Embattled broker/dealer Securities America was handed a legal victory today when a federal judge decided to combine private-placement claims involving Medical Capital Holdings and Provident Royalties with two class actions.

As reported Feb. 18 by Investment News, Judge W. Royal Furgeson Jr. ordered Securities America to create a $21 million settlement fund for investors who are suing the broker/dealer in the two class actions. The ruling is seen as a victory for Securities America because it limits the company’s liability in the private-placement arbitration cases.

Securities America, which is owned by Ameriprise Financial Inc., sold about $700 million of private placements issued by Medical Capital Holdings and $18 million of shares in Provident Royalties.

Judge Furgeson has placed a temporary restraining order on three Financial Industry Regulatory Authority (FINRA) claims against Securities America. The investors who’ve filed those claims are seeking $4.8 million in damages for buying private placements issued by Medical Capital and Provident, both of which were sued by the Securities and Exchange Commission (SEC) for fraud in July 2009.

If you have suffered investment losses in Securities America and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, pleasecontact us.

Sales of private placements in Provident Royalties has gotten yet another broker/dealer in hot water. This time, it’s National Securities Corp., with the broker/dealer facing disciplinary action by the Financial Industry Regulatory Authority (FINRA) over sales of private placements gone bad.

As reported Feb. 17 by Investment News, National Securities says it received a Well Notice from FINRA in January. Receipt of a Well Notice indicates enforcement action on the part of a regulator is likely imminent.

National Securities sold approximately $3.7 million of private placement issued by Provident Royalties. In July 2009, the Securities and Exchange Commission (SEC) sued Provident for fraud.

According to FINRA’s Broker Check Web site, National Securities received the Wells notice for violations of product suitability rules, e-mail supervision rules, and standards of commercial honor and principles-of-trade.

Earlier this month, another broker/dealer, Workman Securities Corp., also was in the news over private-placement sales involving Provident Royalties and Medical Capital Holdings. In a settlement with FINRA, Workman agreed to pay $700,000 for partial restitution to more than a dozen clients who had sued the firm over investments in the two companies.

Like Provident, Medical Capital was charged with fraud by the SEC in July 2009.

If you have suffered investment losses in  and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, pleasecontact us.

Workman Securities, a big seller of private placements in Medical Capital Holdings and Provident Royalties, has reached an agreement with the Financial Industry Regulatory Authority (FINRA) to settle issues over the deals. The broker/dealer will pay $700,000 for partial restitution to more than a dozen clients with legal claims against Workman for sales of the risky investments involving Med Cap and Provident.

Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

As reported Feb. 14 by Investment News, Workman’s insurance carrier, Catlin Specialty Insurance Co., has paid $2.3 million to various clients who’ve sued the firm.

Workman Securities is one of many broker/dealers that sold investors on risky private-placement deals involving Medical Capital and Provident Royalties. Workman reps sold just over $9 million of private placements in Provident, according to U.S. bankruptcy court filings.

According to FINRA’s Broker Check Web site, Workman allegedly was lacking in the supervision and due diligence department at the time it sold the private placements.

“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” the site alleges.

Broker Check goes on to say: “[Workman] failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.”

If you have a story to tell involving Medical Capital Holdings or Provident Royalties, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

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.

It’s been a tumultuous year for independent broker/dealers, with many closing their doors over private-placement deals gone bad, rising legal costs, and capital violations. Now, it appears QA3 Financial Corp. has become the latest B-D to bite the dust.

With bankruptcy looming, as well as a possible net capital violation, QA3 Financial told 400 reps last week of its impending future plans. According to a Feb. 4 story by Investment News, Steve Wild, QA3’s owner and CEO, delivered the news via an email approximately one hour after the market closed.

“In light of the arbitration award rendered against QA3 on January 14, and the fact that our errors and omissions carrier has not yet provided coverage set forth in our policy, we have made the difficult decision to cease conducting business as a broker-dealer effective as the close of business on February 11,” the email read.

QA3’s exit from the brokerage business follows at least two dozen firms that have either shut down or were forced to close their doors in the past year.

QA3’s financial issues have been in the making for some time. The broker/dealer was a big seller of private placements in Medical Capital Holdings and Provident Royalties LLC – both of which face fraud charges from the Securities and Exchange Commission (SEC).

