Monthly Archives: December 2009

Private placement claims are on the upswing, prompting new questions on whether these largely unregulated securities are appropriate investments for many individual investors. A number of the claims filed in recent months target smaller broker/dealers that investors say sold them fraudulent private placements. Case in point: Private placements in Medical Capital Holdings.

In July, the Securities and Exchange Commission (SEC) filed civil fraud charges against Medical Capital, alleging that the Tustin, California-based financial services company committed fraud as far back as 2003.

The SEC accuses Medical Capital Holdings of lying to backers as it raised and misappropriated millions of dollars of investors’ money while keeping mum to buyers about the more than $1.2 billion in outstanding notes and the $993 million in notes that had entered into default or resulted in late payments of both principal and interest to investors.

As reported Dec. 10 by the Wall Street Journal, the Medical Capital case has produced a slew of investor claims against smaller brokerages that sold Medical Capital private placements, including Securities America, Capital Financial Services and QA3 Financial Corp.

Investments in private placements carry a considerable amount of risk. To begin, securities sold through private placements are not publicly traded and, therefore, provide less liquidity to investors. Despite these concerns, the SEC has actually lowered the income and asset thresholds required to purchase private placements. In addition, issuers are allowed to sell a percentage of their private placements to individuals who don’t meet suitability standards.

Kelvin Koma, a former financial adviser with JP Morgan Chase Bank, has been barred from associating with any member of the Financial Industry Regulatory Authority (FINRA). FINRA imposed the sanction over allegations that Koma obtained ATM cards belonging to customers of his member firm’s affiliated bank and then used the cards to make unauthorized withdrawals from customers’ accounts for his own personal use.

Other recent disciplinary actions taken by FINRA include those against:

• William J. Gray, former financial adviser for AXA Advisors LLC. Gray was barred from association with any FINRA member in any capacity for allegedly forging the signatures of a customer, as well as those of brokers of his member firm, on paperwork related to the customer’s purchase of a variable annuity.

• Dermot A. Graham, former registered representative with PFS Investments. Without admitting or denying the allegations, Graham consented to FINRA’s entry of findings that he wrongfully and without authorization converted $8,666.12 in funds for his own use by securing debit or credit cards linked to customers’ accounts and used the cards for his personal benefit without the individuals’ knowledge or consent.

• Ronald Dwayne James, former registered representative with TD Ameritrade. James was barred from associating with any FINRA member over allegations that he conducted securities transactions in a customer’s account without that customer’s prior authorization or consent.

If you suffered investment losses because of fraud, unauthorized trading, conversion or misrepresentation on the part of the above individuals, please contact us.

As everyone knows by now, the meltdown on Wall Street has affected Main Street in unexpected, unusual and unprecedented ways. Consider the enchanting world of Walt Disney’s Magic Kingdom. As reported a year ago by USA Today, the natural gas that cooks the food in Disney’s Magic Kingdom – and elsewhere throughout America’s Main Street – was one of the things that Wall Street bought and sold to investors as safe, low-risk investments.

On Sept. 15, that natural gas deal – known as the Main Street Natural Gas bonds – went bust, plummeting in value after Lehman Brothers Holdings, which had guaranteed the bonds, filed for bankruptcy protection. Investors and consumers subsequently found themselves reeling from the fallout. Investors were out $700 million and places like Disney World experienced higher prices to cook the food for the visitors to its Magic Kingdom.

Main Street Natural Gas is a non-profit corporation of the Municipal Gas Authority of Georgia. In 2006, several Wall Street investment firms came up with the idea to get the Authority to lock in, for presumably decades, inexpensive supplies of natural gas. The idea was simple: Borrow money at low, tax-exempt interest rates and provide that money to the investment banks. Wall Street would then use that debt to make investments and, in turn, supply natural gas at low prices.

