In May and June, investors prevailed in five out of six arbitration claims against Memphis brokerage firm Morgan Keegan. Meanwhile, hundreds of additional individual arbitration claims await decisions from the Financial Industry Regulatory Authority (FINRA).

Since 2008, thousands of investors have suffered more than $1 billion in losses from a group of mortgage-related Morgan Keegan bond funds. The funds, whose investments were tied to the real estate market, plummeted by as much as 80% following the burst of the housing bubble.

In the lawsuits and arbitration claims that have followed, investors accuse Morgan Keegan of misrepresenting or failing to disclose certain facts about their investments.

In April 2010, regulators charged Morgan Keegan and two employees with fraud for inflating the value of mortgage securities and other risky debt held in the bond funds at the center of the ongoing litigation. The complaint – which was filed by the Securities and Exchange Commission (SEC), FINRA and various state securities regulators – also charged Morgan Keegan portfolio manager James Kelsoe of improperly directing his accounting department to make repeated, arbitrary “price adjustments” that boosted the fair values of securities.

Morgan Keegan’s Joseph Thompson Weller, who led the accounting department, is named in the complaint, as well.

An influx of stockbroker fraud lawsuits and regulatory investigations has prompted the Financial Industry Regulatory Authority (FINRA) to significantly expand the information it provides through its BrokerCheck Web site.

Specifically, FINRA plans to increase the number of customer complaints reported publicly, make certain information about brokers available on a permanent basis, and extend the public disclosure period from two years to 10 years for any broker who leaves the industry.

“The greater amount of information that is available to the investing public will only provide the opportunity for investors to be better informed as to the investment professionals they are entrusting their assets to,” said Steven Caruso of Maddox Hargett & Caruso, P.C., in a July 14 phone interview with On Wall Street.

The BrokerCheck expansion will be implemented in two phases, according to FINRA. In late August, historic complaints will be added to the public records of all current and former brokers. By the end of 2010, full records will be publicly available for brokers whose registrations were terminated within the past 10 years.

The Martin Wegener fraud investigation is now the subject of a civil injunction action by the Securities and Exchange Commission (SEC). According to the June 14 complaint, the Grand Rapids stock broker defrauded investors of at least $6.4 million from March 2007 to March 2010.

Wegener’s office in Walker, Michigan, has been closed since April following a raid by law enforcement officials. So far, at least two of Wegener’s former clients are suing New England Securities, the company Wegener represented.

In its 13-page civil complaint, the SEC contends Wegener ran his alleged scheme by investing clients’ money in a variety of bogus securities, as well as in two companies of which he had ownership, Wealth Resources, Inc. and Wealth Resources, LLC.

In reality, however, Wegener was keeping investors’ money for himself, while sending out fake brokerage statements to clients.

The SEC also accuses Wegener of using investors’ money to make Ponzi-like payments to other customers who requested a return of all or a portion of their investment.

Maddox Hargett & Caruso P.C. currently is investigating both Martin Wegener and New England Securities on behalf of investors who sustained investment losses. If you have a story to tell related to this matter, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Private-placement sales in Provident Royalties LLC have come back to haunt many once-successful broker/dealers. The Securities and Exchange Commission (SEC) charged Provident with civil fraud last summer, accusing the company and various top executives of operating a $485 million Ponzi scheme allegedly involving phony oil and gas securities.

Fifty broker/dealers that sold private placements in Provident are now being sued by Provident’s trustee, Milo H. Segner Jr. At the same time, hundreds of investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA).

As reported July 11 by Investment News, many broker/dealers facing Provident-related lawsuits appear to have dangerously low net-capital positions – a fact that could put them in peril if they eventually pay out large legal claims over soured Provident deals.

“Broker-dealers facing millions of dollars in lawsuits could be in a world of hurt,” said Carrie Wisniewski, president of B/D Compliance Associates, in the Investment News article. “It’s a big problem,” she said.

One of the broker/dealers named in the trustee’s June 21 lawsuit is Capital Financial Services. It had only $390,000 in excess net capital at the end of 2009. The firm also has at least nine pending arbitration claims against its president, Brian Boppre, totaling $10.8 million in damages.

Next Financial Group also is a big seller of Provident private placements. It had $3.1 million in excess net capital at the end of last year, including $1.1 million reserved to pay contingent legal liabilities, according to Investment News.

Violation of the SEC’s net-capital requirement can signal the end of a broker/dealer. The Provident case – and the resulting legal claims it produced – has pushed many broker/dealers to the breaking point. Okoboji Financial Services, the fifth-largest seller of the Provident private placements, said in May it was closing up shop. Okoboji reportedly had excess net capital of $32,048 at the end of 2009, but made no provisions for legal liabilities.

GunnAllen Financial got caught up in a similar situation. A leading seller of investment deals in Provident Royalties, the broker/dealer closed in March when its available capital fell below the amount needed to adhere to industry rules. At least 10 other firms that sold private placements in Provident Royalties, as well as in Medical Capital Holdings, have shuttered recently because of net-capital issues.

