Category Archives: Broker/dealer

The top stories in the investment world for 2013 ran the gamut, from non-traded REIT deals that soured to a stampede of broker/dealers closing up shop. Among the highlights in 2013:

Non-Traded Real Estate Investment Trusts (REITs). In June, William Galvin, Secretary of the Commonwealth of Massachusetts, announced settlements with Ameriprise Financial Services Inc., Commonwealth Financial Network, Lincoln Financial Advisors Corp., Royal Alliance Associates and Securities America over sales involving non-traded REITs.  As part of the settlement, the five firms agreed to make $6.1 million in restitution to investors and pay fines totaling $975,000.

LPL Financial. In February, LPL Financial LLC was order by the Massachusetts Security Division to pay restitution of more than $2 million to investors who bought shares of non-traded real estate investment trusts (REITs). In addition to the restitution order, Massachusetts regulators levied a $500,000 administrative fine against LPL.  The settlement stemmed to allegations that LPL failed to supervise brokers who sold investments in non-traded REITs. LPL also agreed to review all other non-traded REITs offered to Massachusetts residents and to make restitution to investors in the state whose transactions violated Massachusetts or company rules.

Separately, a former adviser affiliated with LPL Financial LLC was charged in May by the Securities and Exchange Commission (SEC) of defrauding investors and stealing $2 million from at least six clients. According to the civil complaint, the adviser, Blake Richards, misappropriated client money that “constituted retirement savings and/or life insurance proceeds from deceased spouses.”

In one instance, Richards allegedly tried to gain an investor’s trust by delivering pain medication during a snowstorm to a client’s husband who had been diagnosed with terminal pancreatic cancer, according to the SEC complaint.

Private Placements.  Four culprits behind a massive multimillion-dollar private-placement fraud known as Provident Royalties were given jail sentences by U.S. District Judge Marcia A. Crone. Brendan Coughlin, 46, and Henry Harrison, 47, were sentenced to 21 months in federal prison. They founded and controlled Provident along with Joseph Blimline, 35, who already had been sentenced to 12 years in prison. Paul Melbye received a sentence of 18 months in prison.

Columbia Property Trust. Non-traded REITs again made headlines when Columbia Property Trust went public in October at $22.50 a share. Before going public, however, the REIT underwent a complicated reverse 4-for-1 share split, raising its price to around $29 a share from just over $7.33. Investors who initially bought into the REIT at $10 a share essentially were offered the opportunity to cash out at a net asset value of around 45% less than the price they paid at their initial purchase.

Making matters worse is the fact that Columbia Property Trust had cut its distributions twice since 2009.

Bambi Holzer. Known as the broker to the stars, Bambi Holzer made a name for herself in the securities industry by providing financial advice to Hollywood names like Julia Louis-Dreyfus (who ultimately sued Holzer over a dispute concerning $4.4 million invested in annuities). In October 2013, the Financial Industry Regulatory Authority (FINRA) also sued Holzer for allegedly lying to one of her former firms, Wedbush Securities, about the net worth of several clients when she sold preferred shares of one of the series of fraudulent deals issued by Provident Royalties LLC in 2008.

In December 2013, Holzer was officially barred from the securities industry as part of a settlement with FINRA.

Elder Fraud. Elder financial fraud and abuse came to the forefront of the big investment stories in 2013 as several research studies reported that the elderly were losing more than $3 billion every year to financial fraud and investment scams. Many of the scams involved unsuitable investments, variable annuities and alternative financial products like non-traded REITs and private placements.

Protecting investors – and especially the elderly – was in part behind a move by the Securities and Exchange Commission (SEC) to release a special bulletin warning investors about the myriad of financial titles in existence today. Among other things, the bulletin stressed that financial professional designations and licenses are not the same and that investors should never rely solely on a title to determine whether a financial professional has the expertise they need.