The investments made by Main Street included natural-gas derivatives – contracts that bet on the cost of natural gas in the future. In April, Main Street borrowed $700 million, giving it to Lehman Brothers. In return, Lehman promised to arrange delivery of nearly 200 billion cubic feet of natural gas over 30 years at a below-market price.

“That’s like a taxi driver borrowing $7,000 and giving it to a man who promises to supply gasoline for the next 30 years at 50 cents per gallon less than the market price,” said the USA Today article.

The savings associated with such a deal would be nothing to sneeze at – that is if the company holding all the money stayed in business. Lehman Brothers Holdings filed for bankruptcy on Sept. 15. At the time, less than 1% of the natural gas it promised to deliver actually made it.

As for the $700 million, it went the way of Lehman’s other assets: into a pool of money allocated to repay creditors. In other words, Main Street Natural Gas’ lenders must wait in line with countless other unsecured creditors. If they’re lucky, the lenders might get 30% of what they are owed. And the bonds they purchased to finance the natural-gas deal in the first place? They now sell for pennies on the dollar.

The brokerage firms that sold Main Street Natural Gas Bonds to investors never let on about the significant risks associated with the investments nor did they disclose critical information about the deteriorating fiscal health of Lehman Brothers and its toxic mortgage debt exposure.

If you own or owned Main Street Natural Gas Bonds guaranteed by Lehman Brothers Holdings, you may have a viable claim to recover any investment losses you suffered following Lehman’s bankruptcy. Please contact our firm to tell us your story.

Fair Finance, the Ohio company owned by Tim Durham and the focus of allegations by federal authorities of operating as a possible Ponzi scheme, has new and troubling revelations. This time, they involve Marion County Prosecutor Carl Brizzi, who’s been at the center of the Durham controversy for his financial ties to the Indianapolis businessman and his role as a board member of Fair Finance. 

According to a Dec. 12 article by the Indianapolis Star, the Durham/Brizzi connection may run much deeper than Brizzi has previously let on. The article reports that Brizzi also invested in Red Rock Picture Holdings, a Los Angeles movie production business that loaned millions of dollars to another company Durham manages, National Lampoon. 

The article says it’s unclear whether Brizzi still holds shares in Red Rock. If he does, however, it would clearly refute a previous statement the prosecutor made when he said he had no financial dealings related to Durham other than those already reported.

Adding further intrigue to the story is how Brizzi actually came to invest in Red Rock in the first place. It is a little known company, and few, if any, analysts apparently follow the stock.

According the Indy Star article, Red Rock has loaned at least $1 million to Daniel Laikin, who served as National Lampoon’s CEO until last year when he was forced to resign amid allegations of stock manipulation. Laikin ultimately pleaded guilty to one felony count of conspiracy. 

Brizzi also owns stock in yet another business controlled by Tim Durham – Dallas-based CLST Holdings. In early December, the Securities and Exchange Commission (SEC) subpoenaed CLST for its financial records.

Overconcentration in certain preferred stocks has devastated the portfolios of thousands of investors. Problems first began when already fiscally troubled companies such as Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers (LEH) and Citigroup (C) issued shares of preferred stocks as a way to raise capital. In turn, a number of brokerage firms marketed the preferred stocks of these companies and the preferred shares of other companies in the banking, insurance and financial sectors as safe and stable investments for income-minded investors, causing investors to over-concentrate their portfolios.

Diversification is the No. 1 rule of investing. When an investor places his or her money into one asset class or market sector, the potential for increased and unnecessary risk of loss goes up dramatically. In the case of certain preferred shares, many brokers failed to disclose not only the potential risks associated with the investments but also failed to provide an accurate picture of the financial health of the issuing companies. In reality, many of these companies were in dire financial straits, having already taken huge financial hits on their balance sheets as a result of losses connected to the mortgage meltdown.

A preferred stock essentially is a security issued by companies to raise capital from investors. The advantage of owning a preferred stock is it pays fixed dividends. Banks and other financial institutions are among the main issuers of preferred stocks, accounting for approximately 80% of the S&P U.S. Preferred Stock Index.

