In the securities arbitration claim brought by a wine mogul against Fidelity Brokerage Services, a Financial Industry Regulatory panel may not have ordered the financial firm to pay claimant Peter Deutsch compensation but that doesn’t mean the panelists believe that the broker-dealer placed its former client’s interests before its own.
Deutsch’s family’s company, Deutsch Family Wine & Spirits, markets Yellow Tail and Beaujolais Nouveau wines. He is accusing Fidelity of not handling his account properly when he bet on Chinese shares. He claims that this cost him up to $436M.
Deutsch contends that he believed Fidelity unit Fidelity Family Office when it told him his best interests were the firm’s priority but they then allegedly proceeded to ignore what he wanted and lent out shares belonging to him. The brokerage unit also stopped Deutsch’s trading in China Medical Technology shares when it prevented him from buying an additional 50 million stock shares. Now he claims that this foiled his attempt to gain a controlling stake in the company.
Ruling on Deutsch’s bid for damages last month, the arbitrators turned down that request “in its entirety” on the grounds that they believe he would have lost money anyway even if Fidelity had dealt with his account differently. The panel agreed with the firm in that calculating damages could not be done in a way that wasn’t based on hypotheticals. The arbitrators didn’t weigh in on his claim that the broker-dealer acted inappropriately by lending his shares to short-sellers.
Despite No Monetary Damages, FINRA Doesn’t Think Fidelity Acted In Investor’s Best Interests
That said, the Finra panel said that they identified “serious fault” with the way Fidelity dealt with Deutsch’s account, including its decision to stop his trading in China Medical Technology without finding out what he wanted and instead determining that the wine mogul was engaging in a short squeeze. The securities arbitration panel wrote that the brokerage firm seemed to be more concentrated on its “own interests at the expense” of his client’s interests.
According to the securities arbitration ruling, the Deutsch family began buying the China Medical shares using Fidelity accounts in 2011. The purchases were part of a “China Gold” investment strategy. The goal was to acquire positions in US-listed Chinese Companies that were substantively undervalued but could be expected to go private. This meant that public shareholders could likely make a premium.
After unpaid bondholders of China Medical asked a Cayman Islands court to liquidate the company in the wake of negative news, missed payments, and missed earnings, the Deutsch family sought to gain a controlling interest and to arrive at a deal with a strategic buyer to satisfy bondholders and prevent liquidation. The Deutsch family claims that here is where Fidelity thwarted their actions.
An attorney for Deutsch said that he will now bring the securities fraud case to federal court. Fidelity continues to deny wrongdoing.
Meantime, Deutsch and an ex-advisor have also filed another lawsuit against Fidelity in federal court. This is a case that the brokerage firm is seeking to have dismissed. The plaintiffs contend that an activity report submitted by the broker-dealer to US authorities regarding the wine mogul’s China medical trades included statements that were false.
Wine Mogul Accuses Fidelity of Fraud, Seeks up to $500M in FINRA Arbitration, Institutional Investor Securities Blog, April 20, 2016
Finra Scolds Fidelity For Its Treatment Of Wine Mogul, Financial Advisor, August 18, 2017