Monthly Archives: March 2012

Investors of non-traded real estate investment trusts (REITs) have taken a financial beating over the past year, and now another non-traded REIT – Cornerstone Core Properties REIT – joins a growing list of REITs to face an unexpected decline in value.

As reported March 28 by Investment News, the Cornerstone REIT has fallen in value by more than 70%. Investors in the non-traded REIT were informed earlier this month via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, are now worth $2.25.

“The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011,” according to the letter.

The Cornerstone REIT isn’t the only non-traded REITs facing issues. Investors in Behringer Harvard Short-Term Opportunity Fund I LP saw their investment’s value fall to 40 cents a share in December 2011, down from $6.48 a share just one year earlier.

The Behringer Harvard Opportunity REIT I also has experienced major declines in its valuation. As of December 2011, the REIT was valued at $4.12 a share, compared to $7.66 a year ago.

Indianapolis Colts player Dwight Freeney has become the victim of an alleged multimillion-dollar fraud at the hands of a former financial advisor and business manager.

As reported March 26 by the Miami Herald, Michael Stern, a one-time Miami Beach developer, was arrested in Florida last week on federal wire fraud charges for his alleged role in swindling the NFL star in a California restaurant deal. Stern was charged along with Freeney’s Los Angeles business manager, Eva Weinberg. The pair is accused of siphoning money from Freeney’s accounts and then sending it to a fake account that Stern allegedly tapped for his own personal expenses.

Court documents show that Freeney discovered some unapproved wire transfers from his restaurant investment account last fall totaling more than $2 million.

Recorded phone conversations by the FBI reveal Stern apparently telling an undercover informant that he and Weinberg planned to flee the United States before their scheme could be detected.

In court papers, Weinberg is described as Stern’s “one-time live-in girlfriend.”

Today, federal prosecutors plan to ask a judge to extradite Stern from Miami to California to face trial for the alleged fraud.

Citigroup’s legal bills for arbitration claims from investors involving a failed group of fixed-income alternative funds known as ASTA/MAT keep growing. So far, the tally to reimburse investors who lost money in ASTA/MAT is some $85 million. And it could get even higher because more cases are scheduled for arbitration this year and next.

The ASTA/MAT funds lost some 90% of their value beginning in 2008. The funds, which investors say had been marketed as less risky and more profitable than other fixed-income and municipal investments, were highly leveraged and borrowed approximately $10 for every $1 raised. As the ASTA/MAT funds began to lose money, Citigroup managers continued to sell the products and employ highly speculative investment strategies.

Investors who have since filed arbitration claims with the Financial Industry Regulatory Authority (FINRA) allege that Citigroup and its managers intentionally misled them about ASTA/MAT and were well aware of the risks involved with the funds.

Internal Citigroup records and e-mails about ASTA/MAT appear to back up investors’ claims. As reported March 21 by USA Today, one such e-mail shows Citigroup had put an internal credit risk rating on ASTA/MAT at the highest and most volatile level possible.

“The biggest surprise is the damaging internal e-mails and the extent to which (Citigroup) people committed to writing that these were defective (investment) products,” said Steven Caruso, a partner with Maddox, Hargett & Caruso, in the USA Today article.

Caruso’s firm, along with the law firm of Aidikoff, Uhl & Bakhtiari, secured a $54 million judgment on April 11, 2011, for investors who suffered financial losses in Citigroup’s MAT/ASTA municipal bond funds and several other purported fixed income-related products. The award is the largest ever levied against a major Wall Street brokerage in favor of individual investors.

The ASTA/MAT funds have been the subject of an investigation by the Securities and Exchange Commission (SEC) for more than four years now. So far, details of that investigation have not been made public.

Meanwhile, investors like Ronald Beard keep waiting for an explanation. Beard and his family invested $400,000 in MAT/ASTA in 2007 on the recommendation of an advisor with Citigroup’s private banking arm. In the end, Beard lost almost all of his investment.

“We felt betrayed, and we were shocked,” Beard said in the USA Today story.

Christopher Puglisi of New Jersey also invested in ASTA/MAT in 2007 through an account at Citigroup’s Smith Barney division. He did so only after he was satisfied the money he invested from the sale of his trading business would be safe.

