RIA Who Must Pay $48M: I Wasn’t A Fiduciary

An RIA and former CFP who served wealthy families has already lost $48 million in arbitration by trying to claim that he didn't owe a fiduciary duty to clients. Now he could be on the hook for $3 million more over the same failed investment in another case.

"The arbitrator's jaw just kind of dropped," when attorneys for Lee D. Weiss, managing partner of Family Endowment Partners, claimed he was not a full fiduciary to his clients, says Glenn Gitomer, the attorney for plaintiffs in the larger case.

"Obviously, the whole fiduciary duty of the RIA is such a hot issue," adds Gitomer, of firm McCausland, Keen & Buckman. "It seemed to be that they were somewhat uninformed if they were making that argument or trying to extend the law beyond a way in which the arbitrator would consider palatable."

Neither Weiss nor his lawyer immediately returned phone calls seeking comment.

POLISH TOBACCO INVESTMENT

In the smaller case, filed in district court in Massachusetts, Theodore Guarriello Jr. claims more than $3 million in losses in or related to a Polish tobacco holding company that was "akin to a Ponzi scheme," says Gitomer, whose clients lost millions in the same investment.

A fund controlled by the tobacco company had funneled some money on to a gas turbine power-generating plant in Tunisia that Guarriello knew nothing about, says his lawyer, Gregory Bruch of Bruch Hanna.

"It's as crazy as it sounds," Bruch says, "and it's totally news to the client who thought he was investing directly through Lee Weiss."

LONG ARBITRATION

The arbitration award in the larger case, filed April 14, followed a hearing covered 13 hearing days and included seven witnesses and 25 exhibit books containing more than 1,000 exhibits, according to the award.

Arbitrator Philip Cottone seems to have found Weiss's defense — that when he suggested non-discretionary trades, that advice did not "give rise to fiduciary duties," as the award notes — particularly outrageous.

"It is settled law that registered investment advisors … have a fiduciary duty to their clients pursuant to the federal Investment Advisors Act of 1940 … and that duty is not dependent on whether or not they have discretionary authority," he writes. "Mr. Weiss represented himself as being a Certified Investment Manager and a Certified Financial Planner in FEP brochures, and while it appears he does not carry either designation now, he is certainly an RIA, not just a broker."

Cottone awarded plaintiffs James and Jane Sutow roughly $17 million to cover their losses, plus $30 million in damages and nearly $1 million for legal costs.

Among other transgressions, Weiss failed to disclose to the Sutows that he was a longtime personal acquaintance of Iman Emami, the head of a group that acquired the tobacco company, according to the award..

And none of the investments were consistent with the "moderate to conservative" risk profile that the plaintiffs, James and Jane Sutow, expressed in documents to Weiss, the award says.

'TOTALLY UNSECURED … GROSSLY INADEQUATE'

A banking expert, testifying on behalf of the Sutows, convinced Cottone that Weiss and his firm did essentially no due diligence on the money-losing investments, the complaint says.

"The legal instruments that were recommended for signature by [Weiss and his firm] to [the Sutows] to record these investments were characterized by [the Sutows] in the hearing brief as 'amateurish,' but they are worse than that," Cottone writes. "They seem to have been done on the back of an envelope, are totally unsecured notes with questionable credit, and provide grossly inadequate returns for the risk taken."

The website for Family Endowment Partners, which the award says received millions in dollars in fees for advising the Sutows on these investments, is still live, and the firm still appears to be operational.

The firm's website says it "seeks to fulfill its fiduciary obligations by providing objective, conflict-free investment management advice."