UBS Puerto Rico Bonds. In November, a unit of UBS AG offered to repurchase shares of closed-end municipal bond funds invested in Puerto Rico muni securities from certain clients. During the summer, the market for Puerto Rico’s $70 billion muni debt went south after Detroit filed for bankruptcy in July. UBS Financial Services of Puerto Rico is a huge player in the muni debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds through the end of 2012. Meanwhile, the net asset value (NAV) of the 14 UBS closed-end funds have plummeted.

Investors purchased the proprietary bond funds for $10 a share. According to a story by Investment News, the NAV for the $375 million Puerto Rico Fixed Income Fund was $3.63 at the end of October, down 85% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III was $4.08 at the end of October, a decrease in value of 68% since June.

Once known as a financial broker to the rich and famous, Bambi Holzer has now been barred from the securities industry by the Financial Industry Regulatory Authority (FINRA). Holzer agreed to the settlement with FINRA last week.

Holzer’s problems seemingly began at the onset of her career in the financial business. As reported in a 2009 article by Forbes, Holzer started working in the 1980s as a receptionist for Oppenheimer & Co. She was promoted within a few weeks to assist the firm’s muni bond trading desk. Shortly thereafter, Holzer moved to Shearson Lehman Hutton, where she was accused of fraud, negligence and churning a client account. According to the Forbes article, Holzer’s employer paid $70,000 to resolve those allegations.

Regulatory records show that Holzer returned to Oppenheimer in 1989 and was “permitted to resign” the following year. Over the years, Holzer worked for at least 10 different broker/dealers, including Brookstreet Securities, A.G. Edwards, Bear Stearns, Newport Coast Securities and UBS.

Despite her problems with regulators – as well as a growing list of investor complaints and disciplinary actions – Holzer somehow managed to maintain an image of wealth and success. With a Beverly Hills office located just off of Rodeo Drive, Holzer counted several celebrities among her clients, including former “Seinfeld” star Julia Louis-Dreyfus. In addition to dispensing financial advice, Holzer authored several books and made numerous television appearances.

Eventually, however, Holzer’s sketchy regulatory history caught up with her. In 2007, former client and actress Julia Louis-Dreyfus, as well as other investors, sued Holzer and one of her former employers over a dispute involving $4.4 million invested in annuities. That suit was later settled.

According to the Investment News article, Holzer and her firm at the time, UBS PaineWebber, paid out at least $11.4 million to settle dozens of investor claims that she misrepresented variable annuities by saying that they offered guaranteed returns.

In September 2013, Holzer was suspended by FINRA since September; at the time, her BrokerCheck report contained 115 pages of investor complaints.

One month later, Holzer was sued by FINRA for allegedly lying to one of her former broker/dealers, Wedbush Morgan Securities Inc., about several clients’ net worth when she sold preferred shares of one of the deals issued by Provident Royalties. In July 2009, Provident Royalties was sued by the Securities and Exchange Commission (SEC) for fraud and what later turned out to be a $485 million Ponzi scheme.

In a rare move, the Financial Industry Regulatory Authority (FINRA) made the decision last week to bar an individual broker for violations of securities industry rules tied to sales of non-traded real estate investment trusts (REITs).

As reported by Investment News, former LPL Financial broker Gary Chackman was accused of falsifying documents related to sales of the REITs from 2009 to 2012. Chackman was registered with LPL from 2001 to 2012 when LPL terminated his registration for violating the firm’s policies and procedures concerning sales of the alternative investments.

Chackman “recommended and effected unsuitable transactions in the accounts of at least eight LPL customers, by overconcentrating his customers’ assets in [REITs] and other illiquid securities,” according to FINRA’s letter of acceptance, waiver and consent, dated Dec. 12.

“Additionally, Chackman falsified LPL documents to evade the firm’s supervision and caused the firm’s books and records to be inaccurate by submitting dozens of ‘alternative investment purchase’ forms that misrepresented his customers’ purported liquid net worth,” the letter said.

According to the Investment News article, Chackman’s BrokerCheck report lists three arbitration claims with settlement amounts of $747,000. He also faces a pending investigation courtesy of the Securities and Exchange Commission (SEC).