Instead, Puglisi lost more than $700,000.

The words “due diligence” and “suitability” have taken on a whole new meaning following Greg Smith’s very public condemnation of his former employer, Goldman Sachs. Smith, an executive at Goldman, lambasted his firm via an Op-ed in the New York Times last week. Among other things, Smith called the environment at Goldman “toxic” and that the interests of clients are now “sidelined in the way the firm operates and thinks about making money.”

Smith’s characterization of Goldman may hit a nerve with investors and brokers alike. For investors, the diatribe against Goldman could very well spur them to rethink the quality of investment service and advice they’re receiving. Meanwhile, brokers may be prompted to re-examine and reaffirm the due diligence duties they owe to clients.

No investment is without risk. But financial professionals and their brokerage firms are bound by certain duties to clients – and that includes making investment recommendations based on a client’s suitability, as well fully and accurately explaining an investment.

In the past year, countless examples have come to light in which these duties have fallen by the wayside. Medical Capital Holdings, Provident Royalties, MAT/ASTA, Lehman Brothers principal-protected notes, Behringer Harvard REIT. While each of these cases and the financial products they represent may be different, a common theme ultimately prevails: In one way or another, investors found themselves on the losing end of their investment because the concept of “client-first” was all but forgotten by the brokers and firms they trusted.

Structured investments have rendered a countless number of investors financially ruined – many of whom would never have been invested in the exotic products if not for the recommendations of their financial advisor.  The 2008 financial crisis cast a new light on the potential problems of structured products, from so-called principal-protected investments issued by Lehman Brothers to reverse convertible notes from Morgan Stanley. The result was the same: Investors lost big.

Jargon-laden literature, illiquidity, counter-party risk and lack of transparency all make structured products a complex and often unsuitable investment for the average investor. Despite these characterizations, many financial advisors continue to sell structured products because of the large mark-ups and commissions they bring – not because they are in the best interests of a client.

In the case of Morgan Stanley, a review by the Financial Industry Regulatory Authority (FINRA) into sales of the firm’s structured products – which included principal-protected investments, leveraged exposure, yield enhancement, and access investments – revealed that in many instances the true risks of the structured products were never disclosed to clients.

FINRA’s findings were officially documented in a Letter of Acceptance, Waiver and Consent (AWC) in which Morgan Stanley signed on Dec. 7, 2011, and agreed to pay a $600,000 fine to settle the violations outlined. Among the violations cited: Supervisory deficiencies, as well as unsuitable recommendations of structured products to retail customers.

In the AWC letter, FINRA states that Morgan Stanley failed to create “reasonable systems or procedures to notify supervisors whether structured product purchases complied with the firm’s internal guidelines.” Instead, Morgan Stanley placed the responsibility with branch supervisors.

“During the Review Period, Morgan Stanley had no reports or tools for sales supervisors or compliance personnel that were specific to structured products, or which highlighted and detected single concentrated structured product purchases. As a result, of the 224,000 structured product purchases between September 2006 and August 2008, more than 28,000 were in net amounts that exceeded 25% of the customer’s disclosed liquid net worth and more than 2,600 were effected by customers with slated net worth less than $100,000,” the AWC letter said.

Customers of MF Global could have reason to believe they’ll get more of their money back from the collapsed broker/dealer. James Giddens, the trustee in charge of the firm’s liquidation, is asking a bankruptcy court to distribute another $685 million to MF Global customers.

As reported March 15 by Bloomberg, Giddens wants commodity customers who traded futures on foreign exchanges to receive payments about $50 million, while some $600 million is slated for customers who traded on U.S. exchanges. Holders of physical assets like precious metals are in line to get about $35 million.

Each of the distributions requires a judge’s approval.

MF Global Holdings Ltd., the broker’s parent company, filed for bankruptcy protection on Oct. 31. At the time, it had debt totaling nearly $41 billion after making $6.3 billion in risky trades on European sovereign debt and other assets and getting margin calls. Reports later came to light that as much as $1.2 billion was in missing in client money and that the company’s leverage ratio was an astonishing 38-to-1.

So far MF Global clients have received about 72% of their money following the company’s derailment on Oct. 31. The new distributions, however, would increase that percentage, giving customers who traded on U.S.exchanges about 80% of their claims paid. For customers who traded on foreign exchanges, the amount is less than 10%.

