OppenheimerFunds will pay $35 million to settle charges by the Securities and Exchange Commission (SEC) that it failed to adequately inform investors about using derivatives to add leverage to the Oppenheimer Core Bond Fund (OPIGX) and the Oppenheimer Champion Income Fund (OPCHX).  

According to the SEC’s investigation, Oppenheimer used derivative instruments known as “total return swaps” to add substantial commercial mortgage-backed securities (CMBS) exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund known as the Oppenheimer Core Bond Fund.

The 2008 prospectus for the Champion Fund, however, never sufficiently revealed the fund’s practice of assuming such leverage in using derivative instruments, the SEC said in a statement. And when declines in the CMBS market triggered large cash liabilities on the total return swap contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.

“Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress.”

The Oppenheimer Core Bond Fund lost nearly 40% in 2008, while the average intermediate-term-bond fund lost 5%. Later, the fund became the focus of several lawsuits because of its role in state Section 529 college savings plans. The suits were settled for an undisclosed amount last year.

Meanwhile, the Oppenheimer Champion Income Fund lost 78% of its value, more than 50 percentage points worse than the average high-yield-bond fund.

Elder fraud and abuse is a growing crime – and one that in recent months has garnered heightened scrutiny from securities regulators. Last week, the Financial Industry Regulatory Authority (FINRA) fined broker-dealer Brookstone Securities $1 million in connection to sales of risky tranches of collateralized mortgage obligations (CMOs) to elderly clients. The firm, its top executive and a broker also were ordered to pay $1.62 million in restitution to affected customers.

According to FINRA’s decision, Brookstone Securities made “fraudulent misrepresentation and omissions of material fact in selling complex, esoteric and risky tranches of [CMOs] to unsophisticated, elderly and retired investors.”

As part of the ruling, Brookstone’s owner, Antony Lee Turbeville, and a broker, Christopher Dean Kline, have been barred from working with a FINRA-registered broker/dealer.

In addition, Brookstone and Turbeville were jointly ordered to pay clients restitution of $440,600, while the firm and Kline were jointly ordered to pay $1,179,500.

Another Brookstone executive and minority owner, former chief compliance officer David Locy, was suspended from the securities industry for two years, barred from working as a supervisor in the future and fined $25,000.

Brookstone plans to appeal FINRA’s decision.

FINRA says that from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers about the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments.

Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to induce them to purchase unsuitable CMOs, FINRA said in announcing its decision against Brookstone.

By 2005, when interest rates began to rise and the negative effect of CMOs became evident to Turbeville and Kline, the men never explained the changing conditions to their customers, FINRA says. Instead, they led their clients to believe that the CMOs were “government-guaranteed bonds” and would preserve capital and generate returns of 10% to 15%.

During that two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers who were named in a December 2009 complaint. Meanwhile, those same customers lost $1,620,100.

Two of Kline’s customers were elderly widows who had very limited investment knowledge. Following the death of their husbands, the women were convinced to invest their retirement savings in risky CMOs. FINRA says that Kline told the widows that they could not lose money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin.

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.

 

Low interest rates and a rebounding stock market have caused more investors to seek out a highly risky investing tool: The margin loan. As reported May 29 by the Wall Street Journal, margin accounts let investors borrow against the value of the securities held in their brokerage portfolios. While appealing, borrowing on margin can be a dangerous investing strategy.

Says the Wall Street Journal article:

“When investors put borrowed money in the stock market – the traditional use for margin loans – it magnifies gains and losses. For example, by borrowing $50,000 against a stock portfolio of $100,000, and investing it back in the market, an investor boosts potential returns by half. If the market climbs 10%, he gains $15,000 (minus the cost of interest on the loan), rather than $10,000. But the losses would be just as large if the stock dropped.”

Moreover, many investors are unaware that a brokerage firm or bank can sell their stocks and other securities at rock-bottom prices in order to satisfy a margin call, and they can do so without giving any notice to the investor. Indeed, in certain emergency situations, brokerages can cash out customers’ stocks with little or no notice to protect themselves.

Earlier this month, Green Mountain Coffee Roasters disclosed that founder Robert Stiller had sold $120 million worth of the company’s stock in a single day in order to meet a margin call. Green Mountain shares had plunged by nearly 50% to $25 from $50.

As of the end of March, margin accounts totaled more than $330 billion, according to the Financial Industry Regulatory Authority (FINRA). That’s a 65% increase since 2009.

The first in what may be a slew of similar decisions to follow in cases involving sales of non-traded Apple REITs by David Lerner Associates has been decided in favor of the claimants. As reported May 23 by Investment News, an arbitrator of the Financial Industry Regulatory Authority (FINRA) ordered Lerner to pay the claimants – Joseph Graziose and Florence Hechtel – $24,450 after they return their shares of Apple REIT Nine to the firm.

