Category Archives: Private Placement Offerings

Failed deals in non-traded real estate investment trusts (REITs) and private placements have plagued more investors in recent years, with problems ranging from suspension of share redemptions to inaccurate valuations to outright fraud. Such issues have garnered the attention of the Financial Industry Regulatory Authority (FINRA), which is now investigating real estate developer Tony Thompson and his broker/dealer, TNP Securities LLC, for allegedly failing to turn over certain documents to FINRA.

By failing to turn over documents about his business to FINRA, Thompson is in violation of industry rules that require firms and individuals to produce information when asked to do so by FINRA.

As reported March 12 by Investment News, FINRA initially made inquiries regarding the documents two months ago. At the time, Thompson was attempting to “goose sales for a non-traded real estate investment trust, the $272 million TNP Strategic Retail Trust Inc.”

During that same month, Thompson sent a note to broker/dealers hawking the TNP Strategic Retail Trust and proclaiming that its net asset value was 6% higher than its share price. Specifically, Thompson’s note read: “Closing Feb. 7, 2013! Necessity retail: Now is the time!”

As the Investment News article points out, discrepancies between a REIT’s selling price and its NAV could be dilutive to current shareholders and provide brokers with a pitch laden with urgency to sell.

That’s not the only problem on Thompson’s plate, however. He’s also dealing with huge financial troubles, including the default on $21.5 million of private notes that he sold in 2008 and 2009 to raise money for Thompson National Properties LLC.  Last year, that venture suspended interest payments to investors in a private placement – i.e. the TNP 12 Percent Notes Program – that was designed to raise capital for the firm. Many of the investors in the TNP 12 Percent Notes Program reportedly were elderly, retired or conservative investors living on fixed incomes.

According to a July 10, 2012, article by Investment News, 22 independent broker/dealers had agreements to sell the notes, which required a minimum investment of $50,000. Brokers earned a 7% commission on sales of the notes, according to a filing with the Securities and Exchange Commission (SEC).

If you invested and suffered financial losses with Tony Thompson, the TNP 12 Percent Notes Program, Thompson National Properties LLC, TNP Securities, or TNP Strategic Retail Trust, contact us to tell your story.

Every year, the Financial Industry Regulatory Authority (FINRA) takes note of key regulatory and examination issues that it plans to prioritize in the new year. In 2013, those priorities include a number of hot-button – and familiar – financial products, from structured investments, to non-traded REITs, to business development companies, or BDCs.

In a recent notice to investors, FINRA highlighted the following products and issues, along with an explanation as to why they merit top placement on FINRA’s 2013 watch list.

Structured Products: These products may be marketed to retail customers based on attractive initial yields and, in many cases, on the promise of some level of principal protection, according to FINRA. Moreover, structured products are often complex, and have cash-flow characteristics and risk-adjusted rates of return that are uncertain or hard to estimate. In addition, structured products generally do not have an active secondary market.

Suitability and Complex Products: FINRA’s recently revised suitability rule (FINRA Rule 2111) requires broker/dealers and associated persons to have a reasonable basis to believe a recommendation is suitable for a customer. FINRA says it is particularly concerned about firms’ and registered representatives’ understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.

Business Development Companies (BDCs): BDCs are typically closed-end investment companies. Some BDCs primarily invest in the corporate debt and equity of private companies and may offer attractive yields generated through high credit risk exposures amplified through leverage. As with other high-yield investments – such as floating rate/leveraged loan funds, private REITs and limited partnerships – investors are exposed to significant market, credit and liquidity risks. In addition, fueled by the availability of low-cost financing, BDCs run the risk of over-leveraging their relatively illiquid portfolios, FINRA says.

Exchange-Traded Funds and Notes: In many instances, retail investors may not fully understand the differences among exchange-traded index products (i.e., funds, grantor trusts, commodity pools and notes) and the risks associated with these investments, particularly those that employ leverage to amplify returns. FINRA says it also is concerned about the proliferation of newly created index products that lack an established track record. Examples include products with valuations and performance tied to volatility, emerging markets and foreign currencies.

Non-Traded REITs: FINRA’s interest in non-traded REITs centers on the fact that many customers of non-traded REITs are unaware of the sales costs deducted from the offering price and the repayment of principal amounts as dividend payments in the early stages of a REIT program.

