An investor who claimed that Goldman Sachs & Co misrepresented the risks of a distressed debt fund has lost a $1.4 million securities arbitration case against the brokerage and two of its advisers, according to a ruling.
Athena Venture Partners LP, an investment vehicle for Richard Caruso, filed the case against the unit of Goldman Sachs Group Inc in 2009. The case alleged civil fraud and misrepresentation and the sale of unsuitable investments, among other things, according to a securities arbitration ruling.
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The Financial Industry Regulatory Authority (FINRA) arbitration panel also recommended removing disclosures about the case that appear in public filings for the investor's private wealth adviser at the firm and a Goldman portfolio manager, according to the ruling dated Wednesday and posted to FINRA's website on Thursday.
A lawyer for Athena did not return a call or respond to an email requesting comment. A Goldman Sachs spokesman did not respond to an email requesting comment.
The decision provides a glimpse at some of the unique challenges that wealthy investors can face in arbitration, say lawyers. Brokerages typically argue that wealthy and sophisticated investors fully understand the risks of the securities they are buying, including certain alternative investments such as the distressed debt fund at issue.
Distressed debt funds invest in low-rated securities from troubled companies or may extend credit to those companies.
Goldman argued that Caruso, who controlled Athena, understood the risks of alternative investments and had many years' experience in financial ventures. A general partner for Athena was also an experienced financial professional, Goldman argued. Athena established the account at Goldman specifically to pursue higher-risk, higher-reward investments, it argued, according to the ruling.
FINRA's panel rejected arguments that Goldman misled Athena. Athena alleged that a summary description about the fund failed to disclose, among other things, its use of leverage, types of investments, and the high risk to principal. The panel disagreed, writing that the description itself was not an official fund offering and was sent before the fund opened to investors, according to the ruling.
Athena also alleged that it did not receive a private fund prospectus from Goldman, known as a private placement memorandum, which discloses various risks. But Athena did not prove that point, the panel wrote. Athena's signature in another document acknowledged receiving the memorandum, the panel wrote.
FINRA rulings typically do not include reasons for the panel's decision. Arbitrators must, however, explain their reasons for recommending to remove certain disclosures from public records for securities industry professionals, a process known as "expungement."
Athena initially asked for more than $2.4 million in damages but lowered the request to $1.4 million after the hearing.
(Editing by Matthew Lewis)