The claimants in the case alleged that David Lerner misrepresented the product in question when it was marketed, and that the broker was in breach of contract and fiduciary duty, among other charges. Apple REIT Nine is the 14th-largest non-traded REIT in the United States.

In addition, FINRA ordered Lerner Associates to reimburse the claimants for the $425 filing fee associated with their claim.

In May 2011, FINRA filed an enforcement action against David Lerner Associates over sales of Apple REITs. In February 2012, FINRA amended that filing with new allegations against Lerner’s firm. Specifically, the February amendment focused on statements that Lerner allegedly made to investors following the regulator’s actions against his company in May. According to FINRA, Lerner made misleading and exaggerated statements to investors during a seminar that his brokerage firm hosted, including statements suggesting that the closed Apple REITs were a potential “gold mine.”

As reported in a May 23 story in the Wall Street Journal, Lerner Associates is run by former municipal bond trader David Lerner. Known as “Poppy” in commercials featuring the Apple REITs, Lerner has sold around $6.8 billion of the products since 1992. The firm gets 10% in fees and commissions from the sales, which have generated approximately $600 million in total revenue for Lerner. In total, Apple REIT sales account for 60% to 70% of Lerner’s business since 1996.

The latest decision by FINRA could be a potentially worrisome sign for Lerner in the future. Hundreds of similar arbitration claims have been filed by investors in connection to sales of Apple REITs.

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.

When the non-traded Inland Western REIT went public recently, investors who owned previously purchased shares got their first look at the investment’s true value. What they discovered wasn’t pretty. Shares that were valued in June 2011 at $6.95 were valued at the IPO for $3.20 – a price that required a complex reverse stock split. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price meant they lost some $65% of their original investment.

Other investors in non-traded REIT are in the same boat. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

As reported in a story by the Wall Street Journal, Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA), in the WSJ story.

Dividend cuts also have been an issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

A new trial brief containing excerpts of wiretapped phone conversations reveal details in the case against disgraced Indianapolis businessman and Fair Finance owner Tim Durham. According to the transcripts, Durham discussed ways to hide information from investors as Fair Finance began to unravel in 2009. When investors asked about getting their money back, they were given excuses by Durham – excuses that he and partners admitted to each another were false.

Durham, James F. Cochran and Rick D. Snow now face 10 counts of wire fraud, one count of securities fraud and one count of conspiracy to commit wire and securities fraud. They are accused of running a Ponzi scheme that ultimately defrauded some 5,000 investors in Fair Finance Co. out of more than $200 million. Instead of paying investors, the men allegedly funded other businesses, as well as supported their own lavish lifestyles.

A trial is set for June 8.

As reported May 15 by the Indianapolis Star, the wiretapped phone conversations offer some interesting insight in the case. In one phone conversation that took place on Nov. 9, 2009, Cochran and Durham agreed to close Fair Finance’s Ohio office in two days with no prior notice to investors. According to the government filing, the men used Veterans Day as an excuse for closing, when in reality they were trying to hide the fact that there wasn’t enough money to pay Fair Finance customers when their investments came due.

“So we’re going to buy a day,” Cochran told Durham in a phone call, according to the transcripts. “And I told (a Fair employee) . . . make sure you don’t tell customers in advance.”

“Why?” Durham asked.

“He said ’cause they will run in on Tuesday,” Cochran replied.

“Oh yeah, good story,” Durham said, according to the transcript.

Ten days later, Durham and Cochran discussed what to tell a customer who was asking when he would receive interest payments. Cochran suggested telling the customer the redemptions were being processed.

“Don’t use that explanation too often because it’s really not true,” Durham told Cochran.

In yet another conversation, Durham and Cochran discuss how to blame delayed payments on “office miscommunication.”

“Yeah, we thought, yeah, just say it was a mistake, we told our office to put everything on hold until the authorization and they thought that meant put everything on hold,” Durham is heard saying.

“Yeah, I like that,” Cochran responded.

“So just a miscommunication,” Durham went on. “That’s how we’ll explain it.

Inland American Real Estate Trust, one of the industry’s biggest non-traded real estate investment trusts (REIT), is facing an investigation by the Securities and Exchange Commission (SEC) over potential violations of federal securities laws concerning fees and its administration.

News of the investigation was made public by Inland American in its quarterly report. As in other recent regulatory investigations into non-traded REITs, the SEC is focusing on specifics of Inland American’s fee structure.

According to a May 10 article by Investment News, Inland American stated in its quarterly report that the . . . “SEC is conducting a nonpublic, formal fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws.”

The report went on to reveal that the potential violations include “business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT.”

Inland American is one of five REITs to be sponsored by The Inland American Real Estate Group of Companies. A related REIT, Retail Properties of America (formerly known as Inland Western Retail Real Estate Trust) also has been in the news lately. In early April, the REIT went public with an initial share price listed at an equivalent of $3.20 per share. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price means they have lost some $65% of their original investment.

 

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.