A troubled firm acquired by B. Riley Financial nearly four years ago has won a hefty arbitration award against a former broker accused of placing clients in unsuitable real estate trusts.
A Financial Industry Regulatory Authority arbitration panel last week ordered Mark Sam Kolta to pay nearly $17.7 million in damages plus interest — along with compensation for costs, disbursements and fees — to his former firm, National Securities, over allegations of breach of contract and unjust enrichment.
Kolta has 28 customer complaints dating to 2018 on his official record, most of them involving allegations of unsuitable investment recommendations, according to FINRA's
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B. Riley footed settlement bills
Michael Mullen, the CEO of B. Riley's wealth business, said on Wednesday that most of the settlements arising from Kolta's alleged misdeeds were paid by B. Riley. Last week arbitration's award against Kolta essentially reimburses the firm for those costs.
"B. Riley supported these settlements," Mullen said. "It was important for them to do the right thing by the investors that were harmed."
Mullen was himself the CEO of National Securities' parent company, National Holdings, when the sale to B. Riley took place. Mullen said he oversaw the institution of supervisory controls for brokers after he took over National Holdings in early 2017.
One of the first employees to send up red flags was Kolta, Mullen said.
"He was permitted to resign just before he was going to be terminated for cause," Mullen said.
B. Riley is now in the midst of
Regulation on REIT risks
Attempts to reach Kolta through his lawyer — Steven Lucia of Pheterson Spatorico in Rochester, New York — were unsuccessful. Kolta became the subject of a separate
Nontraded REITs give investors a way to put money into real estate without having to actually own land or buildings. Unlike their publicly traded cousins, private REITs don't have shares that can be bought and sold on exchanges. Their often obscure nature and often high barriers to pulling money out have led many critics to caution that nontraded REITs are best left to investors with a strong ability to bear risk.
Regulators have put forward
FINRA alleged Kolta had not properly taken into account his clients' net worth, income, investment objectives and ages when recommending REITs. FINRA accused Kolta in some cases of falsifying documents to make it seem as if clients who were in fact not qualified to invest in nontraded REITs were well suited for risky investments Regulators also said Kolta placed an unsuitably high percentage of some customers' portfolios in this sometimes risky asset class, according to regulators.
A FINRA disciplinary panel on Aug. 15 barred Kolta from the industry and ordered him to pay $297,823 in disgorgement of ill-gotten gains and $6,041.61 in hearings costs. Kolta appealed that decision the following month to FINRA's national adjudicatory council, which has authority to review the agency's regulatory actions.
Kolta also fired back in his arbitration case against National Securities' allegations, seeking an unspecified amount of damages, attorneys' fees, and costs. But he didn't attend an evidentiary hearing held before the three-member FINRA panel and his counterclaim was dismissed.
Handling the industry's 'rogue brokers'
As is typical in these sorts of cases, the arbitrators in this one did not go into the reasons for their decision. Douglas Schulz, a securities expert and the president of Invest Securities Consulting, said the $17.7 million penalty against Kolta is likely too large to be collectible. Mullen of B. Riley said he did not know if the money could be collected or not.
The amazing thing, Schulz said, is that someone with such an extensive disciplinary record was able to have as long a career in the industry as Kolta enjoyed. After leaving National Securities in 2017, Kolta moved to Aegis Capital for less than a year and eventually landed at Worden Capital Management, which was booted from the industry by FINRA in 2022.
"There are two things we need to do with these rogue brokers," Schulz said. "First of all, don't hire them. Second, if you're going to hire them, you have to supervise the hell out of them. And if they continue to do questionable things, you need to get rid of them."