If you are a retail or institutional investor and sustained investment losses related to Provident Royalties, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Suitability, misrepresentation and issues involving variable annuities and mutual funds topped the list of enforcement actions levied by the Financial Industry Regulatory Authority (FINRA) in 2009. In total, the regulator imposed $50 million in fines and resolved 1,090 disciplinary actions. By comparison, FINRA saw $28 million in fines from 1,007 actions in 2008.

As reported July 9 by Investment News, about two-thirds of the 2009 fines for advertising violations came from auction-rate securities cases. Actions against FINRA members for sales of convertible notes and private placements also were more prevalent in 2009 and into 2010.

Moving forward, analysts predict the industry to see a growing number of fines from cases connected to sales seniors, alternative investments and private placements. Already, two significant cases involving private placements – Medical Capital Holdings and Provident Royalties – are the subject of multiple lawsuits and arbitration claims.

At least 12 broker/dealers that sold private placements issued by Provident Royalties LLC are now either out of business or no longer sanctioned by the Financial Industry Regulatory Authority (FINRA). As reported June 30 by Investment News, the 12 firms in question sold $56.7 million of Provident offerings.

In July 2009, the Securities and Exchange Commission filed a lawsuit against Provident Royalties, charging the company and its founders with fraud. From 2006 to 2009, Provident sold $485 million of private placements through a number of broker/dealers throughout the country.

Those same broker/dealers are now facing a slew of arbitration claims and lawsuits from investors who lost millions of dollars on the Provident deals, as well as on other private-placement offerings, including those from Medical Capital Holdings.

Last month, the trustee in the Provident case, Milo H. Segner Jr., filed a complaint against 49 broker/dealers, alleging they “failed miserably in upholding their fiduciary obligations” when selling a series of Provident Royalties private placements. In total, the lawsuit lists 61 firms that sold investment offerings in Provident.

Investment News provided a list of broker/dealers with problems connected to sales of Provident private placements. Among the broker/dealers on the list:

• AFA Financial Group LLC – AFA sold $2.5 million of Provident private placements; in April, the broker/dealer said it was closing its business due to overwhelming legal and insurance costs.

• Barron Moore Inc. – The Financial Industry Regulatory Authority (FINRA) expelled Barron Moore in June 2008 over penny stock sales. The company sold $205,000 in Provident private placements.

• Community Bankers Securities LLC – Community Bankers ceased its affiliation with FINRA in December 2009. It sold $2.8 million in Provident private placements.

• Empire Financial Group Inc. – FINRA expelled Empire in March 2009 for failing to pay unknown fines and/or costs. Empire sold $2.8 million in Provident placements.

• Empire Securities Corp. – FINRA suspended Empire Securities in May 2010 for failing to pay arbitration fees. Empire Securities sold $205,000 in Provident private placements.

• ePlanning Securities Inc. – The company withdrew from FINRA in February 2009. It sold $3.8 million in Provident placements.

• GunnAllen Financial Inc. – GunnAllen was shut down in March 2010 when it failed to meet FINRA’s net-capital requirements. It sold $22.3 million in Provident private placements.

• Jesup & Lamont Securities Corp. – The broker/dealer closed its doors in June 2010 after failing to meet FINRA’s net-capital requirements. It sold $100,000 in Provident private placements.

• Main Street Securities LLC – The firm withdrew its registration from FINRA in November 2009. It sold $205,000 in Provident private placements to investors.

• Okoboji Financial Services – In May 2010, Okoboji filed forms with both FINRA and the SEC to withdraw its registration as a broker/dealer. Okoboji sold $21.9 million in Provident private placements.

• Private Asset Group Inc. – FINRA suspended Private Asset Group in May 2010 for failing to pay arbitration fees of $2 million.

• Provident Asset Management – On March 18, FINRA expelled Dallas-based Provident Asset Management for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, in a massive Ponzi scheme. Provident Asset sold $50,000 in Provident private placements.

Forty-nine broker/dealers have been named in a lawsuit involving sales of Provident Royalties private placements. The lawsuit, which was filed June 21 by the trustee now overseeing Provident – Milo H. Segner Jr. – charges the broker/dealers of failing to uphold their fiduciary obligations when selling a series of Provident Royalties LLC private placements.

The lawsuit hopes to recover $285 million in claims and commissions from the firms named in the lawsuit. As reported June 29 by Investment News, the leading sellers of the 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.

Investment News provides a complete list of the broker/dealers named in the lawsuit, as well as the commissions they collected.

“The commissions, fees and payments received from Provident Royalties encouraged and played a substantial role in the negligent and/or grossly negligent conduct of the broker-dealers,” according to the lawsuit.

In July 2009, the Securities and Exchange Commission (SEC) filed a fraud lawsuit against Provident Royalties and several high-ranking executives for running an alleged $485 million Ponzi scheme tied to fake oil-and-gas investments. From June 2006 to January 2009, many independent broker/dealers sold private placements in Provident to some 7,700 investors.

