Even though Securities America continues to wage legal battles stemming from sales of Medical Capital private placements, the company apparently is beefing up its network of independent representatives and advisers.

As reported Nov. 1 by Investment News, Securities America acquired a branch of about 45 representatives and managers in control of $500 million in client assets formerly affiliated with Equitas America LLC in September. One month earlier, Steve Bull, a former branch manager with 20 reps under him at Next Financial Group, joined Securities America.

Additional acquisitions and/or mergers could occur in the future, according to Securities America CEO Jim Nagengast, especially in light of the fact that more broker/dealers are closing up shop – either for capital funding issues or legal battles over private placement deals.

For more than a month, Securities America has been involved in an administrative hearing with the Massachusetts Securities Division over allegations that the firm misled Massachusetts investors who bought $7.2 million in Medical Capital Holdings notes from Securities America reps.

The administrative hearing comes on the heels of a Jan. 26 lawsuit in which Massachusetts Secretary of State William Galvin accuses Securities America of committing securities fraud on a “massive scale.” Among the charges, Massachusetts regulators allege that Securities America intentionally failed to reveal potential red flags to advisers and clients about Medical Capital.

In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital, which currently is in receivership.

Since then, investors have filed lawsuits and arbitration complaints over the high-risk private placements against more than 50 securities firms.

If you suffered investment losses in Medical Capital notes sold by Securities America, please contact us. A member of our securities fraud team will help you determine if there is a viable claim for recovery.

When it comes to financial adviser satisfaction, Morgan Stanley Smith Barney rates at the very bottom of six national broker/dealers, according to a J.D. Power and Associates Survey.

Among independent broker/dealers, the survey says Commonwealth Financial Network came out on top, while MetLife Broker Dealer Group ranked the lowest.

As reported Oct. 24 by Investment News, the 2010 U.S. Financial Advisor Satisfaction Study was based on responses from 2,863 advisers who hold a Series 7 license. The study was conducted in February and March, and again between July and September.

Key areas covered in the survey included adviser satisfaction, firm performance, technology and work environment.

This is the first time that the survey has ranked independent broker/dealers.

Last week, Morgan Stanley was sued by a group of Singapore investors who accused the company of rigging a bond sale related to collateralized debt obligations in order to wipe out their $155 million investment. The notes were issued by Pinnacle Performance Ltd, a Cayman Islands-registered outfit that Morgan Stanley had allegedly marketed as “conservative,” with the goal to protect investors’ principal.

Instead, the investors say Morgan Stanley invested their funds into synthetic CDOs, with the bank itself serving as the counterparty on the underlying swap agreements. The investors allege that the arrangement was structured so that Morgan Stanley would collect one dollar for each dollar they lost.

Inland American Real Estate Trust has reset the value of its common shares to $8.03. For investors, it isn’t good news; the price is down from the $10 that the shares sold for when the non-traded REIT was first launched in 2005.

Inland announced the reset on Sept. 21 in an 8-K filing with the Securities and Exchange Commission (SEC). Inland also stated in the filing that it “gives no assurance that a stockholder would be able to resell his or her shares at the new estimated value.”

“We believe the current downturn in the economy has depressed the value of our assets and hence the estimated value of our shares,” Inland said. “The value of our shares will likely change over time and will be influenced by changes to the value of our individual assets as well as changes and developments in the real estate and capital markets.”

Other non-traded have followed Inland lead in resetting their values. Among them: Behringer Harvard REIT I, which reset its shares to $4.25 earlier this summer, and KBS REIT, which reset its value to $7.17 in late 2009.

Maddox Hargett & Caruso is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning non-traded REITs, please contact us.

Non-traded real estate investment trusts (REITs) are big business. According to research from Blue Vault Partners LLC, non-traded REITs are on track to raise $7 billion in 2010, a 17% increase over 2009.

For brokers and firms pushing non-traded REITs, that’s good news. They stand to make huge commissions from sales of non-traded REITs. Investors, however, often come out on the losing end of non-traded REIT deals. That’s because non-traded REITs lack transparency, and they are not even considered liquid investments.

