A hybrid wealth management firm acquired by Arax Investment Partners last year owes a client at least $2 million over allegations that it improperly recommended investments in an overseas media company.
A Financial Industry Regulatory Authority arbitration panel hit U.S. Capital Wealth Advisors and related entities, along with two brokers, with $1.7 million in out-of-pocket damages and various legal and attorney fees. The firms and the brokers — Patrick Mendenhall and Matthew West — also will have to disgorge any commissions or other fees they made from their allegedly unauthorized sales of stock in companies like Microsoft and Alphabet (the parent company of Google).
The complaint in the case was filed in late 2023 by Tracy Driver, then a 62-year-old retiree living in Groves, Texas. Driver accused U.S. Capital Wealth and its related firms, along with Mendenhall and West, of recommending he invest millions in a media and entertainment company called Eros International.
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Eros, which has its headquarters in Mumbai, India,
Allegedly unauthorized stock sales
Driver's complaint also alleges that U.S. Capital Wealth and the other respondents failed to get his approval in 2022 before selling "prized" shares worth hundreds of thousands of dollars in companies like Nvidia, Apple, Nasdaq and Alphabet. Those transactions, according to the complaint, caused Driver "to miss out on substantial gains."
The complaint also says Mendenhall encouraged Driver to try options trading with his stock in the chip designer Nvidia. Driver eventually sold call options on 2,000 shares of Nvidia, requiring him to sell the stock if it reached a certain price.
"The additional 2,000 shares were bought on margin, but this was not clearly communicated to Driver until after the purchase," according to the complaint. "On May 2, 2023, the 2,000 shares were called away on an options trade at $272/share. Post-earnings report on May 24, 2023, Nvidia was up to $390/share and is now trading at over $495/share."
Driver's lawyer, Wesley Lotz of the Lotz Law Firm in Houston, said he and his client are grateful for the award.
"After a six-day evidentiary hearing, the arbitration panel awarded significant relief to compensate Mr. Driver for financial losses at U.S. Capital," Lotz said.
Purchase by Arax
U.S. Capital Wealth Advisors was bought by the private equity-backed aggregator firm Arax Investment Partners
A spokesperson for Arax declined to comment on the arbitration decision.
A disclosure on Mendenhall's BrokerCheck page describes Driver as an "an experienced investor with an estimated net worth of over $6.5 million who actively monitored and participated in investment decisions in his accounts." It says his accounts at the firm were generally profitable.
"One security the client complains about was initially recommended by USCA, but the client continued to make unsolicited purchases when the security's price had already started to decline," according to the BrokerCheck page. "The client also makes claims related to missed opportunity in another stock that was sold as part of an agreed upon covered call strategy but later increased in price."
Order to undo previous Microsoft, Alphabet stock sales
Driver's complaint against U.S. Capital Wealth and the other respondents alleged breach of fiduciary duty, fraud, negligence and unjust enrichment, among other violations. Driver had initially sought more than $3 million in actual damages for money he lost on the Eros stock and sales of his other shares, along with the disgorgement of any commissions or other fees U.S. Capital Wealth made from the sales and punitive damages.
He may end up getting more than that in the end. Along with paying $1.7 million in out-of-pocket damages, U.S. Capital Wealth and the other respondents were ordered to reverse their sales of 1,000 shares of Microsoft stock and 2,000 shares of Alphabet stock in 2022. The stocks are to be returned to Driver and their value added to the total award amount.
U.S.Capital Wealth and the other respondents were also ordered to pay $139,369.01 to cover costs and expenses and at least $212,015.75 in attorney fees, which will eventually be supplemented by 20% of the final award amount. The panel also stipulated that U.S. Capital and the other respondents would be under an obligation to pay various court fees should they try to appeal the arbitration award.
