Monthly Archives: June 2011

Soured investments in real estate deals and private placements involving Medical Capital and Provident Royalties have caused a number of broker/dealers to go belly up this year. Closures of broker/dealers, in fact, are outpacing new entrants into the market. Between May 2010 and May 2011, a total of 336 broker/dealers notified the Financial Industry Regulatory Authority (FINRA) that they were closing their doors for business. By comparison, 190 new B-Ds came on board.

And there appears to be more bad news ahead. As reported June 23 by Investment News, the Compliance Department predicts that the broker/dealer industry could see an 11% net loss of broker/dealers by 2014.

The dwindling number of broker/dealers came to a head this year, highlighted by the failures of such names as GunnAllen Financial, QA3 Financial Corporation and Jesup & Lamont Securities.

Other well known B-Ds like Securities America also have come under fire because of legal troubles connected to private-placement sales in Medical Capital Holdings and Provident Royalties. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Most recently, California-based MCL Financial Group filed its broker/dealer withdrawal form with FINRA. Last year, the receiver for bankrupt real estate syndicator DBSI sued MCL in an attempt to recover commissions generated from sales of tenant-in-common exchanges (TICs). According to court documents, MCL collected $210,000 in commissions from selling TICs issued by DBSI.

Earlier this month, WFP Securities of San Diego, California, also notified FINRA of its plans to shutter. WFP is facing more than $14 million in legal claims, after having sold more than $27 million of private placements issued by Medical Capital Holdings and $6.8 million issued by Provident Royalties.

Investors are suing David Lerner Associates, claiming the company acted negligently in the sale and underwriting of more than $6.8 billion in shares of Apple Real Estate Investment Trusts.

According to the complaint, Lerner allegedly misstated the business model of the REITs in question and misrepresented the value of shares and returns to investors.

As reported June 20 by Bloomberg, David Lerner has collected more than $600 million in fees and commissions over the past seven years while five Apple REITs have made more than $6 billion in proceeds. According to the story, the firm marketed the REITs as appropriate for conservative investors, stating they had never lost money by investing in hotels.

In reality, however, investors who acquired interests in the Apple REITs incurred substantial unrealized losses because their interests are now worth far less than the price paid to acquire them.

This isn’t the first time David Lerner Associates has faced legal issues. Last month, the Financial Industry Regulatory Authority (FINRA) accused the company of overcharging customers regarding sales of municipal bonds and mortgage securities. In 2004, Lerner was fined by the National Association of Securities Dealers over sales contests that promoted proprietary mutual funds and certain variable annuity and variable life insurance products.

Then, a year later, Lerner was fined for airing advertisements that exaggerated the brokerage’s investing record.

In 2006, Lerner was fined $400,000 for violating disclosure rules in the sale of variable life insurance and annuities. In each of the settlements, David Lerner neither admitted or denied any wrongdoing.

Scrutiny is growing for Apple REITs – securities sold exclusively through David Lerner Associates. The products and Lerner have been in the hot seat for more than a month, after the Financial Industry Regulatory Authority (FINRA) filed a complaint stating that shares in Apple REITS had not been re-priced in years.

Meanwhile, Apple REIT investors have been under the impression that their shares were valued at the $11/share purchase price listed on their account statements. As it turns out, Lerner is now telling a different story. In a recent notice to Apple 7 and Apple 8 REIT investors, the value of the shares was $7.83 and $7.57 per share, respectively.

As reported June 15 by Investment News, FINRA stated in its complaint in May that it was misleading to investors not to reflect the updated value of the REITs on the David Lerner Associates Web site, especially in cases where the REITs pay dividends with principal and borrowed funds instead of operating income.

Accurate pricing of shares of illiquid, long-term non-traded REITs has been a bone of contention for nearly two years. Previously, the common practice in the brokerage industry was to list the share price on client account statements at par value, or the amount at which the broker/dealer sold it, with the product typically priced at $10 or $11 a share.

If you are concerned about your investment in Apple REITs, please contact us to tell your story.

Over a period of six years, Li Ching Lu isolated, abused and stole millions from a 74-year-old stroke victim for whom Lu served as a “caretaker.” Last month, Lu was convicted of financial abuse fraud and received four years in a California state prison.

Lu’s crime brings to light, once again, the subject of elder abuse fraud and what can and should be done to make sure this doesn’t happen to you or a loved one.

As reported June 7 by Forbes, the first question concerning Lu’s case is why didn’t anyone notice that she began to isolate her victim from her friends, family, financial advisors? Was no one checking on the victim regularly? And where were the investment advisors? Why didn’t they become alarmed – or at the very least, interested – that the victim herself was no longer in contact with them?

