Legal problems tied to private placements sales in Medical Capital Holdings and Provident Royalties have proved to be the undoing for yet another broker/dealer. Last week, CapWest Securities announced it had filed withdrawal papers with the Financial Industry Regulatory Authority (FINRA).

As reported Sept. 4, by Investment News, CapWest’s profile status with both FINRA and the Securities and Exchange Commission (SEC) is no longer “active.” Instead, it’s listed as “termination requested.”

Representatives for CapWest sold $22 million in private placements issued by Provident Royalties and $30.6 million of Medical Capital notes. Both companies were charged with fraud by the SEC in 2009.

The closing of CapWest comes on the heels of several other broker/dealer closings over private placement deals gone bad, including GunnAllen Financial, Jesup & Lamont Securities Corp. and QA3 Financial Corp.

Earlier this year, CapWest lost a $587,000 FINRA arbitration claim to four clients who claimed negligence and misrepresentation in the sale of oil and gas ventures offered by Provident and Striker Petroleum LLC.

CapWest is owned by Capstone Financial Group.

Exchange-traded funds (ETFs) have exploded in popularity over the years, but they also come with a number of potential drawbacks. Earlier this summer, the North American Securities Administrators Association (NASAA) expressed concern in an advisory notice that many investors may not fully understand the hidden risks associated with ETFs or how the investments actually work – until it’s too late.

“As with any investment, investors should know what they are investing in. They should understand the risks, costs and tax consequences before investing in ETFs. Check under the hood,” said NASAA President and North Carolina Deputy Securities Administrator David Massey in a June 27 ETF notice.

Exchange-traded funds started in 1993 when State Street sponsored the first ETF in the form of the SPDR Trust. The investments – which are designed to mimic the performance of an underlying index or sector – can be characterized as baskets of investments, and include stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments.

The problem is that all ETFs are not created equal. Some traditional ETFs may be appropriate for long-term investors, but other ETFs, such as exotic leveraged and inverse ETFs, may require daily monitoring, notes NASAA in its June ETF notice.

Other risks associated with some ETFs include liquidity. Does the value of the ETF equal that of its underlying securities? The number of ETFs that have been shut down or liquidated is up 500% in each of the last three years over 2007 levels. That comes to one ETF every week.

Huge fees are another issue investors need to be aware of when it comes to some exchange-traded funds. For example, leveraged and inverse ETFs must be traded all the time; that means you will pay a commission or fee each time a share is bought or sold.

The bottom line: The complexity, potential risks and substantial fees of exchange-traded funds may make them unsuitable investments for some investors.

Floating-rate funds are growing in popularity with investors desperate for returns in a stormy investing environment, but they’ve also caused increasing concern among regulators. Last month, the Financial Industry Regulatory Authority (FINRA) issued an investor alert cautioning investors about the risks of the products.

Floating-rate funds are specialized bond funds that invest mainly in debt securities that don’t have fixed interest payouts. As reported Aug. 26 by MarketWatch, rather than holding debt from high-grade companies, floating-rate funds mostly invest in bank loans made to, or bonds issued by, companies with low-credit quality. The portfolios usually come with average credit ratings that are well below the definition of junk, according to the article.

The low credit quality of floating-rate bond funds could spell danger for investors. Not only are the funds less liquid, but they also carry much higher risk. Moreover, floating-rate funds basically buy loans that banks make to companies, and those loans are not securities that can be traded on a regulated exchange. This makes it even more difficult to figure out how much each loan is actually worth.

In 2008, floating-rate bond funds lost an average of 27%, according to Standard & Poor’s Equity Research. Meanwhile, high-yield bond funds lost 26%; short-term bond funds fell 3.4%. In 2009, floating-rate funds were up 41%, while high-yield funds rose 47% and short-term bond funds gained 9.5%.

“That schizophrenic performance profile should make clear that bank-loan investments are a bad idea for bond investors who value stability of principal above all else – the risk is simply too great,” said Christine Benz, director of personal finance at Morningstar, in the MarketWatch article.

The retirement years should be golden years. Unfortunately, in a growing number of cases, many people are spending this time as victims of elder financial fraud abuse.

Elder financial fraud is on the rise. In 2009, MetLife Mature Market Institute released a report, Broken Trust: Elders, Family and Finances, showing that up to one million older Americans are victims of financial fraud each year. The abuse can occur anywhere – in the elderly person’s own home, in nursing homes, or other institutions. Perpetrators include family members, strangers, caregivers, even an investment advisor or financial institution.

“Elder financial abuse is becoming the crime of the 21^st century,” says Denise Voigt Crawford, past president of the North American Securities Administrators Association. The group estimates that one of out every five citizens over the age of 65 has been a victim of some type of financial scam.

In the coming years, elder financial abuse may become an even bigger problem. The number of people 65 and older in the U.S. will double by 2030 to 71 million, according to federal statistics.