Moreover, investors in non-traded REITs often fail to realize that redemptions can be suspended at any time. The same goes for dividends, which could be reduced or suspended. The end result? Investors’ money in non-traded REITs is tied up, oftentimes for years.

As reported by REIT Wrecks, a Website devoted to the REIT sector, a number of non-traded REIT programs have eliminated or severely limited their share repurchase programs. Among these are some non-traded REITs that continue 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.

Says REIT Wrecks: “Based on their Q3 earnings, the two apartment REITs are in heaps of trouble, while Wells Timberland REIT is playing a game of beat the clock with its lenders using money from new shareholders. Avoid these like the plague.”

Maddox Hargett & Caruso currently is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning investments in a non-traded REIT, please contact us.

Embattled broker/dealer Securities America is crying foul as it faces Massachusetts securities regulators over claims of misleading investors who bought $7.2 million in Medical Capital private placements. The legal showdown began in earnest last week, when Securities America appeared at an administrative hearing to answer allegations brought in early 2010 that the broker/dealer failed to disclose potential red flags to both advisers and clients about Medical Capital.

Medical Capital is a Tustin, California, lender that issued private placements to purchase medical receivables. Securities America was one of Medical Capital’s biggest distributors, selling an estimated $700 million of the private placements from 2003 to 2008.

Meanwhile, investors reportedly lost more than $1 billion with their purchases of Medical Capital notes.

In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital and its two top executives with securities fraud. After raising $2.2 billion in capital, the firm is now in receivership. Regulators have since discovered that Medical Capital’s assets included not only medical receivables and loans but also a 118-foot yacht and a $20 million stake in the movie, “Perfect Game.”

As reported Oct. 4 by Investment News, the Securities America case is the first major legal battle involving an independent broker/dealer that sold private placements, or Regulation D offerings.

According to the lawsuit brought by Massachusetts regulators, Securities America deceived investors by allegedly representing MedCap notes as safe, secure and guaranteed, and never revealing the true nature of risk that the investments presented.

In addition, the lawsuit alleges that a due-diligence analyst at Securities America had serious concerns about Medical Capital, including the lack of audited financials for the series of private placement offerings. In 2005, Jim Nagengast, who was then Securities America’s president and current its chief executive officer, wrote in an e-mail that he, too, had issues about the lack of audited financials.

“Massachusetts investors were sold unsuitable, fraudulent notes by fraudulent means,” said Richard Khalife, an attorney for the Massachusetts Securities Division, in the Investment News article. “Unlawful conduct can’t go unpunished.”

Massachusetts isn’t the only regulator suing Securities America over sales of Medical Capital notes. In August, Montana regulators also sued Securities America, alleging that the firm and executives “withheld material information regarding heightened risks” from its representatives and their clients regarding notes issued by Medical Capital Holdings.

More than 40 other independent broker/dealers sold private placements in Medical Capital.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us.

Financial fraud is growing, and more broker/dealers are at the center of the scams. According to data from the Securities and Exchange Commission (SEC), the number of cases brought by the regulator involving broker/dealers rose significantly last year.

In 2009, 16% of the financial fraud cases generated by the SEC involved broker/dealers, compared with 9% in 2008. In 2007, 14% of cases involved broker/dealers.

The percentage of cases involving securities offerings also escalated last year – to 21% from 18% in 2008.

Investors’ once-safe bond funds may not be so safe anymore. That’s because the research firms responsible for assessing the safety of bonds have changed their methodology as of Sept. 1. For many investors, the move means that the investment-grade bond fund they thought they were investing in could now have a credit risk similar to a junk-bond fund.

Before the change, research firms like Morningstar determined the safety of bond funds on the credit ratings issued by rating agencies like Moody’s or Standard and Poor’s. The new methodology is based on default risk.

As reported Sept. 27 by the Wall Street Journal, more than half of the domestic taxable bond funds tracked by Morningstar saw their average credit-quality ratings fall under the new methodology. About 43% of bond funds fell by one credit grade and about 13% dropped by two credit grades, according to the Wall Street Journal article.

