Popular retirement-plan products known as target date funds are facing regulatory scrutiny from both the Securities and Commission (SEC) and the Department of Labor. The criticism comes after target date funds, which entail a combination of stocks, bonds and other investments and are designed for people nearing retirement, suffered massive losses following the market collapse of 2008. Even some of the most conservative target date funds have lost 30% to 40% of their value.

Critics of target date funds contend too many investors simply have the wrong perception of the products. A survey conducted by the research firm Behavioral Research Associates LLC last March showed that 61% of respondents thought target date funds made some type of “promise.” Other investors said target date funds meant a “secure investment with minimal risk,” while some stated that target date funds provided a “guaranteed return.”

All three assumptions are incorrect. Target date funds typically invest in other funds, making them subject to those underlying holdings and, at the same time, the potential for volatility and risk.

Moreover, there is no one-size-fits-all approach to target date funds. The mix of stocks, bonds and other securities varies from fund to fund. That means two funds with the same target date could easily have a vastly different underlying mix of holdings. A Feb. 27, 2009, article by SmartMoney illustrates this point. Oppenheimer’s 2010 fund (OTTAX) had 65% in stocks and lost 41% in 2008. By comparison, the NestEgg 2010 portfolio (NECPX) had about 32% in stocks and lost less than 10%.

Another issue for regulators concerns the costs of target date funds. According to Morningstar, more than half of target date funds have an annual management fee of 1% or more. By the time someone retires, that 1 percentage point in fees will add up, reducing an investor’s total accumulation by up to 20%.

A March 7, 2010, article in Investment News reports that the SEC and the Labor Department plan to issue a joint consumer alert on the use of target date funds in retirement plans.

First Allied Securities Firm will pay $2 million to settle allegations from the Securities and Exchange Commission (SEC) that it failed to properly supervise one of its independent contrators, Harold H. Jaschke. Jaschke, who worked for First Allied from 2005 to 2008, was accused of allegedly duping two institutional investors by making trades without their knowledge or authorization.

The SEC initially charged Jaschke in December 2009, accusing the former First Allied rep of churning client accounts and making unauthorized and unsuitable trades for the city of Kissimmee, Florida, and the Toho Water Authority of Florida. According to the complaint, Jaschke’s alleged actions netted commissions of more than $14 million.

As reported March 5 by Investment News, when First Allied’s former vice president of supervision, Jeffrey C. Young, was first notified of “abnormal trading” in the two clients’ accounts, he stated that he was “unsure” of whether to contact them with the information. Ultimately, no one at First Allied ever did.

The SEC says Jaschke routinely used his personal e-mail account to correspond with clients. This means First Allied should have been aware of the Jaschke’s conduct because he used the same e-mail account to correspond with supervisors and senior management, according to the SEC.

First Allied is owned by Advanced Equities Financial Corp.

Unsuitable investments in Inland American Real Estate Trust and the Inland Western Retail Real Estate Trust have become a growing source of concern for more investors these days. In many cases, sales of Inland REITs were appropriate from the start for some investors. Why? Because the broker/dealers behind the deals failed to disclose all of the necessary information associated with the products, including the high commissions that the REITs commanded. In some instances, those fees exceeded 15%.

The Inland REITs are considered unlisted REITs; they do not trade on national stock exchanges. Redemptions in unlisted REITs are limited and almost always have a minimum holding period. If investors want to exit an unlisted REIT entirely, they usually can only do so at specified times.

Perhaps the biggest criticism of unlisted REITs has to do with their lack of transparency. Unlisted REITs also typically come with no independent source of performance data. Moreover, critics of unlisted REITs cite the often vague prospectus language regarding their formal exit strategies.

In recent months, we’ve heard from several investors who say their broker/dealer never discussed the various risks that investors take on when they purchase shares of an unlisted REIT. In reviewing these complaints, we’ve also discovered that some investors were kept in the dark about the fact that their investment in an unlisted REIT could literally be tied up for an undetermined amount of time in the event the REIT suspends its share-repurchase program.

That’s exactly what happened with Inland American, which suspended its buyback program in March 2009. Investors had two options: Hold onto their shares until buybacks become re-instated or attempt to sell their share, at a significant loss, on the secondary market.

If you believe your broker/dealer failed to provide adequate information concerning investments in the Inland American Real Estate Trust, the Inland Western Retail Real Estate Trust or another unlisted REIT, contact us.

Investors are continuing to come forth with fraud allegations against various broker/dealers in the Medical Capital case. According to investors’ complaints, certain brokerage firms allegedly marketed and sold private placement offerings in Medical Capital Holdings without first disclosing important facts about the company’s deteriorating financial health and the risks attached to the investments they were pushing. In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital with fraud.

