Category Archives: Broker/dealer

Doomed investment deals involving private placements have forced a number of broker/dealers to close their doors this year. Meanwhile, investors in those deals lost millions of dollars because in, many instances, the broker/dealer responsible for recommending the investments failed to perform their due diligence on the financial product they were touting.

As reported May 21 by Investment News, the Securities and Exchange Commission (SEC) is now taking a deeper look at “several areas of high risk” in the securities industry. That includes the due diligence of broker/dealers and their net capital levels.

“We’re looking at due diligence,” said Julius Leiman-Carbia, associate director in charge of the National Broker-Dealer Examination Program in the SEC’s Office of Compliance Inspections and Examinations, in the Investment News article. Leiman-Carbia, who participated in a panel discussion on Monday in Washington as part of the annual meeting of the Financial Industry Regulatory Authority (FINRA), added that he wonders if brokers truly understand all of the products that they sell to clients.

In addition to focusing on due diligence, the SEC is examining “the division between the investment adviser and broker/dealer sides” of firms that are dually registered, including the various types of controls that exist when money is [placed with] the investment adviser.

The SEC also is looking at the country as a whole in an effort to pinpoint specific areas where investor fraud – especially elder financial fraud – is more prevalent.

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.

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.”

The Securities and Exchange Commission (SEC) wants investors who were scammed by R. Allen Stanford in a $7 billion fraud scheme to be treated as brokerage customers by the Securities Investor Protection Corporation (SIPC). If that happens, investors would stand a chance of getting some of their money back.

The SIPC works as an insurance fund, and is backed by member brokerages. While it isn’t designed to cover investment losses, it is supposed to provide a measure of protection for investors in the event that their brokerage goes bankrupt or fails because of alleged fraud. The protection amounts up to $500,000 per customer.

In the Stanford case, the SIPC has been unwilling to pay up, even though the SEC told it to do just that more than two years ago. The SIPC, however, says the protection provided to investors does not apply to those who were bilked by Stanford because the bogus certificates of deposit they bought were sold through Stanford’s bank in Antigua, rather than being held by the brokerage.

That technicality was the subject of a March 7 congressional hearing, in which legal analysts and lawmakers offered their thoughts on the issue, along with recommendations for improving the SIPC.

Sales of private placements in Provident Royalties have become the undoing of yet another broker/dealer. Workman Securities announced earlier this week of its plans to close in November, telling 100 advisers they could move as a group to Virginia-based Allied Beacon Partners.

As reported Aug. 5 by Investment News, Workman representatives who agree to the move were promised a smooth transition, with Allied agreeing to keep Workman’s payout schedule or grid for two years.

In the summer of 2009, Provident Royalties was charged with fraud by the Securities and Exchange Commission (SEC). Workman was a large seller of private placements in Provident, selling $9 million of the investments.

According the Investment News story, Workman had up to 20 unsettled investor complaints relating to losses from sales of private placements in Provident Royalties.

In shuttering, Workman Securities joins dozens of other broker/dealers that met a similar fate because of private placement deals gone bad in Provident and another sponsor in bankruptcy, Medical Capital Holdings.

In February, Workman reached an agreement with the Financial Industry Regulatory Authority (FINRA) to pay $700,000 for partial restitution to more than a dozen clients who had sued the B-D over investments in both Provident Royalties and Medical Capital.

Private placement investments in Medical Capital Holdings and Provident Royalties have caused a mountain of legal woes for broker/dealers recently. Now another private placement may come back to haunt Commonwealth Financial and LPL.

As reported Aug. 4 by Investment News, financial reps from both Commonwealth and LPL sold the fund in question, the Laeroc 2005-2006 Income Fund LP. The fund now wants to raise another $12 million to $15 million to pay off – at a big discount – nearly $50 million of debt.

According to the article, real estate investor Laeroc Partners issued a “cash call” notice in June to investors who bought the Laeroc 2005-2006 Income Fund. The notice states that the fund’s lenders will foreclose by the end of the year on a shopping center in Sacramento, Calif., if the new cash isn’t paid. Reportedly, the Laeroc Fund has paid more than $180 million to buy eight properties and owes some $105 million in mortgage debt.

