The Financial Industry Regulatory Authority’s Department of Enforcement has filed a complaint against Megurditch (Mike) Patatian, a former Western International Securities broker, who allegedly made 81 unsuitable recommendations to 59 customers who purchased more than $7.8 million in non-traded real estate investment trusts.
Patatian is also accused of impersonating two clients, inflating customers’ net worth in 26 transactions to circumvent REIT limitations, and “routinely” exaggerating his customers’ investment experience on new account forms.
While Patatian could not be reached for comment at press time, in the comment section of his BrokerCheck profile, he denied all of FINRA’s claims, calling them “false allegations.”
According to FINRA, the REIT investment recommendations occurred between 2013 and 2017 and were unsuitable because Patatian “lacked a reasonable basis to recommend the product to any investor,…did not understand the basic features and risks associated with the non-traded REITs, and failed to conduct reasonable diligence to understand the product.”
Patatian reportedly believed that non-traded REITs would be illiquid for one to three years, instead of the seven-plus-year timeframe that is typical of such investments.
FINRA pointed out that the prospectus of one REIT Patatian sold to 12 investors (denoted in the complaint as “AHTII”) specified that investors “should purchase the shares only as a long-term investment because of the illiquid nature of the shares.”
FINRA indicated that six of Patatian’s customers had liquidity concerns – one customer who “needed liquid investments” was diagnosed with cancer at the time of her REIT purchase and was going through a divorce, another was a couple nearing retirement who requested “only liquid investments,” and another had been retired for nine years and had “severe” health issues including dementia.
Patatian is also accused of recommending that four customers surrender existing variable annuity policies to fund their non-traded REIT investments. FINRA said that each recommendation was unsuitable because Patatian “failed to understand the adverse financial consequences of the surrenders, causing customers to incur taxes and surrender fees.” Further, FINRA said that he incorrectly believed that the transactions constituted a 1035 exchange and were therefore not a taxable event.
In one instance, Patatian allegedly recommended that a married couple surrender a variable annuity that was held away from Western in order to purchase a non-traded REIT.
After the surrender, FINRA claims that Patatian impersonated the wife on a telephone call with the insurance company to obtain its contract value and surrender charge, which was $4,212. When the insurance company representative asked him to clarify his identity, Patatian purportedly stated that he was the customer’s husband and provided his date of birth and social security number to “authenticate” his identity.
Finally, Patatian is accused of inflating customers’ net worth in 26 sales to circumvent REIT limitations, as well as exaggerating customers’ years of experience in stock and bond investing on new account forms.
The state of the California limits purchases in a single REIT to no more than 10 percent of a customer’s net worth. All 59 customers in the complaint were California residents. In order to comply with these limitations, Western required that each customer sign a client disclosure form that included their net worth and annual gross income.
In one example provided by FINRA, a security guard nearing retirement surrendered his $95,289 variable annuity to purchase a REIT, which represented almost all of his liquid net worth of $130,000. To avoid the 10 percent concentration limit, Patatian allegedly inflated his net worth from approximately $180,000 to $1 million on the client disclosure form.
Patatian also allegedly stated that the client had 30 years of experience investing in stocks, bonds, and mutual funds, when he had only invested in a single variable annuity and had never invested in stocks.
In another example provided by FINRA, a 58-year-old woman with cancer who was going through a divorce liquidated her $360,000 variable annuity to purchase a REIT, although she requested only liquid investments. Patatian allegedly inflated her net worth from $900,000 to $4 million. She lost roughly $26,000 on her REIT investment in addition to the incurred taxes and penalties, and Patatian falsely claimed that she had 20 years of investment experience when she had none, FINRA said.
In total, Patatian was paid $458,418 in commissions from the sale of the 81 non-traded REITs, which is approximately 80 percent of his earned commissions from April 2013 through March 2017, including 96 percent of his commissions in 2013, and 95 percent of his commissions in 2014. FINRA noted that prior to associating with Western, he had no experience or training with REIT sales.
Patatian was registered with Western from April 2013 to April 2020 and was permitted to resign “after the firm questioned the integrity of a client signed document,” FINRA stated in the complaint.
According to his BrokerCheck profile, prior to Western, he was permitted to resign from Cuso Financial Services, for failing “to follow firm policy with regards to firm transaction documentation.” Before that, he was terminated from WM Financial Services Inc. for “inconsistencies in statements provided to the regional sales manager.”
Patatian is currently registered with Supreme Alliance LLC, an independent broker-dealer based in Germany with offices in the United States.