Selling Away

Citigroup Inc. (C) now has to pay Dr. Nasirdin Madhany and Zeenat Madhany $3.1 million over claims that the financial firm failed to properly supervise a broker, which caused the couple to sustain over $1 million losses. The broker is accused of directing them to invest in real estate developments that later went sour.

In 2010, the couple filed a FINRA arbitration case alleging fraud, negligence, and other wrongdoings related to over $1 million in real estate investments they made between ’04-and ’07. The Madhanys, who are senior investors, were customers of then-Citigroup worker Scott Andrew King, who referred them to politician Lawton “Bud” Chiles III. The latter was looking for investors for a number of real estate projects. King, who allegedly had a conflict of interest (that he did not disclose) from buying two condominiums from Chiles at a discount, is said to have connected the couple and the politician without Citigroup’s knowledge.

The Madhanys invested in two real estate projects, which began to have problems in 2007 when the US housing market failed and that is when the couple lost their money. Also, they, along with other investors, had signed personal loan guarantee related to a $12 million loan on one of the projects. When the loan defaulted in 2009, Wachovia sued all of them. Last year, a court submitted a $10 million judgment against the investors, with each person possibly liable for the whole amount.

A Financial Industry Regulatory Authority panel has ordered Lincoln Financial Advisors Corp. to pay $4.43 million in damages and interest to about 22 investors that had accused brokerage manager Scott B. Gordon of “selling away.” The panel wrote in its decision that the brokerage firm was “negligent” in failing to prevent Gordon from using an outside business to raise money from investors. The alleged misconduct took place for almost a year.

“Selling away” involves a broker soliciting clients to purchase securities not offered by his/her broker-dealer and without the brokerage firm’s approval. Regulators consider “selling away” to be a violation of securities laws.

Gordon became software-development company Healthright Inc.’s chief executive in 2005 and ran the company from his Lincoln Financial office. Two Healthright investors sent a written complaint to Lincoln the following year.

A request by Gordon to the brokerage firm that he be able to conduct outside business activity was not approved or denied. In 2006, Grant Gifford, who is a Healthright investor and a claimant in the securities fraud case, discovered alleged misstatements and omissions that Gordon had made. In 2008, FINRA barred Gordon from the securities industry.

Except for Gifford, who lent money to Healthright in his personal capacity, all the other investors in the securities case against Lincoln were part of Healthright Partners, LP.

Related Web Resources:
Finra Panel Orders Lincoln to Pay $4.3 Million to Investors, The Wall Street Journal, October 7, 2010
Lincoln Financial hit with hefty arbitration award over selling away, Investment News, October 5, 2010
Activity Away From Associated Person’s Member Firm, FINRA Continue Reading ›

Articles Posted in Selling Away

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice

Lincoln Financial Advisors Corp. Ordered by FINRA to Pay $4.43M Over Alleged “Selling Away” Scheme to Investors