Subway Founder Loses NASD Arbitration – Not a Big Surprise

The co-founder of Subway recently lost his NASD arbitration claim, in which he alleged the UBS caused him $193 million in damages by improperly investing funds held by trusts he controlled in tech stocks before the 2001 market implosion. As Mr. Deluca discovered, NASD arbitration panels are not usually very investor friendly, especially when the investor in question is a billionaire and a sophisticated businessman and investor. The Wall Street Journal has the whole story:

The billionaire co-founder of Subway, the fast-food chain known for promoting the slimming effects of its sandwiches, charged that the brokerage house of UBS AG slimmed down his bankroll by more than $190 million because of a big bet on tech stocks after the stock-market bubble burst.

But in a decision that recently became public, a three-person National Association of Securities Dealers arbitration panel rejected Fred DeLuca’s 2005 claims that UBS mismanaged trusts created for him, which he argued resulted in big losses. The trusts were heavily invested in technology and telecommunications stocks that fell to earth after soaring in value during the dot-com stock bubble.

The case opens a rare window into arbitration claims by wealthy individuals against their brokers, showing how difficult it can be for them to recover losses from Wall Street brokerages. As is often the case with arbitration awards, the panel didn’t give reasons for its decision. But rich people have a tough time winning claims, because they tend to know a lot about how the stock market works and as a result don’t get a lot of sympathy when they do cry foul. And while the decisions in these cases are made public, the tangled mesh of trusts that some wealthy people use to invest their money can make it hard to determine who filed the arbitration claim.

The decision also underscores how hard it has been for investors to recoup bubble-era losses despite widespread allegations that Wall Street hyped stocks for its own benefit and sold clients unsuitable investments. Investors have had trouble prevailing, as they are usually required to prove that they relied on Wall Street’s advice or that the investments were unsuitable in the first place.

In Mr. DeLuca’s case, people familiar with the proceeding said, UBS argued that the investments were authorized and directed by the 59-year-old Mr. DeLuca and were consistent with his objective of aggressive growth.

“Arbitrators place a difficult burden on wealthy, smart people to establish that they relied on professional advisers,” says Atlanta attorney Boyd Page, who represents individuals in such claims.

The stocks in the accounts, according to the arbitration ruling, included onetime telecom darlings MCI WorldCom Inc., Lucent Technologies Inc. and Tellabs Inc., and tech stocks Altera Corp., America Online, Hewlett-Packard Co. and Microsoft Corp. They also included two health-care issues, Bristol-Myers Squibb Co. and Oxford Health Plans Inc.

One of the largest dollar losses was incurred on a software stock, PMC-Sierra Inc., which fell more than 95% between 2000 and 2002, according to people familiar with the case.

A spokesman for UBS said the firm is “pleased with the outcome in this case,” adding that “the panel agreed with UBS that the claims lacked merit and accordingly dismissed them in their entirety.” Not only did the DeLuca trusts fail to recover any of their losses, they also were ordered to pay $50,000 to reimburse UBS for document-production costs. Mr. DeLuca’s Florida-based broker joined PaineWebber Group Inc. in the 1990s, and UBS acquired the firm in 2000.

A spokesman for Subway’s owner, Doctor’s Associates Inc. of Milford, Conn., declined to comment, saying the matter “has nothing to do with Subway.”

Mr. DeLuca, a resident of Fort Lauderdale, Fla., has a net worth estimated by Forbes magazine at $1.5 billion. Fresh out of high school, he co-founded Subway in 1965 with $1,000 in start-up money from a family friend. Today, Subway is the world’s largest sandwich chain, with more than 25,000 stores in 83 countries.

A lawyer for the trusts that brought the action, Steven Caruso, said he believes the outcome shows it is difficult for wealthy investors to win big-ticket damages in such cases. Out of 148 claims for more than $1 million that were decided on in 2006, he said, more than 60% were “dismissed in their entirety.” Mr. Caruso is president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in such claims.

In a landmark case filed in 1996, the late Canadian investor Henryk de Kwiatkowski, the owner of famed horse breeder Calumet Farms, sought to recover $300 million from Bear Stearns Cos. for currency-trading losses. But a May 2000 jury award of $164.5 million was overturned on appeal.

It is rare for these cases to end up in court, since brokerage contracts that customers sign when they invest with a big firm generally require that investor gripes be handled via arbitration.

Although the 25 trusts whose five trustees filed the claims against UBS weren’t publicly identified as connected with Mr. DeLuca, people familiar with the case said they were created for his benefit. Some trusts were set up offshore in Lichtenstein, the Isle of Man and Guernsey, the people said.

During 12 days of hearings between January and April, UBS lawyers argued that the claims covering the period 1998-2001 hadn’t been filed in time — which can range from two years to four years under different state laws — and that the losses were merely a reduction in huge paper profits from the stocks’ earlier run-up in value.

In a civil lawsuit filed in Connecticut civil court in 2003, former Subway Controller Thomas W. Hislop said he managed some of Mr. DeLuca’s personal investments between 1994 and 2001, and that they soared in value to as much as $500 million.

In his own filing in the same case, Mr. DeLuca said Mr. Hislop incurred losses by failing to heed Mr. DeLuca’s instructions to sell tech stocks in 2000. In an interview with the New Haven Register last year, a lawyer for Mr. Hislop said Mr. DeLuca signed a form in September 2000 directing Mr. Hislop to “stay aggressive.” Asked for information about the case last week, the same lawyer replied that he was on vacation.

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