May 17, 2013
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2012, Claimants alleged causes of action including breach of fiduciary duty, fraud, and elder abuse pertaining to an investment in a Tenant-in-Common ("TIC") real estate investment. Claimants sought indemnification under guaranty agreements; $499,365 in damages plus interest; punitive damages; fees, costs, and expense. At the close of hearing, Claimants sought $648,737.64 in damages. In the Matter of the FINRA Arbitration Between Suzy Asad and 1999 Suzy Asad Revocable Trust dated August 20, 1999, Claimants, vs. Mamdoh Aziz Abas and ProEquities, Inc., Respondents (FINRA Arbitration 12-01167, May 14, 2013).
Respondents Abas and ProEquities generally denied the allegations and asserted various affirmative defenses. Both respondents sought the expungement of the arbitration from their records.
SIDE BAR: Although not fully explained in the arbitration Decision, online FINRA documents as of May 20, 2013, indicate that Respondent ProEquities had characterized the customers' complaint as follows:
CLAIMANT ALLEGES THAT IN LATE 2007 TO EARLY 2008, RR RECOMMENDED THAT CLAIMANT INVEST CASH PROCEEDS OF $499,365 AND ASSUME DEBT IN CONNECTION WITH A TENANT IN COMMON (TIC) REAL ESTATE INVESTMENT LOCATED IN PHOENIX, ARIZONA. CLAIMANT ALLEGES FINANCIAL LOSS DUE TO THE TIC NOT GENERATING THE INCOME AND TAX SAVINGS THAT HAD BEEN PROJECTED. CLAIMANT ALLEGES INJURY DUE TO: VIOLATION OF SEC ACT 1934; BREACH OF FIDUCIARY DUTY; CA SECURITIES, COMMON LAW AND CONSTRUCTIVE FRAUD; UNFAIR SALES PRACTICES; NEGLIGENCE AND NEGLIGENT MISREPRESENTATION; ELDER FINANCIAL ABUSE
The FINRA arbitration panel found Respondents jointly and severally liable and ordered them to pay to Claimants:
- $379,424.33 in compensatory damages plus 7% interest from February 1, 2008 to May 3, 2013;
- $68,838.06 in costs.
- $300.00 for filing fee
Bill Singer's Comment
TIC investments became increasingly popular as a way for a seller of real estate to qualify for a so-called 1031 Tax Free Exchange via the acquisition of an ownership interest in another property. Sales of fractional ownership interests to sellers of appreciated realty became an attractive business for many FINRA brokerage firms, who marketed this transaction as a way to preserve the tax-free status of a property exchange.
TIC transactions, however, have seen their share of consumer complaints. Among the most common source of friction is the alleged lack of adequate pre-sale due diligence by the brokerage firm, and the failure of the firm to reasonably monitor ongoing developments at the subject properties. A cursory glance at the litigation in this area shows disagreements between claimant investors and respondent brokerage firms as to the quality of the latter's review of financial statements; the thoroughness of background checks involving promoters; and the validity of any appraisals done on the property in dispute.