Two Cambridge Investment Research clients have sued the firm, alleging their advisors overconcentrated their portfolio in illiquid, private investments that were inappropriate for their risk profile and that caused a loss of at least $1 million.

Brian and Karen Husted invested roughly $9 million with Cambridge advisors Todd Paradise and Steven Gessner in 2016 after Brian Husted sold his software business, according to the complaint, filed in the Northern Division of the U.S. District Court in Maryland last week.

The Husteds claimed breach of fiduciary duty, negligence and negligent supervision, and violations of the Maryland Securities Act. They are seeking a jury trial and compensatory and punitive damages, interest, costs and attorneys’ fees. The complaint said the exact amount of their alleged loss will be determined during trial.

Cambridge officials would not discuss the allegations, saying "As a matter of policy, we do not comment on pending litigation."

The Husteds chose the advisors because they already had an established relationship involving the management of Brian Husted’s 401(k) plan, the lawsuit said.

The complaint described the Husteds as moderately risk tolerant and growth-oriented. Given the established relationship and the fact that both Paradise and Gessner were certified financial planners, the lawsuit alleged, the advisors should have constructed “an investment strategy with an eye towards growth with only moderate risk of principal loss. This would have naturally included a diversified portfolio of liquid assets such as stocks, bonds, mutual funds, and ETFs, with limited exposure to speculative or illiquid investments or other exotic asset classes."

Instead, the complaint alleged, the Cambridge advisors overconcentrated the Husted assets in a portfolio with several high-risk and alternative investments that tied up their assets and required the Husteds draw on a securities-backed line of credit for cash flow. For this, the advisors generated “high commissions” and Cambridge charged an ongoing advisory fee to manage these investments, the complaint alleged.

The complaint asserted that since illiquid investments take time to register gains and losses, and can’t be valued daily on an exchange, the Husteds were in the dark about how the investments, including $2 million invested in non-traded REITs and $600,000 invested in oil and gas drilling funds, were doing.

Some 29% of the Husted assets were invested in alternatives, the lawsuit alleged, which was “not consistent with the [Husteds] stated investment objectives and risk tolerance, and further, far exceeded [Cambridge’s] firm concentration limits.”

The Husteds first learned their investment wasn’t doing well when, in late 2020, one of the companies they were invested in went public, and Paradise and Gessner suggested selling the new public shares at a “substantial loss, purportedly for tax-loss harvesting,” the lawsuit said.

At that point, the Husteds terminated their relationship with the Cambridge advisors and started working with another advisor who suggested they sell the shares to rebalance their portfolio, the lawsuit said. It was then that the Husteds realized they had lost their entire $750,000 investment, the lawsuit alleged.

Similarly, they didn’t realize their $1 million investment in KBS Growth & Income REIT also had substantial losses until July 2024, when the fund liquidated, the lawsuit said.