FINRA Panel Rules In Claim Involving QA3 and TICs

First it was private-placement sales involving Medical Capital and Provident Royalties. Now QA3 Financial Corp. has lost a $1.6 million arbitration claim over a real estate investment known as a TIC, or tenant-in-common exchange.

As reported Jan. 20 by Investment News, the claimants in the case are an elderly California couple who bought the TIC in question when they were “in less than perfect health, and had very limited investment experience and limited financial reserves.”

In making the award, the arbitration panel stated that QA3 “did not adequately supervise” James R. Files, the broker who sold the products. The award also said that QA3 “had limited direct contact with Mr. Files and did not [show] evidence that it had provided him any specific training on the sale of TICs.”

The award stems from sales of limited partnerships packaged by DBSI Inc., a top creator and distributor of TICs until it began to default on payments to investors. In November 2008, DBSI filed for Chapter 11 bankruptcy protection.

Following the bankruptcy filing, James Zazzali, the trustee in the case, filed a lawsuit against nearly 100 broker/dealers that sold the DBSI TIC product. The lawsuit alleges that the TIC was actually a $600 million Ponzi scheme.

In its decision against QA3, the FINRA panel commented on the selling practices used by the broker/dealer to pitch the TIC to investors, stating that: “QA3 provided substantial evidence and testimony that it had a comprehensive set of practices and procedures concerning the internal approval and marketing of products it approved for sale by its representatives….. However, there is also substantial evidence that its marketing and sales approval practices and procedures were routinely ignored.”

“This is the largest DBSI arbitration award issued to date,” said the attorney for the claimant in the Investment News story.  He added that “the evidence at the hearing showed that QA3 approved some DBSI transactions before a due-diligence review was completed.”

That claim was disputed, however, by QA3.

A TIC is a real estate investment in which two or more parties own a fractional interest in a select property. The investments gained popularity in 2002 after the Internal Revenue Service ruled investors could defer capital gains on real estate transactions that involved an exchange of properties.

In addition to DBSI, QA3 Financial also faces arbitration claims from investors stemming from private-placement sales of Medical Capital Holdings and Provident Royalties LLC.