In September, bankruptcy rumors began to circulate because of a dispute between QA3 and its insurance carrier and the amount of coverage that was needed for the growing number of legal claims from investors over sales of high-risk private placements.

Last month, a Financial Industry Regulatory Authority (FINRA) arbitration panel ruled in favor of an elderly couple who had a filed a claim against QA3 for real estate deals that had soured. The arbitration award was for $1.6 million.

If you have a story to tell involving private placement deals or independent broker/dealers issues, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Private-placements deals in Medical Capital Holdings and Provident Royalties have become a bone of contention for the Financial Industry Regulatory Authority (FINRA), which plans to focus new attention on the broker/dealers responsible for selling the opaque and illiquid private investments to investors.

As reported Feb. 2 by Investment News, private-placements are on FINRA’s hot-button issue list because of the devastating financial losses they’ve caused for investors in the past year. In many instances, the losses are tied to the broker/dealers selling private placements as suitable investments for their clients, yet failing to perform appropriate due diligence on certain private offerings.

Two such offerings include private placements in Medical Capital and Provident Royalties. Both companies were charged with securities fraud by the Securities and Exchange Commission (SEC) in 2009 for misrepresentation and misappropriating hundreds of millions of dollars of investors’ money.

A number of brokers/dealers that sold both products also face lawsuits by regulators, as well as arbitration claims filed by investors.

James Shorris, executive vice president and executive director of enforcement for FINRA, says oversight of private placements will be a “major, major, major initiative” at FINRA in the future. During his remarks at the annual meeting of broker/dealer members of the Financial Services Institute on Feb. 2, Shorris specifically named private placements associated with Medical Capital Holdings and Provident Royalties LLC.

In addition to private placements, Shorris says FINRA also will step up its scrutiny of non-traded REITs, as well as other exotic investments such as reverse convertibles and leveraged exchange-traded funds.

Documents from the Financial Crisis Inquiry Commission (FCIC) shed new light into the hedge fund Magnetar and its role in helping Wall Street create at least $40 billion worth of collateralized debt obligations and then betting against many of those same CDOs to fail.

Magnetar worked with most of Wall Street’s top banks in its deals – deals that ultimately produced millions of dollars worth of extremely toxic, high-risk investments. Among the banks that helped sell those toxic assets to investors: Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

A Jan. 27 story by ProPublica provides in-depth details on the latest findings from the FCIC’s investigation into Magnetar, which has consistently denied any involvement in selecting assets for the CDOs that it invested in and then often bet against.

The most recent report from the FCIC paints a different picture of truth, however. In its final report released on Jan. 27, the FCIC says Magnetar used a CDO called “Norma” to create a $600 million bet against mortgage-related securities. The CDO itself took the other side of the bet. As a result, investors in Norma ultimately lost hundreds of millions of dollars. And the investment bank that underwrote and marketed Norma to investors? Merrill Lynch.

In the FCIC report, Magnetar apparently made the selections without the knowledge of the CDO’s manager, NIR Capital Management. NIR was paid to manage the deal and was supposed to be independent of the investment bank and act in the interests of the CDO as a whole, according to ProPublica.

“When one Merrill employee learned that Magnetar had executed approximately $600 million in trades for Norma without NIR’s apparent involvement or knowledge, she e-mailed colleagues, ‘Dumb question. Is Magnetar allowed to trade for NIR?’”

The Merrill employee was one of the risk managers in charge of policing the firm’s CDO business.

“NIR abdicated its asset selection duties to Magnetar with Merrill’s knowledge,” the FCIC report states.

The e-mails regarding Magnetar’s asset selections for Norma came to light in a lawsuit between Netherlands-based Rabobank and Merrill Lynch. Once the e-mails and other documents were brought forth during discovery, Merrill Lynch settled the lawsuit for an undisclosed amount.

In the FCIC report, it was revealed that Magnetar received $4.5 million as part of the CDO’s “expenses.” Merrill Lynch, however, failed to disclose that fact to other investors, according to the FCIC. Magnetar’s own legal team explained the $4.5 million as “a rebate” on purchases made by the hedge fund.

Maddox, Hargett & Caruso currently is investigating complaints tied to UBS structured investments and the way in which the products were marketed and sold to investors.