In the past year, however, when share prices of preferred stocks suffered massive losses because of the health of the issuing companies, investors quickly discovered that their preferred shares were not working out as planned. Case in point: Fannie Mae, Freddie Mac and Citigroup.

All three companies were forced to seek financial bailouts from the federal government in order to stabilize their business. This in turn caused the price of their preferred stock to plummet. In other cases, such as with Lehman Brothers Holdings, the company’s financial health was beyond repair, making bankruptcy the only option. As a result, preferred stock holders were left with millions of dollars in investment losses.

On April 9, 2009, a class action lawsuit was filed on behalf of purchasers of Citigroup’s 8.50% Non-Cumulative Preferred Stock, Series F. Among the allegations, the complaint alleges that when Citigroup announced its May 2008 offering of the Preferred Stock, it did so with a false and misleading Registration Statement and Prospectus. Once the offering was complete, Citigroup announced billions of dollars in write-downs because of exposure to debt securities. Investors holding Citigroup’s preferred stock subsequently watched the share prices of their investment fall dramatically.

Preferred shares in Fannie Mae and Freddie Mac also have caused financial devastation for preferred shareholders. On Sept. 8, a mountain of losses forced both companies into a government conservatorship run by the Federal Housing Finance Agency. The government’s seizure of the two lenders essentially wiped out any value that common and preferred stockholders had in the two companies.

Many preferred shareholders in Fannie Mae and Freddie Mac had been told that the risk of investing in either company was minimal, prompting them to over-concentrate their holdings in the companies. When the government’s takeover was announced, they watched helplessly as large percentages of their investments essentially vanished overnight.

Brokers have a fiduciary duty to recommend investments that are within a client’s risk tolerance. They also must provide accurate, material facts regarding those investments. When this duty is breached, investors have the right to hold them accountable by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

If you are a preferred shareholder who suffered investment losses because a brokerage or financial advisor misrepresented the risks of certain preferred stocks, please contact us. We want to hear your story, and advise you of your legal rights.

A press release from Fair Finance on the state of its affairs leaves many unanswered questions, not the least of which is when and if investors will be able to redeem their investment certificates. Fair Finance, which is owned by Indianapolis businessman Tim Durham, has been closed since Nov. 24, after the FBI seized banking documents and other records at Fair’s headquarters in Akron, Ohio. Another Durham-owned business, Indianapolis-based Obsidian Enterprises, was raided by FBI agents that same day. 

The U.S. Attorney’s Office in Indianapolis filed court papers last month alleging that Fair Finance (also known as Fair Financial) had been operating a Ponzi scheme, using money from the sale of new investment certificates to pay off earlier investors.

In the press release issued on behalf of Fair Finance by Akron attorney Ron Kaffen, no definitive word is given on when investors – all Ohio residents and the individuals who loaned Fair Finance more than $200 million by purchasing the company’s investment certificates – can collect on what they’re owed. Instead, the release says: 

“Fair has still not determined when or if it will be able to resume regular business with regard to the sale and redemption of its investment certificates. Fair also intends to establish a help line in the near future to answer investor related questions. We regret that we have not been able to provide more information regarding these recent developments. Fair intends to provide as much information as is available during the coming days and weeks. We appreciate everyone’s patience as we work through these issues.” 

Preferred stock losses in Fannie Mae, Freddie Mac, Lehman Brothers, and other fiscally troubled companies have cost investors dearly over the past two years. Preferred shares generally are considered more conservative, low-risk – investments especially attractive to retirees seeking predictable income via dividends. In many cases, however, the supposedly “low-risk” preferred stocks sold to investors turned out to be highly volatile because of the financial health of the issuing companies.

Many investors had been told by their brokerages and financial advisers that preferred stocks were a safe and secure investment. As a result, they purchased large concentrations ofcertain preferreds, including those like Fannie Mae and Freddie Mac. In the case of the nation’s two biggest mortgage lenders, investors believed they had built-in protection. If either company failed, their investment principal would fall under the protection of the federal government.

