Non-traded REITs such as Behringer Harvard REIT I, Behringer Harvard Opportunity, Wells Real Estate Investment Trust II, Inland America Real Estate Trust and Inland Western Retail Real Estate Trust may become more transparent thanks to a new platform under development by the Depository Trust and Clearing Corporation (DTCC).

As reported June 6 by Investment News, the intent of the platform it to provide standards, centralize data and automate transactions for alternative investments like private placements, non-traded real estate investment trusts, limited partnerships and hedge funds. Through the new platform, the DTCC will operate as a go-between among firms that create alternative investments and the broker/dealers and companies selling them.

The platform – called the Alternative Investment Product (AIP) – currently is being used by Pershing LLC. The Charles Schwab Corp. is testing it, according to the Investment News story, and National Financial Services LLC, a clearing unit of Fidelity Investments, plans to have it operating by 2011.

In the interim, about 15 DTCC- affiliated sponsors of alternative investment products are testing the platform.

Alternative investments like non-traded REITs and private placements have come under fire by regulators in recent months for their lack of transparency. In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against the Tustin, California, lender Medical Capital Holdings in connection to private placements that the company issued to more than 20,000 investors nationwide.

Non-traded REITs also faced intense scrutiny lately. Last year, some of the most prominent non-traded REITs, including Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust and Piedmont Office Realty Trust slashed dividends to investors and/or shut down their redemption programs.

The AIP is intended to standardize the way the alternative investment industry communicates information about these types of investments, providing more new clarity.

“The challenge for many alternative investments is that they’re non-standardized,” said one anonymous industry executive in the June 6 Investment News story. “They’re not always priced and valued on a regular basis. This is an investor need, a broker/dealer need.”

Sales of private placements in Provident Royalties LLC have come back to haunt broker/dealer Okoboji Financial Services. On May 28, the Iowa-based company filed notice with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) of its intent to withdraw as a broker/dealer. Investment News first reported the story on June 2.

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

Okoboji Financial also is named in the SEC’s lawsuit for having received a 5% payout in connection to selling Provident notes. As reported in the Investment News article, Okoboji was fined $30,000 by FINRA in 2009 for selling private placements to prospective investors with whom neither the firm nor its representatives had a pre-existing relationship.

In March 2010, Okoboji Financial lost a $978,000 arbitration claim over unsuitable structured settlements, according to records with FINRA.

In April, a lawsuit was filed in federal court in South Dakota involving an Okoboji representative who sold private placements in Provident and Medical Capital Holdings to 87-year-old Thelma Barber. As in the Provident case, the SEC charged Medical Capital Holdings with fraud in July 2009. It is now under a court-appointed receiver.

A Los Angeles Financial Industry Regulatory Authority (FINRA) arbitration panel has awarded investors more than $550,000 in damages for their complaint involving a fixed-income municipal arbitrage investment known as MAT Three.

Created and launched by Citigroup Global Markets and sold through Smith Barney in February 2006, MAT Three was represented as a fixed-income alternative product – an investment that supposedly had similar volatility to that of the Lehman Brothers Aggregate Bond Index. In reality, the highly leveraged fund exposed investors to 100% or more loss of principal and was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.

When MAT Three imploded in February 2008, investors suffered devastating losses.

“Despite widespread evidence that Citigroup misrepresented MAT’s risk level to its own brokers, who then passed the misleading information on to their clients, Citigroup elected to employ the ‘blame the customer’ defense,”’ stated Steven B. Caruso of Maddox Hargett & Caruso, P.C. “The FINRA arbitration panel obviously rejected this defense.”

Maddox Hargett & Caruso, P.C. and Aidikoff, Uhl & Bakhtiar provided legal representation to the investors in the case.

The award represents a return of 100% of the investors’ losses, according to Caruso, who says that the win is the second significant investor win in a MAT case for his firm’s clients in recent weeks.

A recent Medical Capital win by an investor over soured private placement deals is an encouraging sign for other investors with similar losses. The $400,000 award, which was issued May 10 and reported June 1 by Investment News, appears to be the first successful claim against a broker/dealer for selling Medical Capital investments.

The investor in the case was Marilyn Hazell, who filed her complaint against broker/dealer Peak Securities of Largo, Florida. In the complaint, Hazell cited breach of contract, breach of fiduciary duty, negligence and fraud.