Weighed down by sales in Medical Capital Holdings and other failed private placement deals, more broker/dealers are closing their doors. At least nine B-Ds have gone out of business this year.

In 2005, 5,111 broker-dealers were registered with the Financial Industry Regulatory Authority (FINRA); today, the number of firms has declined by 8.2% to 4,693.

A number of reasons are behind the recent broker/dealer closures, including the current economy, as well as regulatory pressure from FINRA and the Securities and Exchange Commission (SEC). For many of the recently shuttered brokerages, however, their fate has been sealed by sales in Medical Capital Holdings.

In July 2009, the SEC charged Medical Capital with fraud in connection to the sale of private placements. In total, the Tustin, California, lender raised $2.2 billion in investor money and sold private placements known as Medical Capital notes through dozens of broker/dealers. More than half of investors’ money is now gone.

Chicago Investment Group, a broker/dealer with approximately 90 brokers and $200 million in client assets, is the latest broker/dealer set to close its doors. As reported June 29 by Investment News, the company revealed last week it did not have enough capital on hand to meet industry rules to remain open for business.

GunnAllen Financial. Cullum & Burks Securities. Okoboji Financial Services. Jesup & Lamont Securities. All are independent broker/dealers that have either faced net-capital violations or been shut down by regulators after their capital levels were deemed too inadequate to continue doing business.

Jesup & Lamont Securities is one of the latest broker/dealers facing a capital crunch. On June 18, FINRA ordered the company and its 300 reps to cease business operations other than liquidating transactions. According to a June 27 Investment News article, the problem may stem to pressure from the SEC regarding sales of $11 million in private shares of Jesup & Lamont’s stock.

Jesup & Lamont is not alone. As reported in the Investment News story, a number of broker/dealers are dealing with capital requirement issues these days as a result of the market downturn of 2008 and early 2009. Broker/dealers also share something else in common: Many are facing legal liabilities from private-placements deals that have gone bust. Two of the most prominent cases involve Medical Capital Holdings and Provident Royalties LLC.

Last summer, the Securities and Exchange Commission (SEC) brought a fraud lawsuit against Provident Royalties and its related business entities. In the complaint, the SEC charged Provident with selling fraudulent private-placement offerings from September 2006 through January 2009. According to SEC documents, Provident raised $495 million from at least 7,700 investors throughout the country.

That same summer the SEC also initiated a fraud lawsuit against Medical Capital Holdings. In its fraud complaint, the SEC alleges that Medical Capital had more than $543 million in phony receivables on its books and had lost more than $315 million on various loans. Meanwhile, the company reportedly collected $323 million in fees for managing the money-losing loans.

The SEC also accuses Medical Capital of running a Ponzi scheme operation. According to the SEC complaint, Medical Capital was selling receivables at a markup among the various funds it controlled and then using money from newer investors to pay investors in the older funds.

Reverse convertibles, also known as reverse exchangeable securities, are complex structured investment products linked to the performance of an unrelated asset. The asset can be a single stock or a basket of stocks, an index or some other asset.

When investors purchase a reverse convertible, they are getting a yield-enhanced bond. They do not own, and do not get to participate in any upside appreciation of the underlying asset. Instead, in exchange for higher coupon payments during the life of the note, investors give the issuer a “put option” on the underlying asset. In other words, investors are betting that the value of the underlying asset will remain stable or go up, while the issuer is betting that the price will fall.

In the best case scenario, if the value of the underlying asset stays above the knock-in level or even rises, an investor can receive a high coupon for the life of the investment and the return of the full principal in cash. In the worst case, if the value of the underlying asset drops below the knock-in level, the issuer can pay back the principal in the form of the depreciated asset – which means investors can wind up losing some, or even all, of their principal.

That’s exactly what happened to Lawrence Batlan, an 85-year-old retired radiologist. Batlan, who suffered a loss of almost 20%, says his Citigroup broker talked him into shifting out of preferred stocks in 2007 and buying $400,000 of reverse convertibles, which promised higher interest and safety.

As reported June 16, 2009, by the Wall Street Journal, Batlan’s reverse convertibles were linked to four well-known stocks and paid between 6.25% and 13% at a time when 10-year Treasurys were yielding around 5% yearly. Then the financial crisis appeared, and the share prices of the four underlying stocks fell below the 20% knock-in threshold. Batlan suddenly found himself the owner of stocks worth $75,000 less than he initially invested.

“I had no idea this could happen,” said Batlan in the article. “I have no desire to own Yahoo stock or the others.” Batlan has since filed a complaint with the Financial Industry Regulation Authority (FINRA) in an attempt to recover the $75,000 back from Citigroup.

Harvey Goodfriend, 77, has a similar story. The retired mechanical engineer says he was told by his broker that there was no risk in reverse convertibles. Goodfriend soon discovered otherwise. He says he lost 36% of the almost $250,000 that his Stifel Nicolaus & Co. broker placed into reverse convertibles two years ago.

If you have suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.