Texas Advisory Firm Ordered to Pay Exxon Retirees $3.8 Million

   By Matthias Rieker 
 

An arbitration panel ordered a Texas advisory firm to pay a group of 19 retired Exxon Mobil Corp. (XOM) employees a total of $3.8 million for losses from an alleged failed investment strategy designed to protect them from stock-market downturns.

The retirees invested nearly $40 million with U.S. Capital Advisors LLC of Houston, and contended that they could have made $3 million from the strategy as it was described to them by advisers with the firm. Instead, they lost $1.25 million, according to their arbitration claim with the Financial Industry Regulatory Authority.

The panel awarded them a combined $1.9 million in damages plus interest, along with $852,630 in punitive damages and almost $1 million in legal and other costs, according to the award posted on Finra's website. Individually, the damage awards ranged from $28,294 to $195,949.

Finra arbitrators usually don't explain the reasoning for their decisions but in this case they did, saying they found "egregious, recurrent, and willful violations of a fiduciary relationship" between U.S. Capital Advisors and the investors.

Many of the claimants put money into the strategy at the recommendation of a group of advisers who targeted Exxon Mobil employees nearing retirement with investment seminars. The advisers originally worked for UBS AG (UBS, UBSN.VX), and the clients stayed with them when they left that firm to join newly created U.S. Capital Advisers in 2010.

The "total return" strategy, the investors were told, would hold mainly U.S. stocks and exchange-traded funds in a rising market and move the money into cash when markets fell, with trades triggered by "objective technical indicators," according to the claim. But when the advisers left UBS, their new firm was "understaffed" and "ill-equipped to execute" the strategy, and they strayed from the model, the claim said.

Asked for comment on the award, Patrick Mendenhall, the chief executive of U.S. Capital Advisors, defended his firm. He said the client's claim focused only on the losses from the total return strategy but ignored gains from other investments.

"We are clearly disappointed with the award; we certainly don't understand it," he said.

Thomas Fulkerson, a Houston lawyer who represented the retirees with his partner, Wesley Lotz, said financial advisers can't argue that advisers who make money in one client accounts would have immunity for the losses in other accounts. He said the panel asked for a specific briefing about the argument.

"We are gratified" by the award, he said.

Write to Matthias Rieker at [e-mail]

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