The Securities and Exchange Commission (SEC) has charged three New York investment firms – West End Financial Advisors LLC, West End Capital Management LLC, Sentinel Investment Management Corp. – and four senior officers – William Landberg, Kevin Kramer, Steven Gould and Janis Barsuk – of conning investors into believing their money was invested in stable, safe investments designed to provide steady streams of income. In reality, West End was in the throes of a deepening financial crisis stemming from failed investment strategies.

The misconduct reportedly occurred from at least January 2008 to May 2009, the SEC says.

“The investment advisers here grossly abused the trust of their clients,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They misappropriated and commingled their clients’ assets and sustained the illusion of a viable and successful business through a range of false representations.”

David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems, and the misappropriation of investor assets.”

In its complaint, the SEC alleges that Landberg used substantial amounts of fraudulently obtained bank loans to make distributions to certain West End fund investors, thereby creating the false impression that West End’s investments were performing well. During the same period, Landberg also misappropriated at least $1.5 million for himself and his family. Landberg’s wife, Louise Crandall, and their family partnership are named as relief defendants in the SEC’s complaint.

The SEC further alleges that Gould and Barsuk knew, or were reckless in not knowing, that Landberg was defrauding the bank that provided loans to a West End fund by misusing funds in a related interest reserve account. Both officers nevertheless participated in the fraud by facilitating Landberg’s misappropriations from that account, the SEC says.

The SEC also alleges that Gould conceived and used improper accounting methods to conceal aspects of the fraud, as well as issued account statements to investors showing false investment returns. Barsuk facilitated Landberg’s uses of investor money to cover his personal obligations.

Similarly, Kramer knew, or was reckless in not knowing, that West End faced severe financial problems and had difficulty obtaining sufficient financing to sustain its investment strategy. Kramer failed to disclose those material facts to investors as he continued to market the funds to new and existing investors through April 2009.

Private placement investments in Medical Capital Holdings and Provident Royalties have caused financial devastation for hundreds of investors after the deals later soured and the companies issuing the securities went belly up. Now, several independent broker/dealers that sold the products to investors are facing financial issues of their own.

As reported Jan. 17 by Investment News, QA3 Financial Corp. is one of those broker/dealers. The story says QA3 is looking at bankruptcy because of a dispute with its insurance carrier over the amount of coverage available for legal claims stemming from private placement sales in Medical Capital and Provident Royalties.

According to the article, QA3 claims it had coverage for $7.5 million of legal claims, damages and expenses, while its carrier, Catlin Specialty Insurance Co., said the coverage is capped at $1 million.

A lawsuit filed in September states that QA3, which includes about 400 independent representatives and advisers, is facing bankruptcy because of its issues with Catlin. Catlin later sued QA3, claiming that private-placement claims under the policy were, in fact, limited to $1 million. That suit is pending.

Like a number of broker/dealers that sold private placement in Medical Capital and Provident Royalties, QA3 is facing a slew of arbitration claims filed by clients who suffered huge financial losses in their investments when the companies were sued by the Securities and Exchange Commission for fraud. Today, both Medical Capital and Provident Royalties are in receivership.

In the case of Medical Capital, Securities America was a top seller of Med Cap private placements. QA3 was a leading seller of Provident deals. By some estimates, QA3 sold $32.6 million in Provident notes, reportedly collecting almost $7 million in commissions.

Broker/dealer Securities America is finding itself entrenched in arbitration claims filed by disgruntled investors over soured private-placement deals involving the now-bankrupt Medical Capital Holdings.

As reported Jan. 9 by Investment News, the broker/dealer could face 150 or more arbitration claims over the next 12 to 18 months. The claims, filed with the Financial Industry Regulatory Authority (FINRA) involve $90 million in investor losses connected to Medical Cap Holdings.

Last month, Securities America’s legal woes began to mount in earnest when a FINRA arbitration panel awarded almost $1.2 million in damages and legal fees to an elderly client who had sued the broker/dealer and broker Randall Ray Talbott for misrepresentation over sales of Medical Capital private placements.

