Facts

The claimant bought Gateway Academy Charter School Tax Anticipation Notes in the amount of $60,000 in April 2001, from a $945,000 Note issued April 1, 2001, at the recommendation of their long-time broker, Klescewski. Gateway Academy issued three Notes in 2001 for a total of $1.8 million but published no prospectus because none of the Notes was for more than $1 million. The charter for Gateway Academy was revoked in January 2002. All three Notes defaulted in July 2002. The claimant lost $60,000.

The claimant filed suit in San Diego County Superior Court. The respondents petitioned the court to compel arbitration and the petition was granted. The claimants filed their claims with the National Association of Securities Dealers on Aug. 29, 2004. The claimant selected Salt Lake City as the site for the hearing. The hearing was held over four days.

CLAIMANT'S CONTENTIONS:
The claimant alleged fraud, misrepresentation, breach of fiduciary duty and negligence. The claimant testified that Klescewski assured the Note was a secure investment backed by Fresno County. The tip sheet used by Klescewski stated that the Note was secured by a pledge of all state and local tax revenue and an intercept mechanism. The claimant's expert, Robert W. Doty, American Governmental Financial Services, testified that Wedbush Morgan Securities Inc. failed to carry out adequate investigation and should not have delegated investigation to the financial advisor of Gateway Academy. Doty testified that Wedbush's departure from applicable national standards was to such an extent as to be reckless. The former head of the municipal bond department for Wedbush Morgan Securities Inc. testified that "4 or 5 of 13 charter school issues failed" during his watch. Gateway Academy finished paying off a prior Note just before the April 1, 2001 Note issued.

RESPONDENTS' CONTENTIONS:
Respondent Klescewski denied making any misrepresentation and alleged that claimant had an investment portfolio that was primarily sub-investment grade. The Panel dismissed all claims against Klescewski during the proceedings.

Respondent Wedbush Morgan Securities Inc. denied any wrongdoing and argued that the only reason that investors lost their money was that Fresno County Unified School District revoked the school's charter without good cause.

Settlement Discussions

Wedbush Morgan Securities Inc. offered $33,000 to which claimant countered $45,000. When claimant agreed to accept $33,000, Wedbush Morgan Securities Inc. stated that the $33,000 offer had been withdrawn.

Damages

$60,000 for the lost investment; $13,596 litigation costs; $25,250 interest. The claimant requested punitive damages and attorney fees. The Panel awarded $120,000 in punitive damages and $30,000 for attorney fees. The Panel also charge all arbitration costs to Wedbush Morgan Securities Inc. in the amount of $10,400. The claimant also received a refund of a $750 payment towards arbitration fees from the NASD.

Other Information

According to plaintiff, on June 9, 2006, respondent Wedbush filed a petition to vacate arbitration award or, in the alternative, to correct arbitration award, in the San Diego County Superior Court.