Non-traded REITs have been under the radar of FINRA, as well as several state securities regulators for some time now. The products generate high-commissions for the brokers and registered representatives that sell them to investors.

Earlier this year, William Galvin, Massachusetts Secretary of the Commonwealth, announced settlements with six broker/dealers for $21.6 million in restitution to clients over sales of non-traded REITs. The firms, which included LPL, have since paid fines of nearly $1.5 million.

The brokerage firm of Merrill Lynch will pay $131.8 million to settle charges it misled investors about two collateralized debt obligations (CDOs)  it structured and marketed, as well as maintaining inaccurate books and records for a third CDO. The Securities and Exchange Commission (SEC) announced the settlement on Thursday.

The SEC’s order found that Merrill Lynch failed to inform investors that the hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs titled Octans I CDO Ltd. and Norma CDO I Ltd.  According to the SEC, Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the products.

“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement, in a statement. “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”

Merrill Lynch agreed to the settlement without admitting or denying the SEC’s findings.

All of the actions in question took place before Merrill Lynch was acquired by the Bank of America in 2009. Specifically, according to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007 when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio … and in return [Magnetar] retain[s] the equity class and we distribute the debt.”

The email further noted that the Merrill Lynch reps agreed in principle to conduct a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

You can read the SEC’s entire decision here.

Even though sales of alternative investments, especially non-traded real estate investment trusts (REITs), are experiencing a major upswing this year, investors are wise to remember the dark days of the past before completely jumping on the alternative investment bandwagon.

Specifically, those days relate to some of the bad decisions made by a number of broker/dealer firms – many of which are now out of business or mired in legal issues and investor lawsuits – and the alternative financial products they sold to clients. Those products were tied to sponsor names like Medical Capital Holdings, Provident Royalties and DBSI Inc.

Medical Capital and Provident were charged with fraud by the Securities and Exchange Commission (SEC) in 2009, while DBSI, which raised $1 billion from investors by selling real estate investments via independent broker/dealers, filed for bankruptcy.

In the aftermath of those failed deals, some broker/dealers ramped up their due-diligence of alternative investments and began working with regulators to establish standards for valuation and account statement reporting. Their attempts to alter the public’s perception of such products may be working.  As reported by Investment News, alternative investments like non-traded REITs are estimated to bring in $20 billion of capital flows by the end of this year. That is twice as much as 2012.

Still, investors may be wise to proceed with caution before totally singing the praises of alternative investments. After all, many of these products – including non-traded REITs – continue to have the same issues as before: illiquidity, unreliable distributions, complex redemption structure and pricey commissions and fees.

The bottom line: History can and often does repeat itself. It’s a lesson perhaps worth remembering.

Non-traded real estate investment trusts (REITs) are proving to be a cash bonanza for some independent broker/dealers in 2013, with the alternative investments bringing in a ton of money via commissions and fees. As reported recently in a story by Investment News, registered reps funneled a “mountain of client cash into non-traded REITs this year – an expected record $20 billion in sales.”

According to the Nov. 30 article, one of those BDs was LPL Financial, which reported a huge increase in commissions in the third quarter for sales of non-traded REITs and other alternative investments of160%, or $81.2 million.

Non-traded REITs and other private-placement alternative investments have not been without controversy over the past couple of years as several big-name sponsors – i.e. Medical Capital Holdings and Provident Royalties – turned out to be frauds. Countless broker/dealer firms that sold their clients on the products later shuttered their business, while others faced – and continue to face – a bevy of investor lawsuits and scrutiny from regulators.

Some firms, however, are apparently thriving in the alternative investment arena. Case in point: Capital Financial Services. Last month, the firm’s parent company, Capital Financial Holdings, noted a surge in income in its third-quarter earnings report – income that was tied to alternative investment sales.