One broker/dealer at the center of the arbitration claims is Securities America. In February 2010, the Massachusetts Securities Division filed a lawsuit against Securities America, which already was facing a pending class action in California, for allegedly misleading investors over sales tied to a series of Medical Capital’s private offerings.

According to the Massachusetts complaint, Securities America ignored red flags and deliberately failed to disclose the risks involved when selling millions of dollars worth of Medical Capital Notes to unsophisticated investors. The complaint further alleges that investors had been told the notes were secured and low risk when, in reality, they were “unregistered, speculative, high-risk securities.”

Based on the Massachusetts Securities Division’s complaint, 400 Securities America advisers allegedly sold $700 million of the private placements in Medical Capital, about half of which are now in default.

If you experienced investment losses related to Medical Capital investments, please contact us. A member of our securities fraud team will evaluate your situation to determine if you have a viable claim for recovery.

Credit default swaps are blamed for instigating the nation’s financial crisis, helping to bring companies like American International Group (AIG) to its knees after it could no longer pay the many claims it owed on the swaps contracts. Nearly three years after the fact, credit default swaps and other complex derivative instruments are still a booming fixture on Wall Street and, unexplainably, largely untouched by financial reform efforts.

This irony is the subject of Gretchen Morgenson’s Feb. 28 column in the New York Times. In the article, she writes that Congressional reform plans for credit default swaps are “full of loopholes,” a fact that almost guarantees “that another derivatives-fueled financial crisis” is right around the corner.

According to the Bank for International Settlements, credit default swaps with a face value of $36 trillion were outstanding in the second quarter of 2009.

Morgenson’s article includes comments from Martin Mayer, a guest scholar at the Brookings Institution and a noted author on banking and finance-related issues. On the subject of credit default swaps, Martin says the following:

“Credit default swaps are a way to increase the leverage in the system, and the people who were doing it knew that they were doing something on the edge of fraudulent… They were not well-motivated.

Mayer’s criticism of credit default swaps dates back several years. On May 20, 1999, he penned an Op-Ed piece in the Wall Street Journal, titled The Dangers of Derivatives. Some of his selected comments include the following:

“These over-the-counter derivatives – created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing – are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall. These instruments are creations of mathematics, and within its premises mathematics yields certainty. But in real life, as Justice Oliver Wendell Holmes wrote, “certainty generally is an illusion.” The derivatives dealers’ demands for liquidity far exceed what the markets can provide on difficult days, and may exceed the abilities of the central banks to maintain orderly conditions. The more certain you are, the more risks you ignore; the bigger you are, the harder you will fall.

“Meanwhile the rules of this game – adopted and enforced by the world’s banking supervisors – further shrink what are already low time horizons in the financial markets. Measuring their positions every day through the algorithms of “value at risk” analysis, players must make constant adjustments of hedges and options to control the losses they may suffer from unanticipated volatility of market prices. In real markets, often enough, you can’t do that.

“The current [plat du jour] – the credit derivative – is the most dangerous instrument yet, and neither the risk controllers at the big banks nor the bank examiners seem to have any good ideas about how to handle it. A vehicle by which banks can swap loans with each other apparently gives everybody a win – banks can diversify their portfolios geographically and by category with the click of a mouse.

“But the system is easily gamed, and it sacrifices the great strength of banks as financial intermediaries – their knowledge of their borrowers, and their incentive to police the status of the loan.

“When a loan is securitized, nobody has the credit watch. Researchers at the Federal Reserve Bank of New York concluded that in the presence of moral hazard – the likelihood that sloughing the bad loans into a swap will be profitable – the growth of a market for default risks could lead to bank insolvencies.”

Fast forward to 2008 and 2009 and Mayer’s predictions became reality. Morgenson contacted Mayer for her Feb. 28 column, asking for his thoughts on solutions to the problems that credit default swaps have produced. Among his recommendations:

• Companies that trade in credit default swaps should be required to put up more capital to back them, Mayer says. That way, if a client asks for payment, the issuer actually has the funds available to make good on the payment.

• Increased regulatory oversight of credit default swaps needs to become the rule, according to Mayer. In addition, he suggests that credit default swaps must be exchange-traded so that their risks are more transparent.

“The insistence that you mustn’t slow the pace of innovation is just childish,” Mayer said in the NYT’s article. “Innovation has now cost us $7 trillion,” a price tag that refers to the loss in household wealth resulting from the financial crisis. “That’s a pretty high price to pay for innovation.”

Two Virginia insurance agents – Julius Everett “Bud” Johnson and Walter Ray Reinhardt – face accusations by the Virginia State Corporation Commission (SCC) of misleading investors regarding $1.7 million in sales of promissory notes.

