Monthly Archives: January 2010

A complaint against Securities America contains a lengthy and potentially damaging list of allegations against the Omaha broker-dealer and its sales of private offerings in Medical Capital Holdings. The complaint, which was filed Jan. 26 by Massachusetts Secretary of State William Galvin, accuses Securities America of not only misleading investors but also intentionally making material misrepresentations and omissions in order to get them to purchase investments in Medical Capital Notes.

Medical Capital was sued by the Securities and Exchange Commission (SEC) in July 2009 and placed into receivership one month later. Since then, its collapse has resulted in about $1 billion in losses for investors throughout the country.

Massachusetts’ securities division launched an investigation into Securities America in December 2009, after receiving complaints from investors who had placed their life savings into Medical Capital based on recommendations by Securities America. According to the complaint, many of these investors were unaware of the risks involved in the offerings. Securities America, on the other hand, was fully aware of these risks, the complaint says.

“Year after year, the due diligence analyst hired retained by Securities America to conduct a review of the various Medical Capital offerings specifically requested – and at many times pleaded – that investors be informed of certain heightened risks,” the complaint reads.

Many investors who purchased Medical Capital Notes had no idea as to how the notes were actually structured. In reality, the offerings were highly complex, speculative securities and considered suitable only for the most sophisticated of investors. In addition, many investors believed they were buying “fully secured” investments when they purchased Medical Capital Notes. As it turns out, that was not the case.

Other information that Securities America allegedly kept from investors included Medical Capital’s lack of audited financials. It was a concern that even Securities America’s own president, Jim Nagengast, felt. In a 2005 email, Nagengast wrote the following:

“My big concern is the audited financials. At this point, there is no excuse for not having audited financials . . . it is a cost they simply have to bear to offer product through our channel. We simply have to tell them if they don’t have financials by XXXX date, we will stop distributing the product on that date. Then they can decide if it’s worth to spend $50,000 to have it done. If they won’t spend the money, that should give us concerns.”

Concerns aside, Securities America ignored its president’s recommendation and continued selling millions of dollars worth of Medical Capital Notes. They did this knowing full well that no audited financials had ever been conducted on any of the Medical Capital entities issuing the notes

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of our securities fraud team.

Main Street Natural Gas Bonds are an investment that many investors would like to forget. On Sept. 15, a $700 million deal called Main Street Natural Gas Bonds exploded, plummeting in value after Lehman Brothers Holdings – which guaranteed the bonds – filed for bankruptcy protection. Thousands of individual investors were affected, with many literally wiped out financially. 

Main Street Natural Gas Bonds were marketed and sold by some broker/dealers as safe, conservative municipal bonds. The reality is they were not. Instead, the Main Street bonds invested in complex natural gas derivative contracts that bet on the future costs of natural gas. The $700 million that Main Street borrowed to finance the contracts was placed with Lehman Brothers, which in turn, agreed to arrange delivery of some 200 billion cubic feet of natural gas at below-market prices.

Lehman’s promise went up in smoke when its fiscal health deteriorated beyond repair and it filed for bankruptcy protection. The ripple effect – and subsequent financial losses for investors – reverberated back to the value of the Main Street Gas bonds. 

Many investors who put their money in Main Street Natural Gas Bonds say their brokerage failed to disclose the fact that the value of their investment was tied to the financial health of Lehman Brothers. These same investors also contend they never received a prospectus about the bonds, which should have revealed key information and facts that investors are entitled to know.

If you believe you were misled about the safety of Main Street Natural Gas Bonds, contact us. A member of our securities fraud team will review your situation to determine if there is a viable claim to recover some or all of your investment losses. 

Investments in Inland American REITs have backfired for investors throughout the country. In many instances, these products – including the Inland American Real Estate Trust and Inland Western Retail Real Estate Trust – were pitched by broker/dealers as a low-risk, conservative investment. In reality, however, investors were putting their money into non-traded REITs, and the qualities that define these REITs are anything but conservative.

Non-traded REITs (or unlisted REITs) are not listed on a stock exchange. Redemptions in them are limited at best. Perhaps the biggest downside to non-traded REITs is their fees, which in some cases can be upwards of 15%.

Many investors were woefully unaware of the high fees associated with their non-traded REITs – until it was too late. And for some broker/dealers, that’s just what they had in mind when they pitched these products to their conservative clients.

Maddox Hargett & Caruso is investigating a number of non-traded REITs, including the Inland American Real Estate Trust and Inland Western Retail Real Estate Trust. If you suffered investment losses in either of these REITs or another non-traded REIT, contact us to tell your story. A member of our securities fraud team will work with you to determine if some or all of your losses can be recovered.

In an ironic twist, just two days after the state of Massachusetts filed charges against Securities America for allegedly misleading investors about sales of Medical Capital notes, the Omaha-based broker/dealer issued a press release announcing new members for its 2010 Advisory Council. The irony is the council itself. According to the release, its purpose is to provide an “opportunity for advisors to give feedback on the strategy, tactics and marketing message of Securities America.”

