Cetera brokerage must pay clients $2.7M over costly product sales

A Cetera Financial Group brokerage must pay the biggest arbitration award ever assessed against the firm to clients who accused the firm of negligence and misrepresentations.

Nancy and Ivan Mailhot and their IRA accounts won an award from Cetera’s First Allied Securities ordering the firm to shell out $2.7 million in damages, attorney fees and other costs, according to a unanimous March 11 decision by a FINRA arbitration panel in Phoenix. The award marks the largest compliance payout involving First Allied since a FINRA case in 2016 and the biggest arbitration award in First Allied’s 29-year history, according to BrokerCheck.

The Mailhots had requested compensatory and market-adjusted damages of more than $1.9 million — identical to the figure awarded in the decision — based on losses in more than a dozen products spanning annuities, nontraded REITs and other products.

Despite the fact that fewer than a third of FINRA client arbitration decisions require damages to be paid, the ruling against First Allied comes a month after a panel awarded a former UBS client $1.1 million. It also follows warnings from regulators that the SEC’s Regulation Best Interest has maintained the industry’s status quo in terms of sales of “complex, costly and risky products.”

With the inclusion of attorney fees and market-adjusted damages, the clients received a “home run” of a decision in their favor, according to Michael Edmiston, an attorney with Jonathan W. Evans & Associates who is the president of the Public Investors Advocate Bar Association.

“It is an award that makes the claimant absolutely whole,” Edmiston said. “It restores them to the place where they should have been, had First Allied not engaged in the behavior that it did. Most successful arbitration awards are compromise awards.”

Representatives for Cetera and San Diego-based First Allied declined to comment on the case. InvestmentNews first reported the award.

Brokers deny wrongdoing
The arbitration claim didn’t name as respondents the two brokers who worked with the Mailhots, Travis G. Blaser and Ronald Reed McCook, and the decision didn’t hold them liable for any part of the award. The brokers almost certainly testified in the case, which is typical of any claim in FINRA arbitration. The clients had initially named two other brokerages with whom they had worked at one time — National Planning and Advisor Group’s SagePoint Financial — but dismissed them from the case prior to the hearings, according to the award document.

Blaser and McCook didn’t respond to a phone call and voicemail to their Scottsdale, Arizona-based business, Blaser-McCook. In statements on BrokerCheck, they each denied the clients’ claims. The clients “were fully aware of, and understood, any and all risks associated with their investments,” according to Blaser’s BrokerCheck statement. “Claimants have cherry-picked a handful of long-term investments that have, in the short term, lost value. However, their portfolio has been properly diversified and has performed well. I have not misrepresented any facts to the clients, nor have I breached any duties or contracts.”

McCook’s BrokerCheck file displays an identical statement denying the allegations. In addition, without any contribution from McCook, First Allied paid a settlement of $52,000 in May 2021 to a client who alleged that McCook recommended unsuitable alternative investments, his detailed file shows. First Allied settled that case last year “to avoid the costs and uncertainties of arbitration,” and McCook “firmly denies” the allegations, he said in another comment on his file.

The allegations
Neither the listed attorneys for the Mailhots or a different law firm, Shepherd Smith Edwards and Kantas, which posted a blog last week referring to them as clients, responded to requests for comment.

“The arbitration panel was just as troubled as our knowledgeable broker misconduct attorneys were about the actions of First Allied Securities and its financial advisors,” according to the blog. “The granting of a complete award sends a clear message that First Allied Securities and its brokers are the ones at fault. The claimants did nothing wrong when they followed the broker-dealer’s recommendations to invest in nontraded real estate investment trusts (nontraded REITs) and other unsuitable products.”

The Mailhots alleged that the brokers misled them about the risks of the products. They included annuities issued by affiliates of AXA, MetLife, Midland National Life Insurance and Jackson National Life Insurance, as well as products managed by Griffin Capital and American Realty Capital. Prior to a bankruptcy protection case for Cetera’s onetime parent, RCS Capital, in 2016, First Allied was affiliated under common ownership with American Realty Capital.

The clients filed the case in April 2018, accusing First Allied of negligence and gross negligence, misrepresentation, omission of a material fact, failure to supervise and breaches of fiduciary duty and contract. In its answer, First Allied asked for the claim to be dismissed with prejudice and for the expungement of the complaints from the two brokers’ records. Each of the parties made multiple postponement requests that prolonged the decision in the case.

In the decision, the arbitrators denied the petition to remove the complaints from Blaser and McCook’s records and assessed attorneys’ fees of more than $660,000 against First Allied.

The products mentioned in the case “represent a fat commission to the brokers that sold them,” Edmiston said, noting that the sales likely stemmed from meetings in which the advisors presented the clients with “glossy folders” about the investments.

“These are products that have to be sold to clients,” he said. “Nobody comes in and says, ‘Hey, I’d like to get the XYZ REIT.’”