WFP Securities is a brokerage house headquartered on Cornerstone Court in Sorrento Valley. It is one of an interlocking network of financial companies with offices mainly in Southern California. The brokerage boasts on its website, “Our motto is simple… Always do what is right for the client.”
Uh, sorry. A slew of irate clients don’t feel that way. No fewer than 16 arbitrations and 4 written demands have been registered against the firm and its web of enterprises. Most of the complaints are against WFP. The two primary spiders in the web appear to be Louis Schooler, who owns 50 percent of the brokerage’s parent company and is president of Western Financial Planning, and his brother, John Evan Schooler, president of WFP Securities and Western Financial Advisors.
The major beef is that clients were put in highly speculative investments that were inappropriate for unsophisticated people of modest means. Those allegedly crapshoot investments often paid fat commissions to brokers, many of whom are named in the arbitration cases. For example, the Beverly Hills law firm of Aidikoff, Uhl, and Bakhtiari is handling three arbitrations totaling $7 million in claims. The brokerage house and related individuals “failed to conduct proper due diligence on many securities that turned out to be Ponzi schemes,” says attorney David Harrison. “A firm has an obligation under regulatory rules to conduct due diligence.” WFP sold shoddy products that were not suitable for investors, many of whom were retired, he says.
Here are some of the complaints filed by investors who claim they have been burned by the brokerage and its affiliates: unsuitable recommendations, negligence, breach of contract, breach of fiduciary duty, negligent supervision, fraud, negligent misrepresentation, violation of the California Corporations Code, lack of due diligence, putting customers in Ponzi schemes, selling fraudulent investment products, deceit and omission of material facts, selling of illiquid investments, failure to disclose brokers’ compensation, elder abuse, breach of implied covenant of good faith and fair dealing, violation of New York Stock Exchange and National Association of Securities Dealers rules, violation of the California Consumer Legal Remedies Act, and entrance into unauthorized transactions.
When investors sign agreements with brokerages, both sides pledge to take their disputes to mandatory arbitration. These are handled by the Financial Industry Regulatory Authority, which was created in 2007 in a merger of the National Association of Securities Dealers and the enforcement arm of the New York Stock Exchange. The authority is a private self-regulatory body. During many years of pursuing stockbroker misdeeds, I found that the New York Stock Exchange’s enforcement group was simply a joke; it would have given a clean bill of health to Charles Ponzi. But the National Association of Securities Dealers was at least moderately diligent in cracking down on bandits — small-time ones, anyway. It famously missed one big-time bandit: Ponzi schemer Bernie Madoff was once vice-chairman of the National Association of Securities Dealers and quite active in association leadership.
The Financial Industry Regulatory Authority boasts that battles between brokers and their customers are resolved by “impartial persons” who are knowledgeable about the securities industry. But it can take much of a lifetime to understand the byzantine byways of Wall Street: how can such people be impartial? That’s why many maintain that arbitrations are stacked in favor of the brokerage houses.
For this column, I will focus primarily on an arbitration filed by San Diegans Connie Coe and Fraser and Cynthia Cathie. It is being handled by San Diego attorney Ron Marron and his assistant Paul Hall. I asked the Financial Industry Regulatory Authority how many arbitrations had been filed against WFP and related enterprises. It wouldn’t talk. I also asked what defenses the brokerage and its cousins were using against the charges. Again, no talkee.
I submitted questions to the brokerage and its Los Angeles–based law firm. They refused to answer any questions, although the lawyer gave me one quote, which is below. Fortunately, I was able to get summaries of the arbitrations and written complaints from a lawsuit filed by WFP’s insurance company on February 16 in federal court in Los Angeles.
The insurer’s lawsuit appears to reveal the brokerage house’s defense strategy. The brokerage asserts that almost all the complaints revolve around four dubious investment products. Then the complainants tossed in other products that had plunged in value because of market forces, not because of wrongdoing by the brokerage house or its brokers, the company insists, complaining of “cherry picking of failed investments.” If WFP had not sold those four investments to its clients, “no arbitrations would have been brought,” according to the insurance company’s Los Angeles filing.
One of the four smelly investments was Medical Capital. In July of 2009, the Securities and Exchange Commission charged that the company and related operations had misappropriated $18.5 million of investor funds from a sale of notes, while telling untruths to its prospects. Eventually, assets were frozen and a receiver was appointed. According to the claim statement filed by Marron, a WFP broker placed $30,000 of Coe’s money into a Medical Capital fund. She will recover no more than 15 percent of her funds, says the complaint. “Court filings have revealed that [Medical Capital] was a type of Ponzi scheme,” says the filing, and the brokerage house did not do adequate investigation.
The WFP web put the Cathies into Desert Capital Real Estate Investment Trust, another of the four investments that butchered most complainants. These were unregistered securities, misleadingly described as short-term notes, according to the claim filed by attorney Marron. The Cathies fear that for the foreseeable future, there are no buyers of these notes; the couple can’t see how they will get money back.
The third of the four malodorous investments was Provident Royalties. Fraser Cathie was induced to put most of his individual retirement account in an entity controlled by Provident, which went into bankruptcy in 2009. “Thus, $40,000 of Mr. Cathie’s [individual retirement account] vanished, leaving him with a mere $8,309.88 in his retirement account,” says the claim statement.