FINRA Panel Grants Advisor Expungement Tied to Covid-Impacted Investment

• Case Outcome: A three-arbitrator FINRA Panel unanimously recommended the expungement of three customer disputes from the advisor’s CRD and BrokerCheck records.
• Core Allegations: The 2022–2023 claims alleged fraud and negligence following losses in a student housing Delaware Statutory Trust (DST) that failed due to the COVID-19 pandemic.
• Key Findings: The Panel ruled the claims were "false" and that the advisor was not involved in any sales practice violations. It specifically noted that the property failure was an unpredictable result of an "exogenous crisis" (the pandemic) rather than poor due diligence.
• Advisor’s Advocacy: Rather than ignoring the issue, the advisor formed a steering committee that helped recover a $50M settlement and $17M jury award for the affected investors before seeking his own expungement.
• Legal Rationale: Relief was granted under FINRA Rule 2080, with the Panel confirming that the advisor performed adequate due diligence and that the clients were sophisticated, accredited investors who understood the risks.

A California financial advisor with nearly a decade of exemplary service encountered three unfounded customer disputes arising from an unforeseen real estate downturn. The 2022-2023 complaints centered on losses in a student housing Delaware Statutory Trust (DST) ravaged by the Covid pandemic. Backed by HLBS Law, the advisor sought expungement in FINRA arbitration to erase the marks from his CRD and BrokerCheck profiles.

The advisor joined LightPath Capital in October 2017. In 2019-2020, clients who were accredited, sophisticated investors with substantial net worths exceeding $1M, real estate expertise, and high-risk tolerances pursued Section 1031 exchanges to defer capital gains taxes. Drawing from their profiles emphasizing growth, income, and tax advantages, the advisor supplied extensive lists of over 30 DST options. He detailed the risks, fees, and terms with each of the clients. The clients independently selected the NP SkyLoft DST, which was a high-rise student housing complex near the University of Texas. In signed disclosures and private placement memoranda, the clients acknowledged the investment’s elevated hazards, such as its sponsor’s litigation history. The clients’ investments ranged from $150,000 to $425,000, comprising modest portfolio portions of between 2% and16%. 

Subsequently, the unanticipated Covid shutdowns decimated the demand for student housing. This halted the investment’s distributions, triggered a bridge loan default by sponsor Nelson Partners, LLC, and ultimately led to a forced property sale. 

The advisor proactively formed a steering committee, rallying 23 broker-dealers and guiding litigation against the sponsor and lender, Axonic Capital. Their efforts resulted in a $50M settlement and $17M jury award for investors. Despite their partial recoveries, clients filed arbitrations alleging securities violations, fraud, and negligence. LightPath settled nominally, for amounts between $25,000 and $130,393, to avert litigation costs. The advisor was only required to make minimal contributions to the settlements ($3,562 in one case), absent admission of fault.

The disclosures unjustly tainted the advisor’s pristine records, offering no genuine investor protection amid an exogenous crisis.

The advisor filed for expungement in October 2024. LightPath filed a non-opposing answer in December. The clients were notified of the expungement hearing. Both clients and California’s securities regulator opposed the advisor’s effort via submitted statements. The clients abstained from the hearing, while the regulator attended virtually.