In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital in connection to sales of $77 million of private securities in the form of notes. In its complaint, the SEC accused the Tustin-based medical receivables firm of lying to backers as it allegedly raised and misappropriated millions of dollars of investors’ money while failing to disclose information about $1.2 billion in outstanding notes and $993 million in notes that had entered default.

In addition to arbitration claims from investors, Securities America faces legal issues from state securities regulators. Securities divisions in Massachusetts and Montana filed lawsuits again the broker/dealer last year over sales of Medical Capital private placements.

Over the years, many independent broker/dealers have pitched investments in Medical Capital notes to investors. Securities America, however, is by far the biggest seller of Med Cap private placements, with 400 brokers selling almost $700 million of the products.

Securities America has about 1,900 representatives and advisers. It is owned by Ameriprise Financial.

If you have a story to tell involving Securities America and/or investments in Medical Capital Holdings, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

A $2.2 million arbitration award is the latest win for investors in cases involving UBS and Lehman Brothers Principal-Protected Notes. The award, which was announced in December by a three-person arbitration panel of the Financial Industry Regulatory Authority (FINRA), is the seventh consecutive win for investors with pending complaints against UBS over the Lehman Brothers notes.

The focus of investors’ complaints centers on the failure of the 100% principal-protected notes touted by UBS to live up to their hype. Instead of the safety and security of fixed- income investments, the notes were actually complex products comprised of risky derivatives.

What UBS and other brokerages failed to emphasize to investors was the fact that the notes were unsecured obligations of Lehman Brothers. When Lehman filed for bankruptcy on Sept. 15, holders of the notes were left with investments that traded for pennies on the dollar.

UBS sold $1 billion of Lehman Principal-Protected Notes to investors. Commissions on the notes were 1.75%, a far higher percentage than what could be generated from sales of certificates of deposit.

If you’ve suffered financial 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.

Soured private-placement deals left dozens of broker/dealers in dire straits this past year, forcing many to close their doors entirely. As reported Jan. 2 by Investment News, the broker/dealer community has shrunk by 9% since 2005 to 4,619. Through November 2010, the number of broker/dealers registered with the Financial Industry Regulatory Authority (FINRA) was 101 below the total at the end of 2009.

The reasons behind the decline vary. Bad business practices over private placements tied to such firms as Medical Capital Holdings and Provident Royalties led several broker/dealers to bite the dust in 2010. Others closed down because of capital-requirement violations. And some went out of business due to soaring legal costs associated with investor lawsuits.

In March 2010, GunnAllen Financial, which at one time had 1,000 affiliated registered representatives, closed its doors because of net-capital violations. Several months later, Jesup & Lamont Securities Corp. followed suit.

Meanwhile, a slew of broker/dealers that allegedly sold private-placement offerings from the now-defunct firms of Medical Capital Holdings and Provident Royalties are the subject of class actions and arbitration complaints from investors. Okoboji Financial Services, a top seller of Provident Royalties’ private placements, closed its doors last May.

One month later, Dallas-based Cullum & Burks Securities, a leading seller of private placements in Medical Capital Holdings, also shut down its business.

More failures and business closings of independent broker/dealers are predicted in 2011.

“It’s been a horrible market and firms are thinly capitalized,” said Larry Papike, president of Cross-Search, a recruiting firm specializing in independent representatives and executives at such firms, in the Investment News article.

Medical Capital Holdings. Securities America. Behringer Harvard REIT I. Main Street Natural Gas Bonds. Tim Durham. Fannie Mae, Freddie Mac Preferred Shares. Goldman Sachs CDO Fraud. Lehman Structured Notes. These names were among the hot topics that dominated the investment headlines in 2010.

In January, Securities America was accused by Massachusetts Secretary of State William Galvin of misleading investors and intentionally making material misrepresentations and omissions in order to get them to purchase private placements in Medical Capital Holdings. Medical Capital was sued by the Securities and Exchange Commission (SEC) in July 2009 and placed into receivership. Its collapse ultimately created about $1 billion in losses for investors throughout the country.

According to the Massachusetts complaint, as well as other state complaints that would follow, many investors were unaware of the risks involved in their Medical Capital private placements. They also didn’t know about the crumbling financial health of the company. Securities America, on the other hand, was fully aware of both, regulators allege.