Private placements in Medical Capital are at the center of a July 2009 fraud complaint by the Securities and Exchange Commission (SEC). In its complaint, the SEC charged Medical Capital Holdings with fraud in the sale of $77 million in notes. According to the SEC, Medical Capital told investors that any funds raised from its private placement deals would be invested in medical receivables. Instead, the SEC alleges that the company took $25 million in administrative fees for one fund, Medical Provider VI.

Federal prosecutors also have opened a criminal investigation of Medical Capital’s officers: Sidney M. Field and Joey Lampariello. In late May, U.S. District Judge David O. Carter agreed to let them tap more than $100,000 in previously frozen assets so they could hire criminal defense attorneys.

As reported in the June 1 Investment News article, Medical Provider Funding VI is the last in a series of offerings that raised $2.2 billion from investors. About $1 billion in investors’ money has reportedly been wiped out.

Since then, many investors have filed arbitration claims against the broker/dealers that sold them Medical Capital notes.

Peak Securities lost its registration with FINRA in November.

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.

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 are non-traded real estate investment trusts, or REITs – an industry that has garnered new interest from the Financial Industry Regulatory Authority (FINRA).

As reported May 28 by Investment News, FINRA is paying close attention to non-traded REITs and, in particular, the ways in which broker/dealers marketed and sold the products to investors.

Non-traded REITs are considered illiquid investments because they do not trade on a stock exchange. The majority of non-traded REITs have a specific time frame that outlines when investors can redeem their REIT shares. Non-traded REITs also come with high commissions and fees, a fact that may lead some broker/dealers to misrepresent the products for personal profit.

The market for non-traded REITs experienced an especially tumultuous year in 2009. Many of the largest non-traded REITs either slashed dividends to investors, shut down redemption programs or both.

In March 2009, for instance, the Behringer Harvard REIT I suspended shareholder redemption requests. A short time later, it announced plans to slash annualized dividends from 6.5% to 3.25%, based on an original share purchase price of $10.  The Behringer Harvard Opportunity REIT I also halted its shareholder redemptions.

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.

Complex securities sold as 100% principal protected notes have failed to live up to their billing. In recent months, untold numbers of investors have witnessed billions of dollars in losses because of so-called investments that were touted by brokers as good as cash investments.

A May 21 article by Gretchen Morgenson in the New York Times highlights the questions surrounding 100% principal protected notes and how these complex securities became the darling of Wall Street and a disaster for many investors.

Principal protected notes are essentially zero-coupon notes whose return is partly tied to the performance of an equity index, such as the Standard & Poor’s 500 or the Russell 2000. How an investor makes money on these types of investments, however, is a complex process. The securities promise to return an investor’s principal, typically at the end of 18 months, along with the added gain from the index’s performance if that index trades within a certain range.

The tricky part is this: For an investor with one of these notes to earn the return of the index, as well as get his principal back, the index cannot fall 25.5% or more from its level at the date of issuance. The index also cannot rise more than 27.5% above that level. If the index exceeds those levels during the holding period, an investor would receive only his principal back.

As the New York Times article points out, 100% principal protected notes were sold by many brokerages to conservative investors who typically put their money in low-risk financial products like certificates of deposit. Many investors quickly became disenchanted with their decision to buy into principal protected notes, especially those who bought notes issued by Lehman Brothers Holdings. Those investments are now worth mere pennies on the dollar following the company’s bankruptcy filing in September 2008.

Two investors who lost big on 100% principal protected notes with Lehman were Corinne and Gregory Minasian, according to the New York Times. On the suggestion of their UBS broker they invested almost $100,000 – more than half of their savings – into Lehman notes in early 2008. They ultimately lost everything, and currently have an arbitration case pending in an attempt to recover their losses.

The Minasians contend their UBS broker failed to explain the risks in the securities, and never provided them with a prospectus. They contend they didn’t’ even know their investment had been issued by Lehman Brothers until the firm actually collapsed in 2008.

“I am not a sophisticated investor,” said Mr. Minasian in the NYT’s article. “Many years ago I dabbled in the stock market, but I learned my lessons. Over the past 10 to 15 years my wife and I invested in CDs.”

UBS sold $1 billion of these notes to investors. Commissions were 1.75%, a percentage that is far higher than those generated on sales of CDs. When Mr. Minasian asked about the commission, he says his broker said none existed.

Investment firm Piper Jaffray & Co. has been fined $700,000 by the Financial Industry Regulatory Authority (FINRA) for email retention violations, related disclosure issues and supervisory and reporting violations.