Considering the recent allegations against Securities America, those messages might need some serious review indeed.

Massachusetts Secretary of State William Galvin sued Securities America on Jan. 26, accusing the company of committing securities fraud on a “massive scale.” In the complaint, Galvin alleges that Securities America committed “acts of material omissions and misleading statements” when it sold nearly $700 million of promissory notes to Medical Capital investors.

According to the complaint, Securities America kept investors in the dark about various risks and other information concerning MedCap notes. “These risks were known to [Securities America]. Year after year, the due diligence analyst, retained by [Securities America] to conduct a review of the various Medical Capital offerings specifically requested, and at many times pleaded, that investors be informed of certain heightened risks,” the complaint reads.

Those risks included Medical Capital’s lack of audited financials.

The Massachusetts investigation also uncovered evidence that top executives at Securities America enjoyed vacation trips to Pebble Beach and Las Vegas resorts courtesy of Medical Capital.

From 2003 through 2009, Medical Capital issued more than $1.7 billion in notes; Securities America placed $697 million of that amount. In return, Securities America took in more than $26 million in compensation, according to the complaint.

Securities America has denied all charges levied by Massachusetts regulators.

Medical Capital currently is in receivership. It was sued by the Securities and Exchange Commission (SEC) in July 2009 for allegedly defraudeding investors out of at least $18.5 million. On Aug. 3, 2009, the SEC obtained an emergency court order halting a $77 million offering fraud perpetrated by the company.

If you suffered investment losses in Medical Capital notes sold by Securities America, please contact us. A member of our securities fraud team will help you determine if there is a viable claim for recovery.

The state of Massachusetts apparently thinks so. Secretary of State William Galvin filed charges against Securities America on Jan. 26, accusing the broker/dealer of keeping investors in the dark about the risks of nearly $700 million in private placement securities issued by Medical Capital Holdings. 

Medical Capital, which raises money from investors and then provides loans to hospitals and other healthcare-related entities, is the same company that the Securities and Exchange Commission (SEC) sued in July for allegedly defrauding investors. In its complaint, the SEC says Medical Capital misappropriated $18.5 million of investors’ money, as well misrepresented its own business record by keeping several defaults under wraps.

As it turns out, Securities America was a big seller of Medical Capital notes. According the Massachusetts complaint, Medical Capital issued more than $1.7 billion in notes from 2003 through 2009. Securities America placed $697 million of that amount. In return, Securities America pocketed more than $26 million in compensation.

“People invested their life savings, while this dealer hid from them the truth of what they were getting into,” said Galvin in a statement.

Securities America denies the charges.

Coincidentally, the Massachusetts complaint was filed four days after Steve McWhorter, Securities America’s CEO, announced his retirement from the company. 

In October 2009, Securities America was sued by Ilene Grossbard of Sarasota, Florida, over allegations that the broker/dealer failed to warn her and other investors about what she says was a multibillion-dollar Ponzi scheme involving Medical Capital notes. The parent company of Securities America, Ameriprise Financial, was named in that lawsuit, as well.

If you suffered investment losses from Medical Capital notes sold by Securities America, please contact us. A member of our securities fraud team will evaluate your situation to determine if you have a viable claim for recovery.

Things are heating up for Securities America, which finds itself at the center of a regulatory probe involving sales of private placement securities. On Jan. 26, Massachusetts’ top securities regulator, William Galvin, filed the first state enforcement case against Securities America, accusing the Omaha-based broker/dealer of failing to tell investors about all of the risks associated with promissory notes issued by Medical Capital Holdings.

The Securities and Exchange Commission (SEC) sued Medical Capital for fraud in July 2009. A court-appointed receiver subsequently revealed that most of the account receivables on MedCap’s books did not exist. 

According to a statement issued by Galvin’s office, Securities America marketed Medical Capital notes for several years through seminars and other marketing tactics. The company continued to sell the notes to investors even after a senior-level company officer expressed concerns about Medical Capital and its fiscal health. 

As reported Jan. 26 by Investment News, Securities America’s due-diligence team discovered numerous red flags about Medical Capital Holdings between 2005 to 2007. Among those issues: The company invested up to $50 million in equity securities of all types, as well as made mortgage loans to entities within the health care industry but “outside of Medical Capital’s core expertise.” 

Securities America was one of the biggest sellers of MedCap notes. From 2003 through 2009, it sold nearly $700 million in Medical Capital investments. That comes to 37% percent of the $1.7 billion in notes that MedCap issued. 

In turn for its sales prowess, the administrative complaint alleges that Medical Capital treated Securities America’s top executives to all-expense paid trips to Las Vegas and Pebble Beach.

If you have a story to tell involving Securities America and/or Medical Capital Notes, contact a member of our securities fraud team.

Securities America, a broker/dealer division of Ameriprise Financial, is facing charges by Massachusetts Secretary of State William Galvin for allegedly making omissions and misleading statements in connection to sales of some $700 million in promissory notes. 