In February, non-traded real estate investment trusts like the Behringer Harvard REIT I became front-page news, as investors filed complaints over what their brokers did and did not disclose about the investments. In the case of Behringer and other non-traded REITs, including Cornerstone, Inland Western and Inland American, investors found themselves blindsided after discovering their investments were high-risk, illiquid and contained highly specific and lengthy exit clauses.

In March, rogue brokers Bambi Holzer faced charges in connection to sales of private placements in Provident Royalties. Like Medical Capital Holdings, the SEC charged Provident with securities fraud, citing $485 million in private securities sales. In March 2010, the Financial Industry Regulatory Authority (FINRA) formally expelled Provident Asset Management LLC, the broker-dealer arm of Provident.

Ponzi schemes were big news, as well, in March. Heading the list of offenders was Rhonda Breard, a former broker for ING Financial Partners. State regulators contend Breard scammed nearly $8 million from investors in a Ponzi scheme that allegedly had been going on since at least 2007.

In April, Goldman Sachs and its role in the financial crisis faced new scrutiny by Congress. Internal emails became the driving force behind the interest. Eventually, charges were filed by the SEC over a synthetic collateralized loan obligation – Abacus 2007-ACI – that produced about $1 billion in investor losses. Goldman later reached a settlement with the SEC, paying a $550 million fine. The fine remains the biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

In May, FINRA stepped up its own scrutiny of non-traded REITs. On its watch list: Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II and Piedmont Office Realty Trust. In particular, FINRA began to probe the ways in which broker/dealers marketed and sold non-traded REITs to investors.

In June, 49 broker/dealers found themselves named in a lawsuit involving sales of Provident Royalties private placements. The lawsuit, filed June 21 by the trustee overseeing Provident – Milo H. Segner Jr. – charged the broker/dealers of failing to uphold their fiduciary obligations when selling a series of Provident Royalties LLC private placements. Among the leading sellers of private placements in Provident Royalties were Capital Financial Services, with $33.7 million in sales; Next Financial Group, with $33.5 million; and QA3 Financial Corp., with $32.6 million.

In July, Fannie Mae and Freddie Mac were back in the news, as a rash of investors began filing lawsuits and arbitration claims over preferred shares purchased in the companies. In 2007 and 2008, investment firms like UBS, Morgan Stanley, Citigroup, Merrill Lynch and others sold billions of dollars in various series of preferred stock issued by the two mortgage giants. According to investors, however, the brokerages never revealed key information about the preferred shares, including the rapidly deteriorating financial health of Freddie Mac and Fannie Mae and the fact that both companies had a growing appetite for risky lending, excessive leverage and investments in toxic derivatives.

In August, new issues regarding retained asset accounts (RAAs) came to light. Specifically, RAAs allow insurers to earn high returns – 4.8% – on the proceeds of a life insurance policy. Meanwhile, beneficiaries often receive peanuts via interest rates as low as 0.5%. Adding to the issues of RAAs is the fact that the products are not insured by the Federal Deposit Insurance Corp. (FDIC).

In September, new concerns about the suitability of leveraged, inverse exchange-traded funds (ETFs) for individual investors began to crop up. Among other things, regulators cautioned investors about the products and stated that they may be inappropriate for long-term investors because returns can potentially deviate from underlying indexes when held for longer than single trading day.

In October, the ugliness associated with some non-traded REITs gained new momentum. A number of non-traded REIT programs eliminated or severely limited their share repurchase programs. At the same time, some non-traded REITs continued to offer their shares to the public. As of the first quarter of 2010, this group included Behringer Harvard Multi-family REIT I, Grubb & Ellis Apartment REIT, Wells REIT II, and Wells Timberland REIT.

In November, sales of structured notes hit record highs of more than a $42 billion. Leading the pack in sales of structured notes was Morgan Stanley at $10.1 billion, followed by Bank of America Corp., which issued $7.9 billion.

Because of their complexity, structured products are not for those who don’t fully understand them. Moreover, once an investor puts money into a structured product, he or she is essentially locked in for the duration of the contract. And, contrary to promises of principal by some brokers, investors can still lose money – and a lot of it – in structured notes.