MF Global’s former CEO Jon Corzine has come under fire following his firm’s implosion. Corzine came to MF Global in March 2010 shortly after the firm faced a scandal involving a trader making unauthorized bets. Earlier this month, Corzine testified at a congressional hearing on his firm’s collapse but offered little insight into the millions of dollars in missing customer funds.

After years of building an investment portfolio, you’re presented with what appears to be a home-run financial opportunity. Before jumping in headfirst and betting your lifesavings, think twice.

Investment fraud is big business in an economic downturn, and can lure novice and sophisticated investors alike. In many cases, the victims are elderly.

All investments contain certain risks. Anyone who promises high returns with little or no risk is more than likely trying to scam you out of your money.

A recent article by Financial Highway offers several tips for spotting potential financial fraud schemes:

Pressure to invest immediately: Whenever someone is pressured to immediately turn over money regarding a potential investment “opportunity,” consider it a red flag. In any investment, it’s wise to research the company or investment advisor behind the investment pitch. Is the company legitimate? Are there arbitration filings or disciplinary actions against the broker? Is the person or company a member of the Financial Industry Regulatory Authority (FINRA)? To investigate the background of an investment firm or broker, check FINRA’s Broker Check Web site.

Lack of quality information about the investment:  When discussing investments, ask yourself if your questions are being answered thoroughly. Is the person offering comprehensive information about the financial product in question? Is he or she willing to provide physical documentation, such as a prospectus and other financial documents? If the answer is no, it could be a sign of a scam.

Flashy presentations that don’t hold up: According to the Financial Highway article, most fraudsters produce Web sites and marketing materials that on the surface appear professional but on closer inspection don’t add up. For instance, there may be a number of spelling and grammar mistakes or the description of the investment itself simply doesn’t make any sense.

An investor arbitration award involving tenant-in-common exchanges (TICs) may have been the final blow for broker/dealer Pacific West Securities. On March 6, a three-person arbitration panel of the Financial Industry Regulatory Authority (FINRA) awarded $2.1 million to a former client of a broker – William Swayne II – affiliated with the firm.

Pacific West announced in December that it planned to close its doors this month and that it had begun a recruiting effort to move the company’s brokers to Multi-Financial Securities Corp. According to the Broker Check Web site, however, Pacific West has yet to file the necessary paperwork to close or withdraw from the securities industry.

As reported March 13 by Investment News, the recent FINRA award against Pacific West Securities involves claimants Joseph and Marilyn Lightfoot, who allege that their TIC investments were not suitable for them “given their age, financial condition, cash flow needs, risk tolerance, over concentration in real estate and for other reasons.”

Included in the award was $200,000 in legal fees and interest.

The lack of suitability of the TICs was highlighted in the arbitration panel’s decision.

 “Among other evidence of a violation of a standard of care under the Securities Act of Washington was the disavowal by [Pacific West and its broker, William Swayne II] of any obligation to conduct a suitability analysis for the sale of TICs in the circumstances of a Section 1031 – like-kind-assets exchange for tax deferral purposes,” according to the award. The arbitrators “determined that the sale of these securities to [the Lightfoots] violated the duty of reasonable care.”

Failed deals and misrepresented investments involving private placements, non-traded real estate investment trusts (REITS) and other alternative financial products resulted in an increased number of enforcement actions and fines by the Financial Industry Regulatory Authority (FINRA) in 2011. According to an annual study by Sutherland Asbill & Brennan LLP, fines from FINRA totaled $68 million last year, up 51% from $45 million in 2010.

FINRA reported filing 1,488 disciplinary actions in 2011 compared to 1,310 cases in 2010, the study says. The biggest enforcement increase concerned inaccurate or fraudulent advertising. Sanctions in that area rose to $21.1 million in 2011, from $4.75 million in 2010.

Suitability cases in particular resulted in $7.7 million in reported fines in 2011.  The 106 cases involving suitability allegations last year doubled the 53 cases reported in both 2009 and 2010, the study said.  Similarly, fines in suitability cases jumped from $3.75 million in 2010 to $7.7 million in 2011, a 105% increase.