By Matthias Rieker
An arbitration panel ordered a Texas advisory firm to pay a
group of 19 retired Exxon Mobil Corp. (XOM) employees a total of
$3.8 million for losses from an alleged failed investment strategy
designed to protect them from stock-market downturns.
The retirees invested nearly $40 million with U.S. Capital
Advisors LLC of Houston, and contended that they could have made $3
million from the strategy as it was described to them by advisers
with the firm. Instead, they lost $1.25 million, according to their
arbitration claim with the Financial Industry Regulatory
Authority.
The panel awarded them a combined $1.9 million in damages plus
interest, along with $852,630 in punitive damages and almost $1
million in legal and other costs, according to the award posted on
Finra's website. Individually, the damage awards ranged from
$28,294 to $195,949.
Finra arbitrators usually don't explain the reasoning for their
decisions but in this case they did, saying they found "egregious,
recurrent, and willful violations of a fiduciary relationship"
between U.S. Capital Advisors and the investors.
Many of the claimants put money into the strategy at the
recommendation of a group of advisers who targeted Exxon Mobil
employees nearing retirement with investment seminars. The advisers
originally worked for UBS AG (UBS, UBSN.VX), and the clients stayed
with them when they left that firm to join newly created U.S.
Capital Advisers in 2010.
The "total return" strategy, the investors were told, would hold
mainly U.S. stocks and exchange-traded funds in a rising market and
move the money into cash when markets fell, with trades triggered
by "objective technical indicators," according to the claim. But
when the advisers left UBS, their new firm was "understaffed" and
"ill-equipped to execute" the strategy, and they strayed from the
model, the claim said.
Asked for comment on the award, Patrick Mendenhall, the chief
executive of U.S. Capital Advisors, defended his firm. He said the
client's claim focused only on the losses from the total return
strategy but ignored gains from other investments.
"We are clearly disappointed with the award; we certainly don't
understand it," he said.
Thomas Fulkerson, a Houston lawyer who represented the retirees
with his partner, Wesley Lotz, said financial advisers can't argue
that advisers who make money in one client accounts would have
immunity for the losses in other accounts. He said the panel asked
for a specific briefing about the argument.
"We are gratified" by the award, he said.
Write to Matthias Rieker at matthias.rieker@wsj.com
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