According to a statement issued by FINRA, Piper Jaffray failed to retain approximately 4.3 million emails from November 2002 through December 2008. The company also failed to inform FINRA of its email retention and retrieval issues.

This isn’t the first time Piper Jaffray has been cited for email retention deficiencies. Information on FINRA’s Web site reports that the company was sanctioned in November 2002 in a joint action by the Securities and Exchange Commission (SEC), the New York Stock Exchange Regulation and NASD following investigations tied to conflicts of interest between Piper’s investment banking and research departments. As part of that settlement, Piper Jaffray was required to review its systems and certify that it had established systems and procedures designed to preserve electronic mail communications.

In settling the latest matter with FINRA, Piper Jaffray neither admitted nor denied the findings.

Read FINRA’s action against Piper Jaffray here.

Citigroup and Morgan Stanley appear to be taking a lead from Goldman Sachs when it comes to collateralized debt obligations (CDOs). As reported in a May 21 article by Bloomberg, Citigroup is the focus of several inquiries for allegedly selling a series of mortgage-linked securities – known as the Jackson Segregated Portfolio – to investors without disclosing the fact that Morgan Stanley helped shape the investments while also betting they would fail.

According to the Bloomberg article, marketing documents for the products – which were underwritten by Citigroup in 2006 – failed to provide information on the entity responsible for selecting the underlying mortgage bonds. Sources close to the deal contend that the entity was a Morgan Stanley unit. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, according to Bloomberg data.

So far, Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals.

In a similar situation last month, the Securities and Exchange Commission (SEC) accused Goldman Sachs of misleading investors by failing to disclose that the hedge fund, Paulson & Company, had a role in picking securities it then bet against.

As in the Goldman Sachs case, the Jackson Segregated investments involved a synthetic CDO. Derivatives linked to mortgage bonds were pooled together, packaged into new bonds and then sold investors. On the other end of the Jackson derivatives was a “short” investor. Profits were made when the underlying bonds failed.

“To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed . . . Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities,” the Bloomberg article reports

Margins calls? Human error? Whatever the reason, billions and billions of dollars in capital vanished in the blink of an eye on May 6, the day the Dow Jones Industrial Average witnessed nearly a 1,000-point drop. Individual and institutional investors alike felt the pain – and will for some time to come. For those needing further proof of the repercussions, just look at your next 401k or brokerage statement. The losses rendered from May 6 will be poignantly clear.

Many are blaming the market’s crash on the debt crisis in Greece. Others point the finger at high-frequency trading. And some fault human error. Specifically, a number of people contend that the crash was tied to someone hitting “B” instead of “M” on the keyboard, resulting in a billion shares of a certain investment sold instead of a million. Various news sources have reported that the firm behind the trading error is Citigroup. Citigroup denies the claims.

Other analysts believe stocks plummeted on May 6 because of massive forced selling by big hedge funds that were responding to margin calls. Margin calls happen when people borrow heavily against their assets and then see their value plummet drastically. This, in turn, forces them to sell part of their holdings in order to make good with their lenders. The end result affects not only individual investors or institutional investors like hedge funds but also the entire economy.

Federal regulations limit the amount of margin trading that individual investors can conduct. This isn’t the case, however, with hedge funds, which are essentially unregulated and can typically borrow many times over the real value of their assets.

Regulators continue to review the financial free-fall that occurred on May 6. Regardless of what they determine, the end result will be the same: Investors are going to feel considerable financial pain for a long time to come.

Investments deals involving CDOs have come back to haunt Morgan Stanley. Federal prosecutors apparently are investigating whether the investment bank intentionally misled investors about various synthetic collateralized debt obligations that it helped design and sometimes bet against. The story was first reported by the Wall Street Journal on May 11.

According to the story, Morgan Stanley marketed and sold the CDOs in question to investors and then subsequently placed bets that their value would fall. Among other things, investigators want to know whether the bank disclosed certain facts to investors, as well as its role in the deals themselves.

In April, the Securities and Exchange Commission (SEC) charged another investment firm – Goldman Sachs – with fraud in connection to sales of synthetic CDOs.

According to the SEC’s complaint, Goldman Sachs failed to tell investors certain details regarding the financial products, including the fact that a major hedge fund not only selected the securities held by the CDO but also bet against them to fail.

Meanwhile, the probe into Morgan Stanley’s CDO is at a preliminary stage.