Cetera is facing more than $5 million in damages after clients began filing arbitration claims accusing one of the firm's advisers of over-concentrating their portfolios in a handful of energy stocks that cratered in share price when oil prices fell.
Adviser George Merhoff was hit with nine complaints where clients claim they have suffered from $50,000 up to $4.6 million in damages, according to notes filed in his FINRA BrokerCheck record. Four complaints do not list amounts.
Two attorneys representing more than a dozen clients say their portfolios were concentrated in the same oil and gas stocks, such as Linn Energy, which tanked in value as energy prices fell in 2014 and 2015. Clients are seeking damages against both Merhoff and Cetera, which they accuse of negligent supervision and breach of fiduciary duty.
"I don't know how they can defend these cases. He basically put all his clients into one bad idea. It wasn't appropriate for the investors and no one at Cetera was monitoring this," says Lars Soreide, a Pompano Beach, Fla.-based attorney representing four clients in arbitration against Cetera and Merhoff.
Cetera is reviewing and responding to the legal actions directed toward the firm, a spokesman said.
"With respect to the action directed towards the independent contractor financial adviser named in this, we expect our affiliated financial advisers to adhere to the highest ethical and professional standards, and we are closely reviewing this matter to determine appropriate next steps. Beyond that, as a matter of policy, we do not publicly discuss such legal matters," the spokesman said in a statement.
Neither Merhoff nor his attorney returned calls seeking comment.
'TELL ME THE WORST CASE SCENARIO'
Ex-client Clint Manzonie says he invested $3.2 million with Merhoff in 2013, following the sale of his share of a business, Spanish Spring Construction. Manzonie, 42, a resident of Parker, Colo., says he viewed these funds as his path to an early retirement.
He met Merhoff, based in Klamath Falls, Ore., through his business partner and Merhoff had served as an adviser on the company's 401(k) plan.
"I had always heard that once you have more than a $1 million or more you can live on the interest. So I called him up and said 'How can I live on the interest?'" according to Manzonie, who adds that he did not know Merhoff well.
Merhoff invested $2.1 million into three nontraded REITs, and approximately $1.2 million into a discretionary account that had a 1% management fee, according to Manzonie.
Manzonie says he has no complaint about the REITs, which generated expected dividends – but he charges that the funds in the discretionary account were increasingly over concentrated in energy stocks. By October 2015, the account was comprised 100% of those equities, according to a statement filed in arbitration against Cetera and Merhoff. Manzonie says he asked Merhoff repeatedly about the strategy he was pursuing.
"The reason I didn't flip out sooner is because he said Linn Energy had great financials. I said George, 'Tell me the worst case scenario.' He said the worse case would be that they would go bankrupt, but they'll never go bankrupt. And if they did, they trade at $10 a share, then after all the senior note holders are paid in full, then all the common shareholders will get $10 a share," Manzonie says. "So when it fell to $4, I thought well I'd be crazy to sell it based on what he is telling me."
In July 2014, shares of Linn Energy traded at about $32. At the close of the markets on Friday, shares traded at eight cents a share. Manzonie lost about $625,000, according to claims filed in FINRA arbitration.
Mazonie says he is not a sophisticated investor, adding in the construction business he was the field guy, operating equipment on job sites. "I never played the stock market before," he says.
Soreide says Manzonie is not alone.
"There were wholesale recommendations across the board. Clint may have put in more dollars, but the accounts are nearly identical," Soreide says.
Soreide's arbitration cases are set to be heard next year, he says.
For his part, Manzonie says he'll never invest again with a financial adviser. The worst part, he says, wasn't losing the money – it came when he received a statement that Merhoff used the remaining balance in his 401(k) — $47,000 — to pay off a margin loan, an action Manzonie says he did not approve.
"The thing that upsets me the most, because I'm an honest person, is when he cashed out my entire 401(k)," Manzonie says. "From a financial standpoint, it's much smaller, but from a moral standpoint, it's… he did it behind my back. Who cares about tax consequences?"