Several bond funds, including Federated Real Return Bond Fund, Cavanal Hill Intermediate Bond Fund, Neuberger Berman Short Duration Bond Fund and TCW Short Term Bond Fund, dropped by even more. In some instances, the funds fell to non-investment-grade ratings, such as BB, from investment-grade ratings of AA.

The new methodology comes on the heels of research from Securities Litigation & Consulting Group, a consulting firm that provides expert witnesses to regulators, law firms, banks and brokerages. The company’s study, published in November 2009, revealed that the mutual fund industry often reported average credit-quality ratings that were at least one whole letter credit-rating higher than the portfolios’ true credit risk.

According to Craig McCann, one of the study’s authors, Morningstar’s change is likely to “have a significant impact on bond portfolios that spread out their credit quality.”

Fidelity Brokerages Services LLC has been ordered to pay $110,000 to an elderly client whose account suffered major losses because it was repeatedly shuffled from agent to agent.

According to an arbitration panel of the Financial Industry Regulatory Authority (FINRA), the claimant in the case, Viola McNeill, 79, had a $700,000 account in Fidelity’s Portfolio Advisory Services (PAS) fee-based management program. In 2007, brokers at Fidelity recommended that McNeill convert her retirement and brokerage accounts into the fee-based account. She agreed, stating her investment objectives as preservation of capital and income.

As reported Sept. 24 by Investment News, McNeill suffers from Parkinson’s disease. Her PAS portfolio was weighted 60% stocks to 40% to fixed income. However, when her account was shuffled between various Fidelity brokers the allocation was never altered.

In 2009, McNeil became aware that her accounts had lost more money than she was withdrawing for living expenses, according to the Investment News article.

Justice was blind recently when it came to sentencing a broker who defrauded investors out of more than $66 million. New York broker Bradley D. Eisner received five years’ probation for his role in a Ponzi scheme that convinced investors they were putting money in a foreign-exchange market when, in reality, the funds were being spent by Eisner and his business partner, Michael R. MacCaull.

The court apparently showed leniency toward Eisner because he turned himself in 2008 and began cooperating with the government. MacCaull, in the other hand, was sentenced to 15 years and eight months in prison in March.

As reported Sept. 20 by Bloomberg, Eisner and MacCaull operated their scam from January 2001 to January 2008.

At MacCaull’s sentencing, MacCaull called Eisner the mastermind of their Ponzi scheme and the one who benefited the most financially. According to MacCaull, Eisner kept the majority of the more than $110 million that their company, Razor FX, stole from investors. Prosecutors say both men used investors’ funds for their personal use, buying lavish homes, cars, and artworks by Picasso and Willem De Kooning.

To conceal the scheme, MacCaull and Eisner created fake customer account statements and returned tens of millions of dollars to investors with money from new ones. Both men must pay back $66.3 million to their victims.

According to prosecutors, a total of 272 investors found themselves victims of MacCaull and Eisner’s scheme. Two of those individuals were David B. Dringman and Evi Remp- Dringman.

“We lost our future financial security to Mr. Eisner, the public face of Razor FX,” said David B. Dringman and Evi Remp-Dringman, in the Bloomberg article. “Ultimately we were forced to make the decision to sell our home in California that we had hoped to keep for our future.”

Concerns about the suitability of leveraged, inverse exchange-traded funds (ETFs) for individual investors may cause Morningstar to stop its 1-to-5 rating of the products. The company may remove the ETFs from broader fund categories altogether and instead place them in a separate group, according to a Sept. 20 story in Bloomberg.

The reason for the possible change is that the ratings are designed for investment vehicles, and leveraged ETFs are trading vehicles. The products use derivatives and debt to amplify the returns of a market index, while inverse funds profit from declines in an underlying benchmark.

In an effort to determine whether investors needed additional protections regarding leveraged ETFs, the Securities and Exchange Commission (SEC) stopped approving new ETFs that made significant use of derivatives in March. Several months later, both the SEC and the Financial Industry Regulatory Authority (FINRA) issued a notice to investors on leveraged ETFs.

Among other things, the 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 a trading day.