Elder financial fraud involves the improper use of an elderly person’s funds or assets. Signs that abuse may be occurring include unexplained large bank or ATM withdrawals by an elderly person; check signatures that appear “off”; large checks written to cash and/or negotiated by the elder’s caregiver; checks that are signed by an elder but completed by someone else; new activity in accounts that previously have been inactive; expensive gifts from an elder to a caregiver; cashing an elderly person’s checks without his or her authorization; forging an elder’s signature; or misusing or stealing an older person’s money or possessions.

More investors are finding themselves steeped in financial losses because of misguided investing advice in non-traded or unlisted real estate investment trusts (REITs). The issue with these complex, illiquid and risky investments has to do with their statement value – which in many instances is inaccurate and based on outdated data.

In 2009, the Financial Industry Regulatory Authority (FINRA) issued a notice to broker/dealers of non-traded REITs prohibiting them from using data that was more than 18 months old to estimate the value of the products.

The problem is this: Some broker/dealers apparently did not abide by FINRA’s notice and, instead, provided artificial and/or misleading per share values on their clients’ account statements.

In other instances, broker/dealers showed the value of a client’s non-traded REIT at par – typically $10 a share. The price was inaccurate, however, because upfront fees, commissions and other expenses were never taken into account.

Other investors in non-traded REITs are facing suspended redemption policies, meaning they are literally stuck in an illiquid investment that they thought was safe, conservative and low risk. That list is long and getting longer, and includes such names as Behringer Harvard REIT I, Cole Credit Property Trust I, Desert Capital, and Inland Western.

The non-traded REIT industry is a big business, raising nearly $20 billion in 2009. For many non-traded REIT investors, these investments are causing more pain than gain.

If you’ve experienced financial losses in a non-traded REIT such as Behringer Harvard REIT I, Cole Credit Property Trust I, Desert Capital, or Inland Western, please contact us to tell your story.

Plagued by lawsuits and arbitration claims over sales in Medical Capital Holdings and Provident Royalties, broker/dealer Securities America has been sold to Ladenburg Thalmann Financial Services for at least $150 million in cash.

Ameriprise, the parent company of Securities America, revealed in April of its intention to sell the broker/dealer subsidiary.

In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital Holdings and Provident Royalties with fraud. Securities America was one of the largest sellers of the troubled private placements. Ultimately, clients of Securities America suffered an estimated $400 million in losses from the investments.

In April, Ameriprise offered a settlement of nearly $160 million to Securities America clients.

As reported Aug. 17 by Reuters, Miami-based Ladenburg – which owns other independent brokerages – agreed to make additional cash payments if Securities America meets certain targets in the next two years.

The purchase, which will be financed by another firm affiliated with Ladenburg Chairman Phillip Frost, is expected to be completed by December 2011.

There is some new information for Securities America clients who suffered losses from private placement investments in Medical Capital Holdings and Provident Royalties. On Aug. 4, U.S. District Court Judge W. Royal Furgeson Jr. signed an order to approve an $80 million settlement between Securities America and class action investors suing the broker/dealer over the failed investments.

Earlier this year, a separate $70 million settlement was reached with investors who had filed individual arbitration claims against some brokers.

As reported Aug. 14 by Investment News, approval of the settlement means Securities America reps and financial advisers who had tainted employment records because of open or pending investor arbitration claims from the MedCap and Provident sales will now see closure.

From 2003 to 2008, Securities America brokers sold about $700 million of Medical Capital private placements. Other broker/dealers sold the investments, as well, but Securities America was by far the biggest distributor of them.

In the summer of 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud.

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.

Three days and counting. That’s the time remaining before Jefferson County Commission must decide whether it will pursue more talks with creditors over a $3.2 billion sewer bond debt or opt for the largest-ever U.S. municipal bankruptcy.

The problems for Jefferson County, Alabama, date back to the 1990s, when the county began a huge upgrade of its outdated sewer system. Acting on the recommendations of consultants from JP Morgan and others, the county entered into a series of disastrous deals that involved complex and risky variable-rate investments, auction-rate debt and interest rate swaps.

The deals later backfired, and the county became stuck with huge loan payments. Meanwhile, then-Birmingham Mayor Larry Langford and a former president of the Jefferson County Commission, ex-Commissioner Chris McNair and others were convicted of rigging the transactions responsible for Jefferson County’s financial downfall.

In 2009, the Securities and Exchange Commission (SEC) charged JP Morgan Securities and two of its former managing directors – Charles LeCroy and Douglas MacFaddin – for their roles in an unlawful payment scheme that allowed them to win business involving municipal bond offerings and swap agreement transactions with Jefferson County.

As part of the settlement, J.P. Morgan agreed to forfeit $647 million of interest-rate swap termination fees, as well as pay a penalty of $25 million to the SEC and $50 million restitution to Jefferson County.