Oren Eugene Sullivan is the disgraced South Carolina broker who recently pled guilty to mail fraud in connection to a multimillion dollar, decades-long Ponzi scheme. In January, Sullivan admitted in federal court that from 1995 through 2008 he ran the Ponzi scheme, selling fake investments to individuals and groups of investors, according to the U.S. Attorney’s Office in South Carolina.

So why does the Web site of the Certified Financial Planner Board of Standards still list Sullivan as a CFP in good standing, with no public disciplinary history? It’s a question that was first raised in a Feb. 14 article in Investment News.

As the story aptly points out, designating authorities are finding it more and more difficult to keep up with the bad deeds and misconduct of financial representatives like Sullivan.

Monitoring conduct is an arduous and difficult task. The CFA Institute, which says that 85% of its investigations begin as a result of self-disclosures and 10% from news reports and regulatory Web sites, has two investigators who monitor professional conduct. Most of that work is primarily done via the Internet, according to the Investment News article.

Other designation groups follow similar investigative routes, as well as perform internal investigations before deciding upon punishment. The process, however, can be a lengthy one, ranging from several weeks to a year or more.

Case in point: Oren Eugene Sullivan.

Records with the Financial Industry Regulatory Authority (FINRA) state that Sullivan sold clients nearly $4 million of fake promissory notes between 1995 and 2008. He repaid about $1.5 million before getting caught by authorities. In August 2009, Sullivan was barred by FINRA. In January 2010, he pled guilty to one fraud charge and faces a maximum of 20 years in prison and a fine of $250,000.

Somehow Sullivan’s actions didn’t mar his CFP designation with the CFP Board, however. Investment News did note that the CFP Board was aware of the allegations against Sullivan, but wouldn’t confirm whether they were actually investigating him.

Main Street Natural Gas Bonds

The September 2008 bankruptcy filing of Lehman Brothers Holdings is unlikely to fade from the memory of investors anytime soon. That’s because the bankruptcy had a ripple effect on other investments tied to Lehman, including investments in Main Street Natural Gas Bonds.

Main Street Natural Gas Bonds were marketed and sold by many 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 put their money in Main Street Natural Gas Bonds allege that the brokers in question never disclosed all of the risks associated with the bonds nor did they reveal the fact that the bonds were connected to the financial health of Lehman Brothers.

If you were sold Main Street Natural Gas Bonds as a safe, low-risk investment, you may have a viable claim for recovery. Please contact our firm to tell us your story.

Leveraged and inverse ETFs have found themselves under the regulatory microscope recently, which makes it all the more interesting that ProShares has decided to launch eight new exchange-traded funds that aim to magnify their benchmark exposures by 300%. The story was first reported Feb. 12 by Investment News. 

Leveraged and inverse ETFs try to achieve a return that is a “multiple” of the inverse performance of the underlying index. For Proshares’ new series of ETFs, that means the funds seek a +300% or -300% return of their indices for a single day before fees and expenses. 

In the summer of 2009, several investors initiated lawsuits and arbitration claims involving the Ultra ProShares Funds and UltraShort ProShares Funds. Specifically, investors accuse ProShares of issuing “false and misleading registration statements, prospectuses and additional information” in connection to the funds. As a result of the alleged false promotion of the products, many investors suffered enormous losses. 

In June, the Financial Industry Regulatory Authority (FINRA) issued a statement on leveraged and inverse ETFs, reminding broker/dealers that the products “typically were unsuitable for retail investors” who hold them longer than a single day. FINRA later restated its position, saying that member firms could recommend leveraged and inverse ETFs to retail investors provided that the broker/dealer conducted a suitability assessment of the investor and the ETF itself. 

Massachusetts Secretary of State William Galvin also has taken up the issue of leveraged and inverse ETFs. In July 2009, Galvin began an investigation of the sales materials of companies that sold the funds. The state later sent letter to three ETF leaders – ProShares, Direxion Funds and Rydex Investments. 