Case in point: Lehman Brothers Holdings. Investors who invested in principal-protected notes issued by Lehman Brothers lost almost all of their investment when Lehman filed for bankruptcy in September 2008.

Also big news in November 2010: Tim Durham and Fair Finance. The offices of Fair Finance were raided by federal agents of Nov. 24. On that same day, the U.S. Attorney’s Office in Indianapolis filed court papers alleging that Fair Finance operated as a Ponzi scheme, using money from new investors to pay off prior purchasers of the investment certificates. According to reports, investors were defrauded out of more than $200 million.

The effects of Lehman Brothers’ bankruptcy continued to unfold in December 2010 for many investors who had investments in Main Street Natural Gas Bonds. Main Street Natural Gas Bonds were marketed and sold by a number of Wall Street brokerages as safe, conservative municipal bonds. Instead, the bonds were complex derivative securities backed by Lehman Brothers. When Lehman filed for bankruptcy protection in September 2008, the trading values of the Main Street Bonds plummeted.

Many investors who purchased Main Street Natural Gas Bonds did so because they were looking for a safe, tax-free income-producing investment backed by a municipality. What they got, however, was a far different reality.

Ex-Wachovia Securities brokers William Harrison and Eddie Sawyers told clients they had a “sure thing” for them to invest in – complete with 35% returns and no chance of losing their principal. Instead, investors ended up losing $8 million.

In a federal fraud lawsuit filed last week, the Securities and Exchange Commission (SEC) says Harrison, 33, and Sawyers, 45, created a “business” called Harrison/Sawyers Financial Services as a subterfuge to entice their clients to invest in a new investment product that promised big returns and no risk. The SEC says the two focused almost entirely on elderly customers, many of whom were unsophisticated investors.

According to the complaint, Harrison and Sawyers made numerous misrepresentations about the products they were selling. In one instance, Harrison told an investor that the money was being placed in stocks, when it was actually being used for high-risk options trading. The SEC says both men asked clients to sign blank forms, then filled out the forms designating Harrison’s wife, Deana, as the clients’ agent and power of attorney.

Harrison and Sawyers also created user IDs and passwords for some clients’ accounts on an online trading site called optionsXpress, as well as set up the accounts so that clients wouldn’t receive statements, according to the charges.

Meanwhile, Harrison and Sawyers were profiting from their scheme. In July 2008, the two men withdrew $234,000.

In early fall, as the financial crisis began to take hold, Harrison and Sawyers started to lose large amounts of their clients’ money. Some clients’ accounts fell 70%. One couple invested $100,000 and later learned that their account had dwindled to $16,000, the lawsuit says.

Harrison resigned from Wachovia Securities on Oct. 13, 2008. In his letter of resignation, he stated that he had “misdirected” $6.6 million of his clients’ money. Sawyers resigned the following day.

Most of the investors who became victims of Harrison and Sawyers had their money in conservative investment products and no knowledge of how to invest in stocks and bonds or how to read financial statements. Many were retired and living on fixed incomes, the SEC says.

Two former Wachovia Securities brokers – William Harrison and Eddie Sawyers – are accused of misleading dozens of elderly clients into investing in what they called a sure thing. Instead, investors lost approximately $8 million, according to a lawsuit filed Dec. 15 by the Securities and Exchange Commission (SEC).

The SEC complaint alleges that Harrison and Sawyers misrepresented the investment strategies they were selling to at least 42 clients in 2007 and 2008. Among their promises: A guarantee of 35% returns without any risk to investors’ principal investment. In reality, the brokers were using investors’ money to trade securities in risky online deals.

The SEC said that in July 2008, Harrison and Sawyers withdrew $234,000 from three client accounts as compensation for their management services. They split the amount.

As reported Dec. 16 by Bloomberg, the SEC accuses the duo of recruiting Wachovia investors to a new business venture called Harrison/Sawyers Financial Services.

According to the complaint, Harrison and Sawyers touted their venture as “an essentially foolproof investment plan guaranteed to make money regardless of market conditions.”

Instead, investors – all of whom the SEC says were “unsophisticated investors” – lost big.