“Interest and other income for the nine-month period ended Sept. 30, 2013, was $430,534, an increase of 149% from $172,632 during the same period in 2012,” Capital Financial Holdings reported. “The increases were due to an increase in the marketing income received related to alternative investment products.”

Capital Financial Services track record with alternative investments has been a rocky one. It was one of the top sellers of Provident Royalties LLC preferred shares, which later were accused by the Securities and Exchange Commission (SEC) of being fraudulent. In August 2011, Capital Financial and the Financial Industry Regulatory Authority (FINRA) reached a $200,000 settlement over Provident’s failed private placements.

Another firm with ties to failed private placements but whose bottom line is apparently on the upswing now because of new deals is Ladenburg Thalmann Financial Services. Ladenburg is the parent firm of three independent broker/dealers; last month it reported a 20% boost in commission revenue for the nine-month period ending in September due, in part, to alternative investment sales.

“The increase in commission revenue resulted primarily from increased sales of alternative investments, mutual funds and variable annuities in the 2013 period as compared to the 2012 period,” the company reported.

As reported in the Nov. 30 Investment News article, Securities America is one of Ladenburg Thalmann’s broker/dealer firms. Securities America also was the leading seller of Medical Capital private placements, with almost $700 million in sales. Like Provident Royalties, Medical Capital was charged with fraud by the SEC in 2009. The former owner of Securities America, Amerprise Financial, as well as Securities America itself, announced two settlements with Medical Capital in 2011 totaling $150 million.

Non-traded REITs and private placements are different products yet share several structure similarities, including high commissions and fees. They also are typically complex investments and, in some instances, tend to provide little disclosure information to brokers and investors alike.

In the aftermath of the Medical Capital and Provident Royalties fiasco, however, many broker/dealers have taken steps to improve the transparency polices and issues surrounding alternative investments like non-traded REITs. Some are working with regulators to create better valuation standards for more accurate account statement reporting. That’s good news for investors. Let’s hope it stays that way.

Legal problems tied to UBS Financial Services of Puerto Rico and, specifically, to sales of a group of troubled closed-end municipal bond funds, are big and getting bigger. Now, investors who suffered financial losses from the investments are taking action against the UBS brokers who sold them the products.

The market for Puerto Rico’s $70 billion muni debt went south when the city of Detroit filed for Chapter 9 bankruptcy protection on July 18.  The bankruptcy filing made Detroit the largest city in U.S. history to do so. The UBS unit in Puerto Rico is a major player in the muni-debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds as of the end of last year.

As reported earlier today by Investment News, disgruntled investors are filing arbitration claims with the Financial Industry Regulatory Authority (FINRA) against individual brokers at UBS Puerto Rico. One of those brokers, Jose Gabriel Ramirez Jr., has had seven investor complaints totaling nearly $51 million filed against him, according to his BrokerCheck report.

The seven complaints range from $1 million to $26 million in alleged damages. In each complaint, investors allege actions of overconcentration and misrepresentation of the closed-end funds by the UBS brokers.

According to the Investment News story, Ramirez currently is on administrative leave from UBS Puerto Rico.

The value of the closed-end bond funds at the focus of investors’ claims with FINRA plummeted by 50% to 60% during the second half of this year.

A unit of UBS AG has offered to repurchase shares of closed-end municipal bond funds invested in Puerto Rico muni securities from certain clients. The story was first reported Nov. 25 by Investment News.

During this past summer, the market for Puerto Rico’s $70 billion muni debt went south after Detroit filed for bankruptcy in July. UBS Financial Services of Puerto Rico is a huge player in the muni debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds through the end of 2012.

Meanwhile, the net asset value (NAV) of the 14 UBS closed-end funds have plummeted.

Investors purchased the proprietary bond funds for $10 a share. According to the Investment News story, the NAV for the $375 million Puerto Rico Fixed Income Fund was $3.63 at the end of October, down 85% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III was $4.08 at the end of last month, a decrease in value of 68% since June.

So far, investors who’ve been contacted by brokers have not been told a set price – or given a guarantee – for their shares.