“Our investigation showed that Securities America ignored their own due diligence analysts and sold these notes to unsophisticated investors without telling them the risks involved,” Galvin said in a statement. “People invested their life savings, while this dealer hid from them the truth of what they were getting into.” 

The notes in question were issued by special-purpose corporations owned by Tustin-based Medical Capital Holdings, which was charged this past summer by the Securities and Exchange Commission (SEC) in a $77 million offering fraud. 

Private placement securities are supposed to be for “accredited” investors, but unsophisticated investors placed their life savings into Medical Capital notes based on recommendations from Securities America that the investments were suitable, according to the Massachusetts complaint. More than 400 registered reps of Securities America sold the notes using private placement memorandums, marketing flyers and pamphlets, the complaint states. The notes were characterized as “secured” in material from Medical Capital and Securities America, the division says. 

From 2003 through 2009, Medical Capital issued more than $1.7 billion in notes, and Securities America placed $697 million. For that work, Securities America received more than $26 million in compensation. 

Since August 2008, Medical Capital has defaulted on all of its outstanding notes and currently is in permanent receivership. As a result, millions of dollars of investors’ life savings remain frozen and illiquid.

If you have suffered investment losses connected to sales of private placements by Securities America and wish to discuss filing an individual arbitration claim with the Financial Industry Regulatory Authority (FINRA), please contact us. A member of our securities fraud will evaluate your situation to determine if you have a viable claim for recovery.

Goldman Sachs just announced a compensation pool- which translates into year-end bonuses and executive pay – of $16.2 billion for 2009. That’s up 47% from the previous year. The news come amid a backlash of criticism from investors and lawmakers alike who say Goldman and other Wall Street players continue to reap the benefits of a financial crisis that they, in large part, created through excessive risk taking and the marketing and selling of complex, highly leveraged financial instruments. In the meantime, Main Street is left to do the clean up work – paying for their errors in judgment via federal bailouts.

Goldman Sachs in particular has taken public heat lately, following news reports on the way the investment bank allegedly packaged and sold risky securities to investors as sound investments and then made bets that those same securities would fail. Goldman wasn’t the only investment firm using this “shorting” strategy, but it certainly made some huge profits as a result of it.

The products in question are known as synthetic collateralized debt obligations, and they ultimately produced billions of dollars in losses for individual and institutional investors. Among those investors: pension funds and insurance companies across the country.

Goldman’s shorting tactics are now the subject of an investigation by Congress and its newly established Financial Crisis Inquiry Commission. So far, some of the most interesting insight has come from Phil Angelides, chairman of the Commission. When folks like Goldman Sachs Chairman and CEO Lloyd Blankfein and JPMorgan’s Jamie Dimon gave their explanation for the near-collapse of the nation’s financial markets, they described what amounted to a “perfect storm.” Angelides, however, cut to the chase, saying:

“Was it a perfect storm or a man-made storm?”

The White House is calling for tougher regulations and oversight of the nation’s banking industry – an idea that is long past due. An independent consumer financial protection agency is part of the proposed overhaul plan. Even more important, speculation and other risk taking on the part of commercial banks and financial institutions – something that previously put the nation’s entire economy in peril – would be drastically limited.

Investors of Freddie Mac Preferred Stock, Series Z are unlikely to forget the date of Sept. 6, 2008. It was on that day the U.S. government made the unprecedented move to place both Freddie Mac and Fannie Mae under the conservatorship of the Federal Housing Finance Agency (FHFA).  In doing so, investors holding preferred shares of Freddie Mac Series Z saw the value of their investment plummet overnight.

The initial offering of Freddie Mac Preferred Stock, Series Z occurred in late 2007 when the mortgage giant – whose financial health already was in jeopardy – found itself severely undercapitalized. Underwriters of the Series Z offering included Goldman Sachs, J.P. Morgan and Citigroup Global Markets, as well as others.

As it turns out, the offering circulars associated with Freddie Mac Preferred Stock Series Z failed to alert investors to a number of possible risks that the preferred shares posed. Among the missing information: Freddie Mac was extremely undercapitalized. It had significant exposure to an undetermined amount of mortgage-related losses. The company also lacked proper risk-management procedures. Most important, insolvency was a real possibility in Freddie Mac’s future.

It’s now believed that many of the brokerage firms that acted as underwriters of the Freddie Mac Preferred Stock Series Z offering knowingly kept this information from investors. Not only did they allegedly fail to disclose the true risks associated with the offering itself but they also may have kept the facts about Freddie Mac’s financial condition under wraps, as well.

Freddie Mac’s Series Z offering initially was issued at a price of $25.55 in November 2007. In September 2008, the preferred stock had declined 95%, trading at $1.25 per share.

If you experienced investment losses in Freddie Mac’s Preferred Stock, Series Z or another preferred stock, please contact us. A member of our securities fraud team will evaluate your situation to determine if you have a viable claim for recovery.

Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study – which claims to be the first professional and academic report to analyze the structure of non-traded REITs – shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report – and one which has been touted in general by critics of unlisted REITs – is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors: 

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold – their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us.