Private Placement Securities: Private placements will continue to be a key focus of FINRA’s investor protection efforts in 2013, with particular emphasis on sales and marketing efforts by broker/dealers. To improve its understanding of private placements, FINRA implemented Rule 5123, which requires member firms that sell an issuer’s securities in a private placement to individuals to file a copy of the offering document with FINRA.

FINRA also reminds member firms that the relative scarcity of independent financial information and the uncertainty surrounding the market- and credit-risk exposures associated with many private placements necessitates reasonable due diligence on prospective issuers. FINRA notes that due diligence should focus on the issuer’s creditworthiness, the validity and integrity of their business model, and the plausibility of expected rates of return as compared to industry benchmarks, particularly in light of the complex fee structures associated with many of these investments.

Independent broker/dealers continue to face a wave of legal and regulatory issues in 2013, with many expected to shutter their businesses.

As reported Jan. 20 by Investment News, the problems facing smaller B-Ds with 150 registered representatives or fewer include higher compliance costs, record low interest rates for money market accounts, competitive commission rates from large or discount broker-dealers and a tax increase that will cut available discretionary funds that investors can put to work in the stock market.

Small B-Ds make up the majority of firms registered with the Financial Industry Regulatory Authority (FINRA).  In the first 11 months of 2012, pressures on the industry reduced the number of FINRA-registered firms to 4,319 – down 97 firms from the prior year and a 14% decline since the end of 2007.

Regulatory and compliance issues are a key factor contributing to the reduction in smaller B-Ds. In a move to improve investor protections, the Securities and Exchange Commission (SEC) approved FINRA Rule 4524 in 2012, which mandated that broker/dealers file additional financial or operational schedules or reports as FINRA deemed necessary.

Many B-Ds to close up shop in the past few years have done so because of deals involving failed private placements, such as those connected to Provident Royalties LLC and Medical Capital Holdings LLC. The SEC charged both of those firms with fraud in July 2099, which in turn spurred a rash of investor lawsuits and arbitration claims. As a result, many broker/dealers were unable to contend with the litigation costs and subsequently shut down.

Failed deals involving private placements, non-traded REITs and high-risk investments like inverse and leveraged exchange-traded funds (ETFs) shed new light on why investors need to be as informed as possible about their financial investments. And the Financial Industry Regulatory Authority’s BrokerCheck database is a good place to start.

BrokerCheck is designed to help investors quickly and easily search the professional backgrounds of brokers and investment firms. This month – partly in response to address recommendations made in a January 2011 study by the Securities and Exchange Commission (SEC) – FINRA announced the addition of several new features to its BrokerCheck system.

With the latest improvements, investors and others now have:

• Access to more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm. In addition, new Help icons are designed to clarify commonly referenced terms throughout the system and within BrokerCheck reports.

• Centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment adviser representatives and investment adviser firms.

• The ability to search for and locate a financial services professional based on main office and branch locations, as well as the ability to conduct ZIP code radius searches in increments of five, 15 or 25 miles.

In 2011, individuals used BrokerCheck to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck here.

One of the key players connected to the Medical Capital Holdings fraud may be heading to jail, following a private-placement scam that resulted in almost $1 billion in losses for investors.

On Monday, Joseph J. Lampariello, former president of Medical Capital, pleaded guilty to wire fraud. He now faces up to 21 years in federal prison and a $49 million restitution order when he is sentenced on Jan. 14. Lampariello also pleaded guilty to failing to file a federal tax form.

So far, Lampariello is the only Medical Capital executive who has been criminally charged.

As reported May 7 by the Orange County Register, Assistant U.S. Attorney Jennifer Waier is not saying whether the investigation is continuing or whether Lampariello is cooperating with the government.

Medical Capital Holdings was charged with fraud by the Securities and Exchange Commission (SEC) in July 2009. From 2003 to 2009, the company raised almost $2 billion from investors under the guise it was using the money to buy discounted medical receivables. In reality, Medical Capital operated similar to a Ponzi scheme, with various MedCap entities buying fake receivables, often from older MedCap funds. The scam generated profits on the older funds’ books, along with commissions for MedCap execs, including Lampariello.