It isn’t clear exactly how much of the Laeroc 2005-2006 Income Fund that Commonwealth and LPL brokers sold.

The fallout from private placements in Medical Capital Holdings and Provident Royalties reached a fever pitch after the Securities and Exchange Commission (SEC) charged the two sponsors with fraud in July 2009. Investors saw about half of their principal wiped out in the two deals. Meanwhile, legal costs associated with client arbitration claims and settlements forced many broker/dealers to close their doors.

Industry executives noted that real estate deals of various stripes, including nontraded real estate investment trusts, which raised money and bought properties from 2006 to 2009, are struggling.

If you are an LPL or Commonwealth client and invested in the Laeroc 2005-2006 Income Fund LP, contact us to tell story.

Clients of David Lerner Associates who own shares in non-traded REITs created by Apple REIT Cos. are not happy campers these days. When their account statements arrived in the mail last month, the value of their Apple REIT shares was designated as “not priced.”

The wording comes as a shock because for years shares of the non-traded REIT were listed at $11. As reported July 17 by Investment News, David Lerner continued to list the same price even after the Financial Industry Regulatory Authority (FINRA) instructed broker/dealers in 2009 to adjust prices on the investments more frequently.

Moreover, FINRA prohibited broker/dealers from using information more than 18 months old to estimate the value of a non-traded REIT.

FINRA filed a complaint against David Lerner in May, alleging that the firm has misled investors, as well as marketed unsuitable investment products to them.

In total, David Lerner has recommended and sold nearly $6.8 billion in Apple REIT shares since 1992, according to FINRA’s records.

A broker/dealer that switches a security’s value to “not priced” isn’t unheard of, but it is far from the norm, attorneys say.

“The price of $11 per share is most likely a misrepresentation of its true value, which is almost impossible to ascertain and price,” said Phil Aidikoff, a plaintiff’s attorney who has been following the David Lerner case but has no investors with the firm as clients in the Investment News article.

“Issues of pricing have been going on for a long time in the securities business,” Aidikoff said.

FINRAs complaint against David Lerner has sparked new concerns among broker/dealers about the sales of illiquid investments such as non-traded REITs and private placements.

Broker/dealer Raymond James Financial has agreed to pay a $1.7 million fine and buy back $300 million in auction-rate securities from clients as part of a settlement with eight states and the Securities and Exchange Commission (SEC).

Broker/dealers have been dealing with the auction-rate securities debacle since February 2008, when the market froze for the products came to a standstill. As a result, thousands of individual and institutional investors were left holding illiquid investments.

In August 2008, Raymond James announced that it was the subject of several investigations by state securities regulators over the auction-rate securities its registered reps had sold to clients.

As reported June 29 by Investment News, the states leading the charges against Raymond James’ settlement are Florida and Texas. Other states involved include Indiana, Missouri, New York, North Carolina, Pennsylvania and South Carolina.

Like many broker/dealers, Raymond James’ registered representatives and financial advisers allegedly characterized auction-rate securities as “cash equivalents” and “highly liquid” short-term investments to customers. In reality, the supposedly “cash-like products” became illiquid investments after the Wall Street firms that once supported the auction-rate market pulled out entirely.

Arbitration claims connected to Medical Capital Holdings and Provident Royalties and other risky deals – including those involving non-traded REITs – could grow much bigger in number following a recent regulatory decision by the Securities and Exchange Commission (SEC).

The new regulation gives investors the option of choosing an all-public arbitration panel to have their disputes with brokers reviewed. In other words, investors can select a panel composed entirely of individuals who have no connection to the securities industry. Typically, the three-person panel is made up of two public arbitrators and one industry professional.

As reported Feb. 6 by Investment News, the SEC’s ruling comes on the heels of a pilot program by the Financial Industry Regulatory Authority (FINRA) that allowed certain investors the choice of substituting an industry arbitrator with a public panelist.

The rule change does not affect disputes among brokerage firms or between brokers and their firms.

“This is a tremendous step in the right direction,” said Peter Mougey, president of the Public Investors Arbitration Bar Association, which represents plaintiff’s attorneys, in the Investment News article.

If you have a concern about your investments with your independent broker/dealer, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.