortgages into different classes with varying rates and risks. Inverse floaters separate fixed-rate bonds into two classes: floaters moving with an indexed interest rate and inverse floaters representing a hedge with prices inversely related to interest rates.

Tepper said Waisome's investment was in residential mortgages not including subprime loans, but he claimed her CMOs amounted to "toxic waste."

Tucker and SAMCO bought $450,000 worth of CMOs for Waisome on May 22, 2006 -- three days before she signed a new account form, the claim said.

Tucker indicated on the form that Waisome approved using speculative investments, but Tepper said that was done without her approval.

By the time Waisome handed over her $100,000 on June 9, 2006, all of the money had been lost.

The CMOs were bought on margin, which means cash was put up for a fraction of the purchase price and credit covered the balance.

How the CMOs could be purchased before Waisome contributed is "one of the questions raised by the statement of claim," Tepper said.

Tepper said recently that the value of the investment might have been closer to $470,000. He didn't know how much the brokers were paid in commissions.

Waisome asked a friend, a retired stockbroker, to call Tucker and ask for a refund, but she never got any money back, the claim said.

Tucker resigned from the company after Waisome's investment disintegrated, said his attorney, Ocean Ridge, Fla., solo practitioner Delmer C. Gowing III.

"When Bruce found out [SAMCO's agents] had margined her, he was upset," Gowing said. "He asked for a rescission of the transaction. When they said no, he quit."

Waisome's claim alleges the brokers recommended an unsuitable product, broke their fiduciary duty to her and failed to supervise the investment. The claim also said Solow had been accused of securities fraud before, and SAMCO and Penson negligently hired him.

Solow was sued by the Securities and Exchange Commission last November for alleged fraudulent sales of inverse floating rate CMOs to unsuitable investors while he was with Archer Alexander Securities in Boca Raton, Fla., in 2003. U.S. District Judge Donald M. Middlebrooks denied a dismissal motion in May.

Solow's attorney, Carl Schoeppl, a partner with Schoeppl & Burke in Boca Raton, and Neil Baritz, a Boca Raton attorney with Baritz & Colman for SAMCO, did not return repeated calls requesting a comment on the arbitration case.

Penson attorney Mark Hanchet, with Mayer Brown Rowe & Maw in New York, declined to comment. He said in an e-mail that the company does not publicly discuss ongoing NASD litigation.

An amended arbitration claim filed by Waisome in April contends that Engemoen, chairman of Penson and an indirect stockholder of SAMCO, was liable because he knew or should have known about Solow's past.

Engemoen's attorney, Keefe Bernstein, said he has filed a motion to dismiss the case against his client.

"His defense is, as a director and someone who has had no contact with Ms. Waisome whatsoever, he's not a proper party in this case," said Bernstein of Akin Gump Strauss Hauer & Feld in Dallas.

At the June 25 hearing, Tepper was given until July 30 to answer dismissal motions, and the defendant lawyers have until Aug. 13 to file their responses. A three-member arbitration panel is scheduled to hear the motions Sept. 17 and 18, and the arbitration hearing was set for June 11, 2008.

Registered brokers and their firms are contractually bound to arbitrate disputes with their customers.

Investors typically win arbitration awards less than half of the time, and the amounts tend to be less than what a plaintiff could hope to get in a lawsuit, said Dale Ledbetter, a Fort Lauderdale attorney not involved in the arbitration case.

"In most cases, if she is very fortunate, she will get 50 percent of what she lost," said Ledbetter of Adorno & Yoss. "She will have to pay her lawyer about a third of that. Then she'll have the forum costs which, even if she wins, she'll have to split 50-50" with the respondents.