When the SEC entered the picture, more than $1 billion had been stolen from thousands of investors across the country.

Sales of private placements have caused the undoing of another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with the Financial Industry Regulatory Authority (FINRA). Several days later, the B-D proceeded to seek bankruptcy protection.

As reported April 24 by Investment News, a three-member FINRA arbitration panel had previously awarded investor Marvin Blum $445,000 in compensatory damages, $900,000 in punitive damages, $150,000 in attorneys’ fees and $12,000 in costs, as well as interest.

Blum, who was more than 70 years of age at the time he purchased the investments, was sold nine different private placements over 13 months totaling $500,000, according to the Investment News story.

Cambridge Legacy Securities is owned by The Cambridge Legacy Group. According to FINRA’s Broker Check Web site, the company’s chief executive, O. Ben Carroll, is the subject of an investigation by FINRA for failing “to have reasonable grounds to believe that the private placements offered by Cambridge Petroleum Group and Cambridge Legacy Group pursuant to [Regulation D] were suitable for any customer.”

In 2010, FINRA fined Carroll $25,000, as well as suspended his privilege to act as a principal for three months. He no longer is registered with FINRA.

Cambridge Legacy Securities also is no longer in business. However, an affiliated RIA, Cambridge Legacy Advisors, is, according to the Investment News story.

Failed private-placements deals have forced a number of broker/dealers to shutter their businesses over the past year. Much of the demise stems from sales involving private placements issued by Medical Capital Holdings; preferred stock investments sponsored by Provident Royalties LLC; and tenant-in-common exchanges that were manufactured by DBSI, Inc.

In July 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud. On Nov. 8, 2010, DBSI filed for bankruptcy. Since then, many investors have filed arbitration claims with FINRA against the various broker/dealers that sold them the failed products.

The collapse of Medical Capital Holdings has led to numerous lawsuits and arbitration complaints by investors against the brokerages that failed to perform their due diligence before selling them private-placement investments in the troubled company. Now, for what is believed to be a first, an individual has been criminally charged with securities fraud for his role in selling Med Cap notes.

Nine counts of securities fraud were filed Feb. 23 by the Weld County District Attorney’s Office against John Brady Guyette. According to the Weld County complaint, the former Colorado stockbroker sold $1.3 million of Medical Capital investments to investors between August and December 2008. During that time, Medical Capital was showing signs trouble and had already missed several payments to investors in certain note offerings.

As reported Feb. 27 by Investment News, the focus of the complaint against Guyette concerns allegations that he sold Medical Capital notes to investors after the company failed to make payments to investors.

One of those investors is Lucille Linde, 92, who lost her life savings in Medical Capital investments. She began investing in Medical Capital and with Guyette in 2005. Three years later, in August 2008, she invested $300,000 in Medical Capital VI, says the Investment News article.

“Linde reported that prior to writing the checks on Aug. 15, 2008, [she] had been told by a fellow MedCap investor, Borge Villemsun, that MedCap had been late in making principal and interest payments to [him],” the complaint reads. “Linde reported confronting [Mr. Guyette] with this information. Linde reported that [Mr. Guyette] assured [her] that Villemsun had been paid and that the MedCap VI investment was guaranteed safe.

“Linde was not aware that when [she] wrote the checks on Aug. 15, 2008, MedCap II had failed to make principal and/or interest payments due to MedCap II investors. [Mr. Guyette] failed to disclose this information to Linde.”

The Securities and Exchange Commission (SEC) filed fraud charges against Tustin-based Medical Capital Holdings in 2009, freezing its assets and appointing a receiver to oversee its financial books. A number of independent broker/dealers subsequently came under fire from regulators for failing to disclose key information about Medical Capital to investors.

Securities America was the independent broker/dealer subsidiary of Ameriprise. It was one of the broker/dealers of Medical Capital Investments, selling some $700 million of the private placements. In August 2011, the B-D was acquired by Ladenburg Thalmann Financial Services Inc. for a reported $150 million in cash.

Senior investors are an easy and vulnerable target for financial fraud. Individuals 65 or older manage a large percentage of the nation’s liquid assets and, most important to the perpetrators of financial fraud schemes, they are often more susceptible to money schemes and deception due to physical or mental limitations.

