A retired widow has sued the manager of a Baltimore-based hedge fund who she alleges did not disclose the risky investment that led her to lose more than half of her life savings.
Virginia Baerga claims Wayne A. Menzie, who was also her longtime financial adviser, told her that his M&B Capital Management Fund was a “safe and secure investment” but did not mention she did not meet the minimum qualifications to invest in the fund.
The lawsuit, filed last Friday in Baltimore City Circuit Court, seeks the $360,000 she lost as well as $700,000 in punitive damages.
“This lady is in a real tough spot,” said Thomas C. Costello, of the Costello Law Group in Towson. “She’s retired, and a significant portion of her savings is gone.”
Menzie, who lives in Havre de Grace, did not respond to requests for comment.
Baerga, who worked in hospital administration, met Menzie through her bank more than a decade ago, according to Costello. He began working as her financial adviser in 2003, according to the lawsuit. In 2012, Menzie told Baerga he would be starting his own financial advisory firm and asked her to transfer her money, according to the lawsuit.
“Menzie went on to falsely state that at his new firm he would invest her life savings in a conservative manner,” the lawsuit states.
Menzie formed M&B Capital Management LLC, formerly CMB Capital Management LLC, in October 2011, according to state records. (The company was forfeited last October for failing to file a property return in 2012, according to state records.)
Baerga invested $500,000 in the Capital Management Fund between June and September of 2012, an amount equaling a third of the fund’s $1.5 million in assets under management, according to a March 2013 filing with the U.S. Securities and Exchange Commission. Rather than being low-risk, however, the fund was a “highly speculative, illiquid and leveraged investment” that collapsed in October 2013, at which point Baerga withdrew her remaining money, according to the lawsuit.
But Baerga claims she should never have been allowed to invest in the Capital Management Fund in the first place. Menzie, in SEC filings, states the fund sells securities to “accredited investors” only, meaning individuals with an annual income of greater than $200,000 or a net worth of greater than $1 million, according to federal guidelines.
If securities are sold to a non-accredited investor, the fund is required to provide the investor with information that resembles a “full-blown prospectus,” said Abba David Poliakoff, chairman of the Securities Practice Group at Gordon Feinblatt LLC in Baltimore, who is not involved in the case.
An unaccredited investor also triggers additional, lengthy disclosures to the SEC that most funds try to avoid, according to Kenneth B. Abel, co-chair of the Business Group at Ober, Kaler, Grimes & Shriver PC in Baltimore.
“It’s expensive and time-consuming,” he said. “It’s not that it’s hard but that it’s too much trouble to do.”
Baerga alleges in her lawsuit that she did not learn of the Capital Management Fund’s high level of risk nor that she was considered an unaccredited investor until after the fund collapsed in October 2013.
“Due to defendants’ superior knowledge of the securities markets and investments, plaintiff reposed trust and confidence in them and reasonably and justifiably relied on defendants to conduct themselves so as to protect her interests,” the lawsuit states.
Poliakoff said lawsuits such as Baerga’s are common but that most brokerage firms have rules that require such cases to go directly to arbitration.
The lawsuit seeks damages for fraud, constructive fraud, breach of contract, negligent representation and violations of the Maryland Securities Act.
“These cases are complicated because they relate to multiple areas of securities law,” said Abel. “Based on the complaint, all of these [areas] are in play.”