Lu’s crime occurred in California, where banks are mandated by state law to report suspicious activity to adult protective services or law enforcement.  That alone begs another question as the Forbes article points out: How could the caregiver manage to launder $4 million through six different banks, using 63 different accounts? If your bank were monitoring activity on all your accounts, it’s a reasonable assumption to expect that someone might notice the 74 year old’s tremendous and unusual withdrawals.

As for Lu, she used her victim’s money to buy a Porsche SUV, a home, a BMW, pay the tuition at her son’s private university, support her gambling habit and make large jewelry purchases.

Elder abuse fraud is growing crime. Every year, the elderly suffer $2.6 billion in financial losses.

Reps for Securities America, the troubled broker/dealer whose name is now permanently linked to lawsuits and arbitration claims involving sales of failed private placements in Medical Capital Holdings, have been asked to sign a “letter of support” that they plan to remain with the firm. The unusual move has some people suggesting that Securities America is about to be sold.

Ameriprise Financial, the parent company of Securities America, announced in April of its plans to find a new buyer for the company.

As reported June 8 by Investment News, the letter of support to Securities America states the following:

“We are confident in the abilities of Securities America’s senior management team to navigate the company through these challenges and opportunities.

“We believe they will assist [parent company] Ameriprise in the selection of a new owner with the interests of the advisors and our clients firmly in mind.”

It then concludes: “We intend to stay with Securities America to see what opportunities will come from this process.”

Securities America has been embroiled in legal issues since July 2009, when the Securities and Exchange Commission (SEC) charged Medical Capital Holdings with fraud. Dozens of independent broker/dealers sold private placements in Medical Capital to investors, but Securities America was by far the product’s biggest distributor. It sold about $700 million worth of the notes to clients. Nearly half of that amount is now in default.

In April, Securities America reached a potential $160 million settlement with investors in a class-action law suit.

Omni Brokerage Inc. is the latest broker/dealer to go out of business. The Utah-based B-D, which is facing $2.8 million in claims for selling DBSI tenant-in-common (TICs) exchanges, says its shuttering is tied to lack of business, not legal issues.

However, Omni is at the center of several arbitration claims filed by investors with the Financial Industry Regulatory Authority (FINRA) over failed DBSI deals. As reported in a June 2 story by Investment News, a lawsuit filed by DBSI trustee James Zazzali says Omni generated $271,000 in commissions from pitching the DBSI TICs.

Omni joins dozens of other broker/dealers that sold failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC and, as a result, have gone out of business. As of March 2010, a total of 16 broker/dealers have closed their doors.

DBSI was a leading packager of tenant-in-common exchanges. TICs are a form of real estate ownership in which two or more parties have a fractional interest in a property.

DBSI began to default on its payments to investors in 2008. The firm later filed for Chapter 11 bankruptcy protection.

In December 2010, the trustee for the DBSI bankruptcy sued more than 90 broker/dealers that sold the failed product, including Omni.

According to the Investment News story, the DBSI trustee claims that TICs from DBSI were actually part of a $600 million Ponzi scheme. A similar allegation has been waged against Medical Capital Holdings and Provident Royalties.

Jim Nagengast, CEO of embattled Securities America, claims that The Bank of New York Mellon Corp. and Wells Fargo Bank NA are suing the broker/dealer in an attempt to reduce their liability in the sale of failed private placements in Medical Capital Holdings.

The story, first reported May 29 by Investment News, cites an email to the Securities America advisers in which Nagengast reportedly claims that a pending settlement in a class action filed against Securities America, if approved, would wipe out the banks’ claims against the firm.

The Bank of New York Mellon Corp. and Wells Fargo Bank filed separate lawsuits against Securities America last month. Both banks were formerly trustees for Medical Capital Holdings.

The Bank of New York complaint states that the broker/dealers that sold private placements in Medical Capital breached their obligation to MedCap investors by selling an unsuitable product and failing to disclose the risks of the notes.

Bank of New York Mellon has sued 13 broker/dealers; Wells Fargo has sued six firms, as well as Ameriprise Financial, which owns Securities America.

In September 2009, two months after the Securities and Exchange Commission (SEC) charged Medical Capital with fraud, a group of Medical Capital investors sued The Bank of New York Mellon Corp. and Wells Fargo Bank in a class action lawsuit. The plaintiffs in that class action claimed in an amended 2010 complaint that the two trustees signed off on requests by Medical Capital executives to take $325 million in fees — despite documents for the notes indicating that fees were not supposed to come from investor funds.

From 2003 to 2008, dozens of independent broker/dealers sold private placements in Medical Capital, raising $2.2 billion. By far, Securities America is the biggest seller of Medical Capital notes, selling about $700 million.

In total, investors have lost more than $1 billion in principal. Today, regulators and the Medical Capital bankruptcy trustees say Medical Capital operated as nothing more than a Ponzi scheme.