Many senior citizens who become victims of financial exploitation suffer in silence, never reporting the crimes to authorities out of fear or embarrassment. Other victims are afraid of losing their independence or that family members may move them into a nursing home.

According to the AARP, financial scammers cheat investors out of some $40 billion a year, and seniors are the most common targets. As reported by the North American Securities Administrators Association (NASAA), some of the most popular financial scams involve “investment pools” to collect money that is then used to purchase and renovate distressed real estate properties. In reality, however, these so-called flips are often Ponzi-like schemes in which the scammer takes the investor’s money to pay off previous investors. Like most Ponzi schemes, the ruse eventually falls apart when there are not enough new investors to continue the scheme.

Another popular investment scam targeting the elderly involves certain promissory notes or private placement investments. The note itself may promise high returns through a private investment, according to NASAA. But in reality, unregistered promissory notes can be a cover for Ponzi schemes or another type of financial fraud.

One prominent case that resulted in investors losing millions of dollars in fraudulent oil and natural gas private placements was that of Provident Royalties, LLC.

The Securities and Exchange Commission (SEC) filed fraud charges against Provident and three company founders in the summer of 2009 for their role in the scheme, which turned out to be an elaborate $485 million Ponzi scheme.

Investors of any age encouraged to always check with their state securities regulator to determine if an investment involving promissory notes or private placements and its sponsors are properly registered.

Clients of CapWest Securities received a vindication of sorts today when an arbitration panel of the Financial Industry Regulatory Authority (FINRA) ordered the broker/dealer to pay $9.1 million in damages and legal fees stemming from sales of failed private investments in Medical Capital Holdings and Provident Royalties LLC.

The problem is that CapWest closed last year, so the likelihood of investors receiving any substantial financial recovery from the award is slim.

Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.  Investors across the country lost millions of dollars from investments in private placements from the entities.

The $9.1 million award is believed to be one of the single largest arbitration awards based on sales of failed private placements, according to a Jan. 19 article by Investment News.

Information equals power, which is why securities regulators are encouraging investors to be aware about popular investment fraud scams so they don’t become a victim. One of the most popular vehicles for investment fraud includes unregistered securities such as private placements.

Also known as Regulation D offerings, private placements do not have to be registered with the Securities and Exchange Commission (SEC). This means they often lack detailed financial information, as well as a prospectus.

In 2010 and 2011, an increase in investor complaints regarding private placements caused the Financial Industry Regulatory Authority (FINRA) to launch a nationwide investigation of broker/dealers marketing and selling the products. As a result of the investigation, a number of fraud and sales practice abuses were uncovered. Two major cases involved Medical Capital Holdings and Provident Royalties.

Both entities were charged with fraud by the SEC in 2009. Since then, several broker/dealers that sold private placements in Medical Capital and Provident Royalties have faced enforcement actions, as well as fines by regulators. Meanwhile, investors are continuing to file lawsuits and arbitration claims over the failed deals.

As reported Dec. 14 by the Wall Street Journal, baby boomers are most vulnerable victims of investment scams involving private placements. Of the enforcements in 2010 for investors age 50 or older, cases involving unregistered securities outnumbered those related to ordinary stocks and bonds by a ratio of five to one, according to the North American Securities Administrators Association.

One of the victims of those crimes is Keith Grimes, 56. Grimes put $500,000 – his entire life savings – into an investment fund that promised returns of 14% to 24%. Described as having a manager with a successful track record of trading stocks and other financial products, the investment turned out to be a Ponzi scheme, in which money from new investors is used to pay returns to other investors.

The so-called manager of the fund in question was James D. Risher. On Dec. 6, Risher was sentenced to more than 19 years in federal prison. Meanwhile, Grimes, who lost almost all of his financial savings in the doomed deal, is now living in a borrowed mobile home and running an industrial-fiberglass business, according to the Wall Street Journal article.

According to the SEC, Risher raised $22 million from more than 100 investors, while placing only $2.5 million in brokerage accounts and losing about $890,000 through his trading. More than $8 million went to “management and performance fees,” with Risher spending $4.5 million on jewelry, gifts, property and personal expenses.