In a Statement of Claim filed in June 2009, Claimant Curtis Pilot asserted various causes of action including fraud, misrepresentation, suitability, and breach of fiduciary duty in relation to his investment in the MAT Five Investment Funds.Claimant sought $4,000,000 in compensatory damages plus interest and costs; and he also sought $4,000,000 in punitive damages. In the Matter of the Arbitration Between Curtis Pilot, Claimant, versus Citigroup Global Markets, Inc., Salomon Smith Barney, Morgan Stanley Smith Barney, and Webb Hutchings Radcliff, Respondents. (FINRA Arbitraion #09-03614, August 2, 2010).
Respondents generally denied the allegations and sought dismissal of the claim. In April 2010, the parties reached a settlement.
As part of the settlement negotiations, Respondent Radcliff was dismissed with prejudice. According to the FINRA Arbitration decision:
[T]he matter was resolved as it was a "product issue" relating to the performance and management of MAT 5 and not related to sales practice conduct attributed to Respondent Radcliff . . .
. . .
The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.
The Panel determined that Respondent Radcliff was dismissed as part of the settlement and that the evidence provided demonstrated that Radcliff had not been engaged in any sales practice violations but rather the MAT Five product was the underlying issue.
Bill Singer's Comment: The MAT Five fund engaged in highly leveraged financial activities that hedged tax-free municipal bonds against corporate bonds. According to reported litigation, many investors thought that the MAT Five fund was a conservative, low-risk product with moderate volatility. Unfortunately, it appears that some investors lost their entire principal and that volatility exceeded benchmarks such as the S&P 500 or traditional munie bond indices.
The Panel is to be applauded for attempting to distinguish between those siutations in which a registered representative has made affirmative, materially misleading statements in connection with the sale of an investment product (sales practice violations) and, as was apparently the case here, those situations in which the underlying product was inherently flawed or marketed to the salesforce as a less-risky investment than it truly was. If you're having trouble wrapping your arms around the concept, think of it this way: If you went into an Apple store to buy an iPhone 4 and subsequently discovered that the antennae was failing, that was more likely an issue of a flawed product than something that was foisted upon you by an unscrupulous salesperson.