FINRA Arbitrators Award Over $9 Million In CapWest Private Placement Suit

January 19, 2012

In an initial Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2009 and thereafter amended in February and June 2010, Claimants asserted causes of action, among which were, failure to treat the Claimants in a just and equitable manner; breach of contract; breach of fiduciary duty; and negligence. The allegations arose in connection with Claimants' investments in Provident Royalties LLC, Medical Capital Corporation , and DBSI, Inc.  - all well-known names to those who follow securities industry litigation involving alleged frauds in the private placement sector..

SIDE BAR: For more details about this high-profile regulatory and fraud cases, read these Securities and Exchange Commission ("SEC") and FINRA documents:

Also read this "Street Sweeper" column:Public Customer Wins Medical Capital Notes Arbitration (January 4, 2011)

A Hollywood Spectacular

Although the FINRA arbitration that is our topic today is fairly cut and dry - a "yes you did" and "no we didn't" contest - there are some truly fascinating aspects of this dispute.  For example, consider this incredible caption:

In the Matter of the FINRA Arbitration Between:

  1. ADKO Investors, LLC
  2. Alan C. Dadd as Trustee of the Alan C. Dadd Family Trust
  3. Merle Allen
  4. Bar D Ranch, Inc.
  5. John Beaupre, individually, and as the Sole Member of J.Beaupre Neilsen Complex LLP
  6. Lawrence Berg
  7. Henry Bradley Burns
  8. Lou Ann Burns
  9. Deanna Clotfeiter as Trustee of the Deanna Clottelter Revocable Living Trust
  10. James C. DeMartini
  11. Ruth T. DeMartini
  12. Richard Faulkner
  13. Sudie Faulkner
  14. Sharon Fritzler
  15. Kimber Heineman
  16. Hardy Hodges
  17. Kenneth Hofmeister
  18. Mary Lou Hofmeister
  19. Jimmy and Helen King as Trustees of the King Family Revocable Trust
  20. Jarod Kuntz
  21. Pamela Kuntz
  22. Mary Jensen as Trustee of the Mary A. Jensen Funnel Trust
  23. Bruce Nomian
  24. Pamela Panther as Trustee of the Panther Family Revocable Trust
  25. Donald Reutiinger and Janell Reutiinger, individually, and Donald Reutiinger as President of Bar D Ranch, Inc.
  26. David Robertson, individually, and as Managing Member of ADKO Investors, LLC
  27. Sharon Beaupre as the Sole Member of S. Beaupre Neilsen Complex LLP
  28. Leslie Schifferns
  29. Glenn Spaur
  30. Randall StotzClaimants,


CapWest Securities, Inc., Respondent

(FINRA Arbitration 09-06962, January 13, 2012).

Okay - that's 30:1.  Not great odds. It reads more like the opening roll of the credits for a Cecille B. DeMille's spectacular rather than a FINRA arbitration.  Frankly, I think that we should add Respondent Charlton Heston, just to be fair.

Of course, I wonder whether they reserved Madison Square Garden as the site for the hearings.  I mean, seriously, can you imagine 30 clients with 30 lawyers huddled around a small FINRA Arbitration conference table? And don't even begin to think about how they would have taken a lunch-break order for that group!

From the Sublime to the Ridiculous?

Having set the stage with a Claimants' cast of thousands (okay, I exaggerate), we should have expected an equally staggering demand for damages.  We were not disappointed. Sit down for a sec before you read the dollar amounts.  They may take your breath away.

As demanded in the original and successive Statements of Claim, Claimants' sought the following compensatory damages plus interest, attorneys' fees, and costs:

  • $6,055,763.00
  • $7,645,763.00
  • $8,300,763.00

All Dressed Up With No Place To Go

Given Claimants demand for multi-million dollars in damages, and all that was at stake, it's not surprising to learn that these proceedings got a bit testy.  Consider this comment in the Decision:

On September 23, 2011, the Panel conducted a hearing to consider Claimants' motion for sanctions and to preclude. Respondent did not appear. The Panel determined that an attempt was made by the conference operator to contact Mr. H Thomas Fehn,counsel for Respondent, that Mr. Fehn had been notified by FINRA of the date and time of the hearing, and that the operator was unable to reach Mr. Fehn at the phone number provided. On September 28, 2011, the Panel issued an Order granting Claimants' motion for sanctions and to preclude. Under authority of FINRA Rules 12212 and 12511, the Panel struck Respondent's Answer to the Statement of Claim and entered an award in favor of Claimants subject to further submissions by Claimants of affidavits of damages, attorneys' fees and costs, and responses thereto. The Panel preserved the scheduled hearing dates pending receipt of the requested submissions.

The Panel notes that copies of Claimants' Affidavit of Damages and Affidavit of Attorneys' Fees and Costs were provided to Respondent with stipulation that Respondent would have ten (10) business days to reply. Respondent did not file a response. . .


After considering the pleadings, Claimants' Motion for Sanctions and to Preclude, including Claimants' Affidavit of Damages and Affidavit of Attorneys' Fees and Costs, the FINRA Arbitration Panel found RespondentCapWest liable and ordered it to pay to Claimants:

  • $7,925,763.00 in compensatory damages;
  • $1,188,863.00 in attorneys' fees;
  • $5,840.90 in costs; and
  • interest on the awarded sums at 8% per annum

Bill Singer's Comment

According to various reports, CapWest sold tens of millions of dollars  in private placements, among which were those issued by Provident Royalties, Medical Capital, and DBSI.  However, CapWest was not alone in selling such securities - which soon became toxic with the onset of the Great Recession.Faced with a deteriorating economy, increasing regulatory and investor complaints, and growing litigation costs and awards attributed to unhappy clients, many firms involved with these products crashed and burned.

In September 2011, these private placements prompted the closing of CapWest; other notable casualties of the private placement sector were QA3 Financial, GunnAllen Financial, and Jesup & Lamont Securities Corp. All of which likely explains why Attorney Fehn stopped appearing on behalf of Respondent CapWest.  All of which raises the tantalizing question as to how much of this nearly $10 Million award the Claimants will actually see.