For many investors, promissory notes tend to conjure memories of recent deals gone bad, especially those associated with Medical Capital Holdings or Provident Royalties. Both entities were charged with fraud by the Securities and Exchange Commission (SEC) and cost investors millions of dollars in financial losses.

Promissory notes are again back in the news. This time a broker who worked for a firm – Success Trade Securities – that is alleged to have sold more than $18 million in fraudulent promissory notes to 58 investors has been barred by the Financial Industry Regulatory Authority (FINRA).

The broker, Jinesh “Hodge” Brahmbhattm, worked for Success Trade Securities from 2009 until April. He was barred by FINRA last week.

Many of the individuals who invested in the fraudulent notes are current and former NFL and NBA players. As reported Nov. 20 by Investment News, one athlete, Jared Odrick of the Miami Dolphins, has filed an arbitration complaint with FINRA against Brahmbhatt, Success Trade and the company’s top executive, Fuad Ahmed.

The letter of acceptance, waiver and consent from FINRA doesn’t mention Brahmbhatt’s work with Success Trade as the reason he was barred from FINRA. Rather, it cites Brahmbhatt’s failure to appear and testify in August at a disciplinary hearing regarding Success Trade and Ahmed.

Earlier this spring, FINRA filed a cease-and-desist order against Success Trade and Ahmed. The order specifically instructed the two “to halt further fraudulent activities” and cited “the misuse of investors’ funds and assets.”

FINRA also filed a complaint against Ahmed and Success Trade, alleging “fraud in the sale of promissory notes issued by the firm’s parent company, Success Trade Inc.”

According to a Nov. 18 story by Yahoo Sports, Brahmbhatt had once been registered in a financial advisers program created by the NFL Players Association. He dropped his FINRA license in April, and told Yahoo Sports at the time that he had more than 30 clients who had purchased some $12 million of the allegedly fraudulent promissory notes from Success Trade.

Meanwhile, Odrick, the NFL player, filed his arbitration complaint with FINRA in April. He says in the complaint that he invested $625,000 in Success Trade notes and one other series of promissory notes beginning in 2011. Among other things, Odrick alleges that he was promised returns of 10% to 12.5%. The Success Trade note “was part of a large Ponzi scheme orchestrated by Success Trade, Ahmed and Brahmbhatt,” the complaint states.

Older adults are more likely to become victims of investment fraud and financial scams than the general public. In many cases, the root of this fraud is related to the so-called elder investing expertise of the financial advisers that seniors turn to for financial advice.

A simple search on the Internet of financial advisers for seniors will produce a multitude of different titles, including elder care financial specialist and senior financial adviser. For many older investors, it’s difficult to know if these individuals actually have the proper training and credentials they say they have to help investors with their money.

Earlier this year, the Consumer Financial Protection Bureau released a report on senior designations and what older Americans can do to prevent themselves from being scammed by financial advisers who may falsely claim to specialize in giving advice to seniors. According to the report, there are more than 50 senior designations in today’s marketplace by people recommending or selling products such as securities, investment opportunities, financial products, and insurance products like annuities and long-term care insurance.

Some of these designations are legitimate and require specific training and professional license; others, however, are simply window dressing.

The CFPB advises elderly investors to thoroughly check the background of any financial adviser with a senior designation behind his or her title. Among the resources you can use:

*The Financial Industry Regulatory Authority’s Broker Check Web site. Broker Check lets you search the professional backgrounds of securities brokers and investment advisers, as well as their firms.

*The Investment Adviser Public Disclosure (IAPD) database. IAPD provides instant access to registration documents filed by more than 25,000 SEC- or state-registered investment advisers. IAPD also provides access to registration information filed with the states by investment adviser representatives (certain individuals that are employed by an investment adviser).

*If your adviser sells insurance, the CFPB recommends that you contact your state insurance commissioner for additional information.

*If your adviser sells securities, your state securities regulator can provide additional information.