Widow's Failed Brokerage Account Causes Finger Pointing
The $21 billion State Employees' Credit Union is in the middle of a legal quandary involving a widow who opened up a failed brokerage account with a defunct, credit union-formed broker-dealer and investment firm.
The New York Times first reported on the story of Helen Cohen, a widow, now deceased, who bought an investment account from what it said was SECU in September 2005. A broker suggested Cohen buy a real estate investment with a company that owned a Florida apartment complex.
According to the Jan. 15 article, Cohen could make a tax-free exchange of an apartment building that she owned for 30 years and defer capital gains on the sale. Cohen invested $1 million, but a trustee later discovered that the apartment complex was financed with an interest-only loan and other factors that might result in a significant loss.
Cohen's trust eventually lost $700,000 through the failed real estate investment, and the trustee filed a claim in 2009 to recover that amount plus $2.6 million in damages, The Times reported.
The case is now set to go before a Financial Industry Regulatory Authority hearing Feb. 21 to Feb. 28 in San Diego, Arthur Leider, who represents Cohen's trust as president of Investors Arbitration Specialists, told Credit Union Times.
Jim Blaine, president of the $21 billion SECU in North Carolina, in response to the article, sent a letter to The New York Times reporter, and he also provided a copy of the letter to Credit Union Times, (full text, page 10). The article was "definitely not up to 'the standard of the Times,'" Blaine wrote, while offering more details on the Cohen case.
Blaine said XCU Capital, a broker-dealer and investment advisory firm, launched by then Xerox Federal Credit Union, was bought by LPL Financial in September 2007. SECU acquired XCU's corporate brokerage shell in January 2008 after all accounts had been transferred to LPL. The brokerage charter was moved to North Carolina and renamed SECU Brokerage Services in May 2008. Blaine said Cohen does not have an account with SECU Brokerage.
"[Our] due diligence found no existing complaints/liabilities associated with XCU Capital," Blaine said, noting Cohen's complaint was filed in May 2009. "SECU, under California law, has been placed in the position to arbitrate/litigate this matter. A position which continues to amaze us. All parties currently characterize themselves as victims."
According to the Times article, SECU filed a counterclaim in June 2010 against Foster Thornton LLC, the firm that employed Cohen's trustee, saying it told Cohen that it had no concerns or reservations with the real estate investment. SECU asked the court if the trustee would be liable for Cohen's losses. Michael Weisel, the attorney representing SECU, could not be reached and did not comment in the Times article.
One of the main issues involving the Cohen case deals with the fact that when investors file a complaint against a broker, it is typically heard by an arbitration panel such as the Financial Industry Regulatory Authority, rather than a jury or judge. This route tends to be quicker and not as expensive. Some legal experts said the Cohen case has complicated the arbitration process because the rules are that no party can bring any legal action against the other party if the matter can be resolved in arbitration.
Meanwhile, Blaine criticized the Times article saying, "The merits of this case do need to be resolved, but hopefully you can understand our concern with the implications of your article."
Blaine goes on to say "We would like to yell slander, libel, retraction, apology; but perhaps from the New York Times perspective, the word 'treasonable' best applies. Treasonable? Yes, treasonable, since many of your critics say the newspaper has lost its way, is past its prime, and the quality of journalism represented by your article certainly gives 'aid and comfort' to your enemies."