Last fall, the SCC ordered Johnson, Reinhardt and their companies to stop selling the notes for 120 days, alleging that they were illegal securities because neither the notes nor the sellers were registered with the state of Virginia. As for investors – many of whom were reportedly told that their money was guaranteed – they want answers.

“All I got was a runaround,” said James Kelley, a Chesterfield County, Virginia, man who invested $25,000 that was supposed to be repaid in January but wasn’t, according to a Feb. 3 article in the Richmond Times Dispatch.

Kelley said he went to speak with Johnson at his office, where he was told Johnson was out. When Kelley waited in the parking lot, however, he says he saw Johnson leave a few minutes later out of a back entrance of the building.

Gerald Crant is another investor who placed $100,000 with Johnson. He claims Johnson told him the promissory notes were insured by the Federal Deposit Insurance Corp. Now he’s worried because he hasn’t received his January interest payment.

According to the Times Dispatch article, Kelley says that Johnson told him he would get more information in the coming weeks, while Crant says he received a letter from Johnson’s lawyer stating that the slow economy was the reason he had to stop making interest payments.

The SCC, which regulates securities transactions in the state of Virginia, lists a litany of allegations against both Johnson and Reinhardt and the 12 companies they operate, including:

· Making material misrepresentations and material omissions;

· Failing to provide financial disclosures;

· Failing to provide investment-risk disclosures;

· Failing to provide a litigation or compliance disciplinary disclosure;

· Failing to disclose that the securities offered were not registered; and

· Falsely stating that the securities were exempt from registration.

In addition, the SCC’s records accuse Johnson and his companies of operating as a fraud. The allegations include issuing corporate promissory notes for one issuer then transferring the money to another entity and using new investors’ money to pay interest to previous investors – something typically associated with a Ponzi scheme.

In September 2009, SCC records show that Johnson and Reinhardt stated they had sold $1.7 million of notes to 38 Virginians, and that the notes were private offerings and complied with federal regulations. A senior investigator with the SCC says he found documents showing Johnson guaranteed $3.2 million of the companies’ debt, while Johnson declared he did not know the outstanding balance on the notes.

The companies that the SCC cites as those operated by Johnson are: Benefit Contract Administrators, MHC Linen Service LLC, River City Cleaners LLC, Roberts Awning Restoration and Renewal LLC (formerly known as Roberts Awning LLC).

Other defendants in the case include Benefit Contract Administrators LLC, Mid Atlantic Insurance Agencies, LivingWell Healthcare of Virginia LLC, Everett Awnings doing business as Roberts Awnings, and FIC Financial Group.

Reinhardt operates three businesses: First Fidelity Financial of Richmond LLC, Commonwealth Assurity LLC and Capital Investor Group.

Reinhardt is accused of selling illegal securities between 2005 and now. He also is accused of operating as the broker-dealer in offerings and selling the illegal promissory notes of Benefit Contract Administrators, MHC Linen Service, River City Cleaners, Mid Atlantic Insurance Agencies, LivingWell Healthcare of Virginia, Roberts Awning Restoration and Renewal and FIC Financial Group.

As an aside, if the securities in the Johnson and Reinhardt case had been registered, investors might have learned some important information about the people and companies behind their investments. Specifically, Reinhardt had previously been barred twice from selling securities in North Carolina.

If you suffered investment losses in connection to either Julius Everett Johnson or Walter Ray Reinhardt, contact us to tell your story.

Investors turned to the Behringer Harvard REIT for safe investing, but are now stuck holding essentially worthless positions.

In an attempt to avoid the risk of investing in the stock market, some investors chose real estate investment trusts (REITs). REITs are specialized entities that own or manage income-producing real estate. They are established to avoid corporate taxes, allowing pass-through taxation to the investors.

Financial advisors have recommended people invest a substantial portion of their nest egg in REITs, representing them as safe and conservative investments for retirement. The advisors may not disclose the REITs underlying financial condition and the risks of the investment becoming illiquid. One such example is the Behringer Harvard REIT I. This REIT never made any money and is now completely illiquid, thereby preventing investors from selling their positions. The REIT was sold to inexperienced and conservative investors, who are now stuck holding essentially worthless positions.

Failure to disclose these and other potential risks to investors could be violation of Securities laws and could also lead to a host of other viable legal claims, such as breach of fiduciary duty.

If you have suffered investment losses from REITs, contact us to tell us your story. We want to counsel you on your options.

News of private placement deals run amuck keeps coming. The latest concerns private placement offerings – also known as Regulation Ds – involving Pacific Cornerstone Capital and former CEO Terry Roussel. The two were fined $750,000 in December by the Financial Industry Regulatory Authority (FINRA) for making misleading statements and, in some instances, omitting facts in connection to sales of two private placement deals: Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC.

FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.

Cornerstone Industrial Properties and CIP Leveraged Fund Advisors were affiliated businesses of California-based Pacific Cornerstone. Pacific Cornerstone’s largest single shareholder happens to be Roussel.

According to FINRA, Pacific Cornerstone sold private placements in Cornerstone Industrial Properties and CIP Leveraged Fund Advisors via offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment.

The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted an unrealistic yield on a $100,000 investment in excess of 18%. The alleged actions took place from 2004 to 2009.

In total, investors placed more than $50 million into the two deals. FINRA has not stated how much, if any, of clients’ money may be missing.

Over the five-year period in question, FINRA says that Roussel told investors that all was well with their investments. In addition, he periodically sent letters to investors that portrayed a positive yet unrealistic outlook for their investments. The letters also failed to include required risk disclosures, as well as a complete financial picture of Cornerstone Industrial Properties and CIP Leveraged Fund Advisors.

Maddox Hargett & Caruso is investigating ongoing complaints by investors who sustained losses in private placement offerings related to Medical Capital Holdings, Provident Asset Management LLC and Pacific Cornerstone Capital. If you’ve suffered financial losses in any of these investments, contact us to tell your story.

Securities America has fired off an angry letter to the Massachusetts Securities Division over its lawsuit against the broker/dealer for allegedly misleading investors who bought high-risk private placements in Medical Capital Holdings. The story was first reported Feb. 17 by Investments News.

According to the article, Securities America is outraged by the charges and contends Massachusetts regulators don’t understand the workings of private placements and Regulation D offerings.

The complaint that Securities America is referencing accuses the broker/dealer of misleading investors who bought nearly $700 million of private placements issued by Medical Capital from 400 Securities America representatives. The Massachusetts lawsuit also alleges that between 2003 and 2008, a group of Securities America executives repeatedly failed to heed the warning of an outside due-diligence analyst regarding the risks of the Medical Capital investments.

In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital with securities fraud. A number of lawsuits and arbitration claims have since been filed by investors who allege that various securities firms, including Securities America, failed to disclose the risks associated with the investments. As for Medical Capital, it currently is in receivership.

Investments in reverse convertibles are proving disastrous for more investors, many of whom are retirees and were allegedly misinformed about the products from their broker/dealers. In January and February, the Financial Industry Regulatory Authority (FINRA) took action, issuing a regulatory notice to members about the ways in which reverse convertibles are marketed and sold to retail investors.

Specifically, FINRA reiterated to firms that their registered representatives must perform due diligence when it comes to explaining features and full extent of risks associated with reverse convertibles to investors. FINRA also cautioned that broker/dealers must ensure that an adequate suitability analysis is performed before the products are recommended to clients.

Reverse convertibles are short-term bonds connected to stocks. Once the notes mature – their terms generally last from three months to a year – investors get their principal back. On the downside, if the underlying stocks fall to a certain threshold – usually 20% down – investors get the depressed stocks instead of their full principal.

Hundreds of thousands of investors found this out the hard way in 2008 and 2009 as stocks fell to record lows. Nonetheless, Wall Street continues to push reverse convertibles much to the detriment of investors who may not be fully aware of what they’re buying.

Lawrence Batlan is one of those investors. The 85-year-old retiree suffered a loss of almost 20%, according to a June 19, 2009, story on reverse convertibles in the Wall Street Journal. The article says that Batlan’s broker talked him into moving out of preferred stocks in 2007 and buying $400,000 of exotic securities, which supposedly offered higher interest and safety.

In Batlan’s case, the reverse convertibles were linked to four well known stocks, paying between 6.25% and 13% when the yearly yield on 10-year Treasurys was around 5%. Then everything changed, and the bear market took hold. The share prices for the underlying stocks that Batlan’s reverse convertibles were linked to fell below the 20% threshold. As a result, Batlan found himself out $75,000.

“I had no idea this could happen,” says Batlan in the article. He has since filed a complaint with FINRA in an attempt to recover his losses.

Harvey Goodfriend, 77, also was quoted in the Wall Street Journal story. Goodfriend says he was never told about the risks of reverse convertibles. He ended up losing 36% of the almost $250,000 that his Stifel Nicolaus & Co. broker placed into reverse convertibles two years ago.

For years, critics of reverse convertibles have cautioned that the complexity of the products make them unsuitable investments for most retail investors. As it turns out, those words are ringing loud and clear for a growing number of investors who’ve lost their nest eggs to reverse convertibles.

If you’ve suffered investment losses in reverse convertibles because a broker/dealer failed to disclose specific details about the products, contact us.