Monthly Archives: September 2012

Facebook and its underwriters have a new problem on their hands: They’ve been hit with approximately 50 arbitration claims and civil lawsuits from investors following Facebook’s initial public offering in May.

And there’s other players mired in Facebook’s legal issues. As reported Sept. 26 by the Wall Street Journal, hundreds of brokers and financial firms that pushed investors to buy Facebook shares also could potentially face arbitration claims and lawsuits.

According to the WSJ article, the majority of investors are taking legal action against Facebook and its main underwriter, Morgan Stanley, for failing to adequately warn them how mobile usage could negatively impact the company’s financials.

Steven Caruso, a partner at law firm Maddox Hargett & Caruso in New York, said in the Wall Street Journal article that he is preparing to file as many as a dozen arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who claim the deal’s price was “elevated” or they “weren’t given the same information.”

Facebook’s IPO on May 18 was one of the most anticipated events of 2012. The much-heralded IPO has since been on downhill slide, however. The initial IPO share price of $38 has fallen 47% and erased about $38 billion in Facebook’s stock-market value. On Wednesday, Sept. 26, the company’s shares were listed at $19.94 in New York Stock Exchange trading.

The Securities and Exchange Commission (SEC) is seeking a court emergency order to freeze the assets of the Atlanta-based investment advisory firm Summit Wealth Management and its principal, Angelo Alleca, for running a Ponzi-like scheme that cost investors some $17 million.

The SEC says Alleca defrauded investors in what it describes as a purported fund-of-funds strategy that tried to hide trading losses by creating new private funds to make money to pay back the original fund investors.

“Alleca told Summit Wealth clients that he was investing their money in funds, but instead he was rolling the dice in the stock market without success,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit.  “Rather than fess up about his trading losses, Alleca tried a cover up by creating new funds. Instead of winning back the money, he just compounded his fraud by suffering further losses.”

According to the SEC’s complaint filed Sept. 19 in an Atlantafederal court, Alleca and Summit Wealth Management offered and sold interests in Summit Fund, which they told clients was operating as a fund-of-funds. Clients thought Alleca andSummitwere investing their money in other funds and investment products rather than directly in stocks and other securities. The fund-of-funds investment strategy is intended to diversify investor money and minimize exposure to risks.

Instead of engaging in active securities trading with his clients’ money, however, Alleca incurred substantial losses. He subsequently concealed the Summit Fund trading losses from investors and provided them with false account statements, the SEC says.

When it came time to meet redemption requests from Summit Fund investors, the SEC alleges that Alleca created at least two hedge funds to raise money from Summit Wealth clients – the Private Credit Opportunities Fund LLC and Asset Class Diversification Fund LP. Alleca’s plan was to cover up the losses that he had incurred in Summit Fund by illegally transferring profits from the new funds in a Ponzi-like fashion in order to meet earlier redemption requests.

Alleca’s plan backfired when those successive funds incurred further trading losses. Meanwhile, Alleca continued to issue false account statements to investors in Summit Fund, as well as the additional funds in order to hide the actual losses on their investments.

Investors, especially elderly investors, want and desperately need more information regarding financial professionals and investment products and services, says a new report from the Securities and Exchange Commission (SEC). The report also shows that investors lack critical knowledge of ways to avoid investment fraud.

Results of the study – which was conducted by the SEC and mandated by the Dodd-Frank Wall Street Reform Act and Consumer Protection Act – revealed in-depth findings about investors’ understanding of their investments.

“Studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the Library of Congress Report, investors lack critical knowledge about investment fraud,” stated one passage in the 182-page report.

Among the key findings of the study:

• Fees, investment performance and disciplinary history are top priorities for investors when choosing an investment advisor.
• Investors want a plain language description of the investment product being offered.
• A narrative explanation of advisor fees and compensation and a fee table would be useful to investors.
• The majority of regular investors surveyed found prospectuses highlighted important information and were well organized, but only around half of them thought they were user-friendly or written in clear, concise language that they could understand.
• Approximately 31.8% of the survey respondents indicated they understand the term, annual asset fees, while about 46.2% of respondents indicated they thought they knew what the term means. When asked to determine which mutual funds provided the greatest and least financial incentive to sell their shares, less than one-seventh of online survey respondents correctly determined that additional information would be needed to make this determination.
• Slightly more than one-half (55.1%) of online survey respondents indicated they  want to know whether the individual advising them (as opposed to the financial services firm itself) would receive some of the portion of these annual asset payments.

“What is alarming is Americans seem to believe they are far better at handling their finances than they actually are,” said FINRA Foundation President Gerri Walsh in a recent NBC News.com article. “This is particularly worrying, given that most investments Americans make are for their retirement.

“When you stack investor knowledge against what people are doing with their retirement investments you see a frightening picture emerge,” she said.

A New York arbitration panel of the Financial Industry Regulatory Authority (FINRA) has ordered Citigroup Global Markets, Inc. to pay compensatory damages of more than $1.4 million to an investor who suffered losses tied to a municipal bond fund that was marketed as safe and secure but in reality contained risky derivative securities.

