Monthly Archives: August 2013

The price of gold has had an amazing run over the past decade. But as gold investors are now learning, those days may be a thing of the past.

Gold investor Jon Norstog knows this reality first hand. A $29,000 investment that Norstog made in 2011 is now worth about $17,000, a 42% loss.

“I thought if worst came to worst and the government brought down the world economy, I would still have something that was worth something,” said Norstog, 67, in an April 2013 story by the New York Times.

For a countless number of investors like Norstog, the idea that rising gold prices are no longer a sure thing is a hard one to grasp. Making matters worse is the fact the financial industry seized on the idea that gold would always be the pinnacle of great investments – not to mention a forever safe haven – to market a growing range of gold investments, including government-minted coins, publicly traded commodity funds, and mining company stocks, according to the New York Times story.

But $5 billion that flowed into gold-focused mutual funds in 2009 and 2010, according to Morningstar, helped the funds reach a peak value of $26.3 billion. Since hitting a peak in April 2011, those funds have lost half of their value, the NYT reported.

Indeed, after gold prices reached incredible highs two years ago, they’ve fallen fast. The price of bullion soared to more than $1,900 an ounce in August 2011; on Aug. 6, 2013,  gold prices were less than $1,300 an ounce.

“Gold is very much a psychological market,” said William O’Neill, a co-founder of the research firm Logic Advisors, in the New York Times story. O’Neill told its investors to get out of all gold positions in December after recommending the investment for years. “Unless there is some unforeseen development, I think the market is going lower,” he said.

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

The Financial Industry Regulatory Authority (FINRA) filed a complaint on July 30 against real estate investor Tony Thompson, alleging that he deceived and defrauded investors who bought $50 million in high-yield promissory notes sponsored by Thompson National Properties LLC.

Thompson is well known in the independent-broker-dealer industry for his real estate deals, including 1031, or “tenant in common,” exchanges.  He launched Thompson National Properties in 2008, raising $250 million from investors via a series of real estate-related offerings. Among them is a now-struggling non-traded real estate investment trust, TNP Strategic Retail Trust Inc., which eliminated dividends to investors this year.

FINRA’s complaint focuses on the level of disclosure regarding financial difficulties at Thompson National Properties in the PPMs, said Thompson’s lawyer, Thomas Fehn, in an Aug. 6 article by Investment News. Fehn contends those issues were appropriately disclosed.

According to the complaint, Thompson National Properties had provided a purported guarantee of principal and interest for three notes programs sold from 2008 to 2012 through a network of independent broker-dealers.  TNP Securities LLC, which is Thompson’s broker/dealer, also named in the complaint.

The three note programs in FINRA’s complaint include the TNP 12% Notes Program LLC, the TNP 2008 Participating Notes Program LLC and the TNP Profit Participation Program LLC.

As reported in the Aug. 6 story by Investment News, Thompson’s profile on Finra’s BrokerCheck system states that TNP Securities and Thompson “engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchaser” of the note securities. In FINRA’s complaint, one of those series of private notes is reported to be in default, while two others have stopped making payments to clients.

Thompson and TNP Securities are allegedly in violation of Securities and Exchange Act of 1934, as well as FINRA’s Rule 2020, which prohibits the use of manipulative, deceptive or other fraudulent devices by registered representatives and broker-dealers. They are also allegedly in violation of FINRA Rule 2010, which requires registered reps and broker-dealers to adhere to high standard of commercial honor and trade.

Thompson and TNP Securities are no strangers to FINRA. Both have been on the regulator’s radar for some time now over allegations of failing to cooperate in a FINRA investigation.

A recent editorial by Investment News addresses a newly introduced bill intended to end the mandatory arbitration clause found in contracts between financial advisers and their clients.  Rep. Keith Ellison, who introduced the bill, says he believes that doing away with mandatory arbitration could begin the process of rebuilding investor trust in Wall Street.

“Investors want to get back in the market, but they’re rightly wary that the game is rigged against them,” Ellison said in a statement after introducing the bill. “Investors shouldn’t have to sign away their rights in order to work with a financial adviser or broker/dealer. By removing some of these unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen the economy.”

The mandatory arbitration clauses are standard in brokerage contracts and often included by registered investment advisers. Specifically, the clauses dictate that any client complaints must be settled in binding arbitration instead of the courts.

As the Investment News editorial correctly points out, there are other reasons to get rid of mandatory arbitration, not the least of which is the fact that investors should not be required, as they are now, to relinquish their legal rights in advance of a future complaint with their broker. Such a requirement does nothing to instill trust and faith in Wall Street.

In reality, as of three years ago, the Securities and Exchange Commission (SEC) has had the authority to end, or at the very least, limit mandatory arbitration under the Dodd-Frank Act. But the SEC has yet to make a move in that direction.

This summer, one SEC member – Luis A. Aguilar – went against the tide and introduced a bill to kick start the process. That bill, the Investor Choice Act of 2013, is strongly supported by several investor protection and financial groups, including the North American Securities Administrators Association (NASAA), which believes that inclusion of mandatory arbitration provisions in broker/dealer and investment adviser customer contracts denies many investors the ability to pursue legitimate claims against fraudsters.

“Investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution. Rep. Ellison’s legislation will ensure that investors have the unencumbered right to seek redress in the appropriate and desired forum,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner, in a statement.

The bottom line: If the investment world hopes to restore the trust of investors – and create true financial reform – it needs to act in their best interests. Period. Ending mandatory arbitration is a beginning.

On the last day of July, the Securities and Exchange Commission (SEC) approved new rules designed to increase protections for investors who turn their money and securities over to broker/dealers registered with the SEC.

Approved by a 3-2 vote, the new rules require broker/dealers to file new reports with the SEC that should result in higher levels of compliance with the regulator’s financial responsibility rules.

“These rules will provide important additional safeguards for customer assets held by broker/dealers,” said Mary Jo White, Chair of the SEC.  “These rules will strengthen the audit requirements for broker/dealers and enhance our oversight of the way they maintain custody of their customers’ assets.”

Broker/dealers must begin to file a quarterly report, called Form Custody, with the SEC and annual reports with SIPC by the end of 2013.  The requirement for broker/dealers to file annual reports with the SEC is effective June 1, 2014.