The Financial Industry Regulatory Authority has filed a complaint against a former representative with Western International Securities in Westlake Village, Calif., claiming he recommended unsuitable non-traded real estate investment trusts to clients, in some cases inflating client assets to make them eligible for the REITs and in one case impersonating a client.
According to Finra, Megurditch Patatian (also known as Mike Patatian) recommended 81 REIT investments worth $7.8 million to 59 clients from 2013 to 2017, even though, the agency says, “he lacked a reasonable basis to recommend the product to any investor” and didn’t understand its basic features or conduct reasonable due diligence on the purchases. Many of these clients were retirees whose risk profiles were not suited to non-traded REITs, according to the complaint.
Non-traded REITs are not traded on exchanges. They are often illiquid, include high up-front charges and charge fees for early redemption that critics say eat into return.
To fund some of these purchases, Finra said, Patatian had the customers surrender variable annuities, which triggered taxes and fees. Finra’s Department of Enforcement also said that he recommended unsuitable variable annuity exchanges.
“In one instance,” said the agency, “Patatian also impersonated a customer—without the customer’s consent or knowledge—in a telephone call with an insurance company to obtain the contract value and surrender fee for the variable annuity.”
The agency said that Patatian was paid $458,418.07 in commissions from the sale of the 81 non-traded REITs, and that this represented about 80% of his earned commissions from April 2013 to March 2017. These sales were 96% of his 2013 commissions and 95% of his 2014 commissions, the agency said. Western terminated his registration in April 2020, letting Patatian resign after it “questioned the integrity of a client-signed document.”
All 59 of his customers were from California. According to Finra, the state and the REIT issuers limited the amount that a customer could invest in any non-traded REIT to 10% of the customer’s net worth.
“To avoid the 10% limit,” the Finra complaint says, “Patatian inflated customers’ net worth on the client disclosure form in 26 instances. In doing so, Patatian was able to sell non-traded REITs in amounts over 10% of the customers’ net worth to 18 customers.”
Twenty-one of the clients were seniors. One of his customers mentioned in the complaint was a 68-year-old retiree who wanted low-risk, liquid investments. Finra said Patatian recommended a $60,000 investment in a non-traded REIT, which would have represented 12% of her $500,000 net worth, and adds that the broker inflated this customer’s assets to $3 million on her client disclosure form. Another customer, a 58-year-old, had cancer and was going through a divorce, and required liquidity in her investments. Patatian, Finra said, recommended that she sell a $360,000 variable annuity and put the proceeds in a non-traded REIT. The agency says that the broker inflated this customer’s net worth from $900,000 to $4 million on her client disclosure.
Finra says that these investments were not suitable for investors with short-term liquidity needs and the prospectuses for these investments said specifically that they were only for those seeking long-term investments given their illiquid nature.
“Patatian incorrectly believed that the non-traded REITs he sold would be illiquid for just one to three years,” the agency said. “In fact, the non-traded REITs Patatian sold could remain illiquid for seven or more years.”
Finra’s Department of Enforcement recommended in disciplinary proceedings that Patatian be required to disgorge ill-gotten gains and make complete restitution with interest.
Patatian is currently with Supreme Alliance, whose main address is in Germany and whose branch office is in Granada Hills, Calif. His BrokerCheck profile says that he resigned from Newbridge Securities in 2020 after the firm said he failed to disclose an arrest in the pre-hire process. In 2013, BrokerCheck says he resigned from CUSO Financial Services; it was alleged that he failed “to follow firm policy with regards to firm transaction documentation.”
Patatian had not returned a phone call or e-mail seeking comment from Financial Advisor as of press time. However, in a reply to a BrokerCheck disclosure last year that spoke of his alleged violation of Finra suitability rules, he said “I deny all claims against me. False allegations.” In a specific customer dispute, he said that one client who complained had acknowledged the liquidity provisions documents.