The investor purchased Citi’s Rochester Municipal Fund in 2007 after Citigroup recommended it as a safe alternative to her municipal bond fund investments and one that would pay slightly more interest. Instead, the Rochester Municipal Fund consisted mainly of toxic and speculative derivative securities whose value is dependent on the performance of underlying assets.

“Through the issuance of this arbitration award, our client not only received a substantial portion of the losses that she sustained as a result of her investment in the Rochester Municipal Fund, but the arbitrators also further held Citigroup liable for 9% of statutory interest on her principal loss, as well,” says Maddox Hargett & Caruso’s Steven B. Caruso, who served as counsel for the investor.

The case shines an important spotlight on the questionable sales practices of brokers and the impact those practices can have on investors regardless of their wealth or financial sophistication.

“Wealthy investors in particular are often asked to defend their investment choices by brokerage lawyers in arbitration cases, because of the false assumption that they must have a deeper understanding of what they are buying than average investors, said Caruso in a Sept. 12 article by Reuters. “Wall Street often mistakenly equates wealth with financial know-how.”

In addition to this FINRA arbitration award, Maddox Hargett & Caruso, P.C. has served as co-counsel in numerous other FINRA arbitration proceedings involving Citigroup’s ASTA-MAT municipal arbitrage products. To date, investors in those cases have been awarded damages of more than $60 million.

Older Americans 65 years of age or more are increasingly becoming victims of elder financial fraud and abuse. In many states, financial fraud is now the fastest-growing form of elder abuse. Perpetrators can be anyone – from strangers, to family members, to trusted financial advisors and brokers. Often, however, there are obvious warning signs that can prevent elder financial abuse from happening.

The first step to elder fraud prevention is to be vigilant, said Patty Struck, who oversees Wisconsin’s securities division, in a recent Wall Street Journal article. Several years ago, Struck’s office received a call from a man who was concerned about his father’s financial adviser.

According to the article, the son learned that the adviser was helping his father take out a new loan on the house, despite the fact that the mortgage had previously been paid off. The adviser had even driven the father to the bank to help him fill out the paperwork, Struck said in the Wall Street Journal story.

Seeing no financial need for the loan, the son called Wisconsin regulators. As it turns out, the adviser was looting his clients’ accounts. That included not just the caller’s father, but also his grandmother’s money, as well.

Financial scams against the elderly run the gamut. Some of the most common ones include the following:

Phony investments: During a sluggish economy, con artists come out in droves, according to the AARP. Using fear as their motivator, they prey on the elderly with tales of investments that can help them grow their money faster. Many of these financial scams involve phony investment products that promise “guaranteed income” and “consistent high returns.”

Unrealistic returns are a common theme of investment scams, which is why it’s important to do your homework before investing in any financial product.  To find out if the company or person offering the investment is truly legitimate, check the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority’s Broker Check.

Telemarketing scams. The U.S. Department of Justice estimates that rogue telemarketers take in an estimated $40 billion each year, bilking one in six consumers. The AARP says that about 80% of these victims are 50 years of age or older. Scammers use the phone and the Internet (and, increasingly, Facebook) to conduct investment and credit card fraud, lottery scams, and identity theft.

Charging excessive amounts of money for a service. Financial fraud perpetrators and scam artists often convince seniors that they need some type of service, such as a furnace cleaning or weatherization program. Then, they overcharge them hundreds, even thousands of dollars. This tactic also is used for products that many older people find essential to their quality of life, such as hearing aids and safety alert devices.

Remember, elder abuse can happen when you least expect it. Every year, billions of dollars are lost to the financial exploitation of the elderly.

“At least one in 10 elders is exploited,” says Jenefer Duane, founder of the Elder Financial Protection Network, a nonprofit group that aims to prevent financial abuse by creating partnerships and public awareness campaigns. “It’s become so rampant, it’s an epidemic situation.”

If you suspect an elderly person may be the victim or target of financial abuse, contact your local authorities.

Friends, relatives, and caregivers are increasingly doing double duty as perpetrators of elder fraud crimes and investment scams, according to the Consumer Financial Protection Bureau. Since mid-June, the CFPB has been gathering public input on the financial exploitation of older Americans. It has received more than 750 comments so far.

The CFPB plans to use the comments to develop tools to help seniors make better financial decisions to safeguard their assets.

Such efforts are certainly needed. Over the years, financial exploitation of older Americans has continued to grow throughout the United States.

“It’s going to continue and get worse as more seniors move into their so-called golden years,” said Don Blandin, president of the nonprofit Investor Protection Trust (IPT), in an Aug. 25 by the Baltimore Sun. “They are still going to have a lot of wealth that could be taken from them.”

In a study conducted by the IPT two years ago, one in five people age 65 and older revealed that they had been the victim of a financial scam. The problem is likely much worse, however.

In a recent IPT poll of 750 experts, including regulators, social workers, elder-law attorneys and financial planners, nearly 80% said the greatest financial threat to seniors comes from family members.

