By Suzanne Barlyn
Jan 10 (Reuters) - A unit of Wells Fargo Corp must pay $1.3
million to a California couple for losses tied to a strategy
that included a $5 million loan and a risky type of
exchange-traded fund, a securities arbitration panel has ruled.
Wells Fargo Advisors LLC was found liable in a case alleging
civil fraud, misrepresentation, breach of contract and other
misdeeds, according to a ruling Wednesday by a Financial
Industry Regulatory Authority arbitration panel. The panel, as
is customary, did not explain the reasons for its decision.
The panel also held Wells solely responsible for a total of
$24,000 in FINRA hearing fees. Arbitrators typically order
parties to share the fees, say lawyers.
The investors, Hooman Moshar, an engineer and his wife, May,
sought $1.9 million in damages and other relief when he filed
the case in 2011.
The case underscores a problem of investors being pushed to
use their securities accounts as collateral for loans issued by
bank affiliates of brokerage firms, said Marc Zussman, a Los
Angeles-based lawyer who represented the investors.
Their broker's suggestion that the Moshars, of Laguna Hills,
California, invest in a risky type of exchange traded fund (ETF)
added to the losses, Zussman said.
A Wells Fargo spokesman declined to immediately to comment.
The investors' troubles began during the stock market
decline of 2008 when he was a client of Wachovia Securities,
which is now part of Wells Fargo Advisors. Earlier, they took
out a $5 million loan with the Wachovia Bank to invest in real
estate, using the brokerage account as collateral, according to
Zussman. The loan was part of an overall investing strategy for
the couple discussed by them, their broker and banking
representatives, said Zussman.
Hooman Moshar became concerned about the strategy as the
value of his investment portfolio, once $7 million, began to
fall. His broker, however, advised him to ride out the market,
Zussman said.
When the account declined to about $5 million, the broker
began to buy ETFs to make up some of the losses, Zussman said.
Some were plain-vanilla ETFs, but others were leveraged ETFs,
which amplify short-term returns by using debt and derivatives,
and are considered more suitable for professional traders than
for long-term retail investors or anyone else who cannot
tolerate a high-risk portfolio. The ETF strategy added about
$200,000 to Moshar's total losses, Zussman said.
In 2009, the bank called the Moshars' loan and liquidated
his account to pay off the balance. About $23,000 was left. The
couple, as a result of the strategy, missed out on an ensuing
market upswing because there was little left to invest, Zussman
said. The portfolio, if not tied to the loan, would have made
about $2 million as the stock market improved, Zussman said.
"The outcome was correct. The issue was an unsuitable
investment strategy," Zussman said.
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