Or so they thought.  It didn’t turn out that way, of course. When the government placed the two companies into conservatorship, investors holding preferred and common shares were essentially wiped out, leaving them with huge financial losses and not the “safe” and “predictable” income they had been told to expect.

If you’ve experienced substantial investment losses because a brokerage or financial advisor misrepresented the risks of Freddie Mac, Fannie Mae or other preferred stocks, please contact us. We can advise you regarding your legal options.

Thomas Hargett, securities lawyer being interviewed by CBS affiliate, Channel 8, Indianapolis.

Fair Finance’s offices in Akron, Ohio, remain closed, leaving investors with no answers and no access to their money. One investor who has $140,000 invested with Fair Finance and its co-owner Tim Durham showed up at the company’s Market Street headquarters at 7:30 a.m. on Dec. 7, hoping to be first in line, reported the Akron Beacon Journal. By 9 a.m., he was joined by other investors – all of whom were greeted by locked doors and dark offices.

Last week, Maddox Hargett & Caruso and David P. Meyer & Associates filed a class action lawsuit on behalf of Fair Finance investors that alleges the company’s offering circulars to prospective investors contained material misrepresentations and omissions. The complaint also charges that insiders, including co-owner Durham, breached their fiduciary duty to investors and instead personally enriched themselves.

Investors, all of whom are Ohio residents, purchased investment certificates from Fair Finance that paid interest rates substantially higher than those for certificates of deposit offered by commercial banks. Unlike CDs, however, the securities sold by Fair Finance come with no government guarantee if Fair Finance is unable make good on its payments to investors.

FBI agents raided the offices of Fair Finance on Nov. 24, as well as the offices of another Durham-owned company, Indianapolis-based Obsidian Enterprises.

Provident Royalties Joseph S. Blimline faces a temporary restraining order and emergency asset freeze by the Securities and Exchange Commission (SEC) for his alleged role in a $485 million fraud and Ponzi scheme involving oil and gas placements. The SEC obtained the order on Dec. 3.

Previously, on July 7, the SEC had filed a complaint against three other co-owners of Provident Royalties: Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison. In that complaint, the SEC obtained a temporary restraining order and asset freeze, as well as appointed a receiver of the defendants’ assets.

The SEC alleges in its amended complaint that Provident advanced approximately $93 million of investor funds to Blimline and various entities he controlled. The funds were for the purported purchase of oil and gas interests, or loans, to which Provident often never received title or repayment.

In addition, the amended complaint alleges that in presentations to investors and representatives of broker/dealers that marketed Provident securities, Blimline failed to disclose his receipt of such funds, his involvement in the management of Provident and a prior sanction imposed against him by securities authorities in Michigan for prior conduct.

If you’ve experienced substantial investment losses in Provident Royalties, please contact us. We want to hear your story and advise you on your legal options.

Investments in Freddie Mac preferred stock have caused financial havoc for countless individual and institutional investors. A number of full-service brokerage firms sold Freddie Preferred Stock (including Series W (FRE-PW), Series X (FRE-PX), Series Y (FRE-PY), and Series Z (FRE-PZ) as a safe, stable fixed-income investment, causing investors to overconcentrate their portfolios. It’s what investors didn’t know that has come back to haunt them.

Offering circulars for Freddie Preferred Stock failed to disclose a number of risks associated with these investments. Specifically, information was not readily apparent regarding Freddie Mac’s exposure to mortgage-related losses or the fact that the company was facing monumental capital issues.

Freddie Mac offered preferred shares to investors as late as November 2007, with an offering of its Series Z at a price of $25.55. In September 2008, Freddie Mac Preferred Stock, Series Z, declined 95%, trading at $1.25 per share.

If you’ve experienced substantial investment losses because a brokerage or financial advisor misrepresented the risks of Freddie Mac preferred shares, please contact us. We want to hear your story and advise you on your legal options.