Relatives aren’t the only perpetrators of elder financial fraud. Many older investors are exploited by the financial brokers and advisers they hire to help them manage their investments.

An August 2012 survey by the Certified Financial Planner Board of Standards found that more than half (56%) of the 2,600 financial planners polled had worked with an older client who had been a victim of deceptive or abusive practices by another adviser. Planners say they encourage victims to report abuse to authorities but estimate that only 5% do so.

As baby boomers age, they often accumulate a wealth of financial assets through inheritances or a lifetime of saving for their retirement years. For financial perpetrators, these facts make individuals 65 and older a prime target for financial fraud and abuse.

Robert Govenat knows this all too well. In November 2007, longtime friend and financial planner Algird Norkus told Govenat about an alternative investment for “select people.” Norkus promised that the investment would keep Govenat’s principal safe, while paying 13.5% in annual interest, according to an Aug. 12 story by the Chicago Tribune.

Fearful of what was happening in the financial markets at the time, Govenat agreed to invest with Norkus. That decision would eventually cost Govenat nearly all of his life savings: $225,000. To make matters even worse, Govenat introduced his mother to Norkus and into what ultimately turned out to be a Ponzi scheme. She lost more than $200,000 in the scam.

Norkus pleaded guilty to one count of mail fraud. In March, he began serving 63 months in prison. He also was ordered to pay $4.6 million in restitution to nearly 70 victims, many of them elderly.

Govenat and his mother are just two of thousands of seniors who find themselves the victims of financial exploitation in the United States. In 2011, the state of Illinois, where Govenat and his mother lived, received 6,205 reports of suspected financial abuse and exploitation of senior citizens. The numbers have increased in recent years and are up 14% from 2007. Financial exploitation accounts for nearly 60% of reported abuse cases against older adults.

To combat the problem, law enforcement and state securities regulators are ramping up their efforts to protect seniors. The Department of Health and Human Services recently announced a $5.5 million grant that will be distributed to states for elder abuse prevention. Some states, including Illinois, are enacting new laws aimed at providing better protection of the elderly from financial abuse and fraud. Other states like Maine are holding workshops and seminars to give tips and information to seniors and others on spotting fraud and exploitation.

Investors in non-traded real estate investment trusts (REITs) have experienced a host of problems with their investments recently, as eight of the largest non-traded REITs report losing $11.3 billion, or 37% of their value, over the past seven years, according to an analysis by Investment News.

Among the non-traded REITs on that list: Behringer Harvard REIT I, Retail Properties of America, Inland American Real Estate Trust, Wells Real Estate Investment Trust II and Dividend Capital Total Realty Trust.

So what exactly has gone wrong with non-traded REITs? According to several investor alerts issued by the Financial Industry Regulatory Authority (FINRA), a number of non-traded REITs have been misrepresented to investors as safe, low-risk investments. In reality, however, many have proved to be the total opposite.

Other issues cited by FINRA regarding non-traded REITs in general include valuation irregularities, illiquidity, high front-end fees, sudden suspension of distributions, and undisclosed risks.

Investors in the Behringer Harvard Strategic Opportunity Fund I are facing the reality of some of those risks, as they learn their investment’s liabilities now exceed the value of its assets.

It isn’t the first time that investors in the Behringer Harvard family of REITs have had to face bad news. Another REIT, the Behringer Harvard Opportunity REIT I, saw its estimated value decline nearly 50% at the end of 2011 to $4.12 a share from $7.66 a year earlier. The news was even more grim for the Behringer Harvard Short-Term Opportunity Fund I LLP: Its valuation dropped to 40 cents a share at the end of December 2011, down from $6.48 a share as of Dec. 31, 2010.

The concept of “buyer beware” may be taking on a whole new meaning in the investing world under a proposed rule change by the Securities and Exchange Commission (SEC). The change would allow private offerings, hedge funds and other investment vehicles to go from soliciting individual investors behind closed doors to conducting widespread advertising campaigns without restrictions.

For more than three decades, hedge funds and other private investments have been barred from marketing to the public. Now, as regulators propose easing that ban, many fear unsophisticated investors might be lured into investing in products in which they don’t understand the risks.

As reported Aug. 29 by Bloomberg, SEC commissioners voted 4-1 to invite public comment on the proposed change. The proposal itself is driven by the Jumpstart Our Business Startups Act, which repealed a ban on pitching investments like hedge funds and private placements to all but a select few investors.

The Jumpstart Our Business Startups Act was signed into law by President Obama in April, and has drawn criticism from investor-protection groups who believe it could potentially expose more investors to misleading advertisements by some private funds.

“Unsophisticated investors will be inundated with offers of inappropriate investments sold through misleading advertisements,” said Barbara Roper of the Consumer Federation of America in the Bloomberg article. “Fraud will surge in a market already ripe with problems.”

Indeed, private offerings are the No. 1 fraud scheme leading to enforcement actions and investigations, according to the North American Securities Administrators Association. The number of cases involving these types of investments has increased 60% from 2010 to 2011.

The SEC plans to accept comments for 30 days before holding a final vote on the rule change.