In one instance, Harrison and Sawyers reportedly told a husband and wife who had invested $100,000 that their money had “maxed out” by achieving a 35% return. In truth, the couple’s investment had lost nearly $84,000.

Most of the investors involved in the scheme were more than 50 years of age. Some were retired and living on fixed incomes, the SEC says.

In addition to allegations of misrepresentation, the lawsuit says that the two brokers set up online brokerage accounts in some clients’ names, while pooling the investment money from other clients into accounts set up in the name of Harrison’s wife and in a joint account held by the Harrisons.

If you’ve suffered losses while doing business with William Harrison and Eddie Sawyers, please contact our securities fraud team. We will evaluate your situation to determine if you have a claim.

Their names may be different – Cornerstone Core Property, Inland American, Inland Western and Behringer Harvard REIT I – but these non-traded real estate investment trusts (REITs) have produced similar financial woes for their investors.

Non-traded REITs can be tricky investments. The products do not trade on national stock exchanges. Redemptions in them are limited at best; most non-traded REITs entail a lengthy holding period – in some instances, up to eight years.

The biggest fault concerning non-traded REITs is one of transparency. Non-traded REITs generally provide no independent source of performance data for investors. Instead, investors must rely on the broker/dealer responsible for pitching and selling the the investment.

And therein lies the problem.

In recent months, numerous complaints have come to light concerning non-traded REITs and, specifically, the broker/dealers behind the deals. Investors allege that they were never given complete details about their investment, as well as the many risks associated with non-traded REITs in general.

The lack of disclosure may have something to do with the high commissions and fees that broker/dealers take in from sales of non-traded REIT shares. In many cases, these fees are 15% or more.

This year, many investors in non-traded REITs have had to face a harsh reality. Instead of getting the stability, liquidity and a reliable source of income they were initially promised by their broker/dealers, they received dividend cuts and elimination of shareholder redemption programs.

Earlier this year, the Financial Industry Regulatory Authority (FINRA) began to take a keen interest in non-traded REITs by conducting a sweep of the promotion practices and sales of broker/dealers associated with the products.

Maddox Hargett & Caruso currently is investigating sales of non-traded REITs, including Cornerstone, Inland American, Inland Western and Behringer Harvard. If you’ve suffered financial losses of $100,000 or more in a non-traded REIT and believe those losses are the result of inadequate information on the part of your broker/dealer, please Contact Us.

Sales of tenant-in-common exchanges (TICs) have come back to haunt a number of broker/dealers, as they face a lawsuit brought by the trustee of one of the biggest creators and distributors of TICs – DBSI Inc.

DBSI, which defaulted on its payments to investors in 2008, has filed for Chapter 11 bankruptcy protection. Now, James Zazzali, the trustee in charge of the bankruptcy, is taking legal action against nearly 100 broker/dealers that sold the doomed product. The lawsuit, which was filed in November, alleges that the TIC from DBSI was actually a $600 million Ponzi scheme.

As reported Dec. 8 by Investment News, the five biggest earners of commissions for selling DBSI include: Berthel Fisher & Co. Financial Services Inc.; QA3 Financial Corp.; DeWaay Financial Network LLC; The Private Consulting Group, which shut down last year; and Questar Capital Corp.

Many of the firms listed in the DBSI lawsuit already are waging similar legal battles over failed private-placement deals. Among those on the DBSI list: Brecek & Young Advisors Inc., which merged into Securities America Corp. in 2009; KMS Financial Services; J.P. Turner Co. LLC; and Alternative Wealth Strategies Inc.

Unlike other private-placement investments that have hit hard times recently, DBSI has not been charged with fraud by the Securities and Exchange Commission (SEC). In July 2009, two high-profile private placements, Medical Capital Holdings Inc. and Provident Royalties LLC, were sued by the SEC for fraud. In the case of Provident Royalties, more than 40 broker/dealers that sold the product have been sued by Provident’s receiver.

A TIC is a real estate investment in which two or more parties own a fractional interest in a select property. The investments became popular in 2002 after the Internal Revenue Service ruled that investors could defer capital gains on real estate transactions involving the exchange of properties.