Specifically, numerous complaints allege that these products, which include the UBS AG Yield Optimization Notes with Contingent Protection linked to the common stock of Lehman Brothers Holdings, were sold by certain brokers with the characterization that investors’ principal investment would be fully protected.

In reality, these notes subjected investors to significantly more risk than they expected based on the risk characterization portrayed by their broker. Many of the investors who eventually purchased UBS AG Yield Optimization Notes were conservative, risk-averse investors looking to preserve their capital and generate income.

UBS AG Yield Optimization Notes are considered a reverse convertible. This type of investment is not only difficult to understand but also highly risky. In the case of the UBS Optimization Notes, the investment’s actual performance was linked to Lehman Brothers stock. When Lehman Brothers filed bankruptcy in September 2008, the notes became worthless.

As a result, investors lost all their principal investment. The contingent protection associated with the product turned out to be of little benefit because that protection vanished overnight when Lehman’s stock price went south.

Many investors failed to realize key details about UBS AG Yield Optimization notes because certain information was never disclosed to them. Making matters worse: They also never learned about the worsening financial condition of Lehman Brothers – until it became too late.

If you have suffered losses in Lehman principal-protected notes and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, please contact us.

On Jan. 25, the Securities and Exchange Commission (SEC) charged Merrill Lynch with civil securities fraud for “misusing customer order information” to place proprietary trades and for charging customers undisclosed trading fees.

Without admitting or denying the charges, Merrill has agreed to pay a $10 million fine and consent to a cease-and-desist order.

According to the SEC, the infractions occurred between 2003 and 2005 on Merrill Lynch’s proprietary equity strategy desk, which traded for the firm’s benefit and had nothing to do with executing customer orders. Merrill’s trading desk was located on its main equity trading floor in New York, where market makers received and executed customer orders.

The SEC says Merrill’s equity strategy traders had access to institutional customer orders and used that access to place trades on Merrill’s behalf after the customer trades were made. The SEC went on to say that this misuse of information was contrary to claims by Merrill Lynch to customers that orders would be maintained on a strict need-to-know basis.

“Investors have the right to expect that their brokers won’t misuse their order information,” said Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement. “The conduct here was clearly inappropriate. Merrill’s proprietary traders had improper access to information about the firm’s customer orders, and misused it to place trades on the firm’s behalf.”

The SEC’s order also found that between 2002 and 2007 Merrill had agreements with certain institutional and high net-worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

Bank of America acquired Merrill Lynch in 2009 in a $20 billion deal forged with the help of government bailout dollars during the height of the financial crisis in 2008.

Apparently short on cash, broker/dealer Capital Financial Services is trying to combine 36 separate investor arbitration claims and lawsuits as part of a class action settlement. The claims are tied to private-placement sales totaling millions of dollars in Provident Royalties.

As reported Jan. 23 by Investment News, a federal judge recently issued an order stating that all arbitration claims and lawsuits against Capital Financial Services would be halted until he decided if they should all become part of a single class action lawsuit.

Combining the pending litigation, which involves sales by broker/dealers of Provident Royalties LLC private placements, could save them millions of dollars in damages and legal fees, according to the Investment News story.

Capital Financial is among several broker/dealers named in the class action, Billitteri v. Securities America Inc. Other defendants listed include National Securities, Next Financial Group and QA3 Financial Corp.

The lawsuit itself was filed in the summer of 2009, after the Securities and Exchange Commission (SEC) charged Provident Royalties with fraud and allegedly running a Ponzi scheme. According to the SEC’s complaint, Provident sold $485 million in securities and developed a wide network of independent broker/dealers to pitch the investments to investors.

Court documents show that Capital Financial is facing 36 separate legal cases from investors who bought almost $11.9 million in Provident Royalties private placements.

As it is, however, Capital Financial may have little money for legal fees and claims. According to court filings, its assets include $1.4 million of insurance and $120,000 in excess net capital, totaling $1.52 million. That means Capital Financial has about 12 cents per dollar available for clients who have sued the firm or plan to.

Arguments for and against combining the arbitrations and other lawsuits against Capital Financial are scheduled to be heard at a hearing in April.

If you’ve suffered financial losses of $100,000 or more in PRovident Royalties or Securities America and believe those losses are the result of inadequate information on the part of your broker/dealer, please Contact Us.