The bottom line: Leveraged and inverse ETFs are not for everyone. These types of ETFs provide leverage on a daily basis. Above all, leveraged and inverse ETFs are not a save-and-hold investment – a fact that many retail investors were woefully unaware of. 

Sales of Inland American REITs have produced a firestorm of financial headaches for investors, many of whom were sold on the products based on inappropriate recommendations from broker/dealers. Investments such as the Inland American Real Estate Trust and the Inland Western Retail Real Estate Trust are non-traded, or unlisted, REITs – financial products that have come under increasingly scrutiny lately because of the potential risks they may carry.

Non-traded REITs are not listed on a stock exchange, and investor redemptions are usually limited to a specified time frame. Most important, non-traded REITs can be pricey to get into, with fees as high as 15%.

In conversations with several investors, Maddox Hargett & Caruso has learned that many individuals who invested in non-traded REITs, including the Inland American Real Estate Trust and the Inland Western Retail Real Estate Trust, were ill-informed by their broker/dealer of the high fees, illiquidity and other risks tied to the products. If you suffered investment losses in either of these REITs or another non-traded REIT, contact us to tell your story. 

Embattled businessman Tim Durham apparently will not oppose the appointment of an interim receiver for Fair Finance and its parent corporation, Fair Holdings. The story was first reported on Feb. 11 by the Akron Beacon Journal. The news comes one week after the law firms of Maddox Hargett & Caruso and David P. Meyer and Associates Co. filed paperwork asking a Summit County, Ohio, court to appoint a receiver for Fair Finance and Fair Holdings.

Attorneys for Fair Finance deny the company has been involved in any wrongdoing.

The offices of Fair Finance have remained closed since Nov. 24 when the FBI raided the company’s Akron headquarters and the offices of a related business in Indianapolis, Obsidian Enterprises. According to court records, federal investigators suspect that Fair Finance was being operated as a Ponzi scheme.

Meanwhile, a federal judge is weighing whether to unseal search-warrant documents related to the FBI’s November raids. On Feb. 11, during a court hearing in Youngstown, Ohio, a representative of the U.S. Attorney’s Office in Indianapolis argued that unsealing the search warrants could damage the federal government’s ongoing investigation.

Investment firm Morgan Stanley is facing an arbitration claim by the city of Burlington, Vermont, which alleges breaches of fiduciary duty and fraud involving something known as a wrap account. According to the claim, Morgan Stanley’s actions resulted in damages of more than $21 million for the Burlington Employees’ Retirement System – losses that were mainly due to hidden fees and commissions associated with the wrap account Morgan Stanley recommended.

As reported Feb. 11 by Investment News, the city alleges that the fraud occurred from 1981 through 2006 and that the Morgan Stanley employees in charge of its account engaged in a “pay-to-play” scheme. According to the claim, Morgan Stanley selected only managers who funneled a portion of their management fees to the brokerage firm.

In addition, the claim alleges that Morgan Stanley was charging per-trade commissions despite an initial contract that promised free trading. The allegedly excessive fees and mark-ups dramatically reduced the city pension fund’s returns, contributing to the $21 million in losses.

A Feb. 9 article in Forbes (Wrap Account Rip-Off?) highlights the potential drawbacks of wrap accounts. A wrap account is essentially an investment account in which clients are charged a flat percentage of their assets (usually between 1% and 3%) in return for unlimited trading.

Wraps have become an increasingly popular sales product on Wall Street – so popular, in fact, that brokerage firms now have roughly $1.5 trillion in assets under management in them, according to the Forbes article.

Critics, however, say wrap accounts have plenty of pitfalls and may be just as bad – if not worse – as commission-based accounts.

Burlington is asking a Financial Industry Regulatory Authority (FINRA) arbitration panel to order Morgan Stanley to pay the city, its board and the plan actual damages incurred as a result of Morgan Stanley’s alleged misconduct. The claim also is requesting punitive damages.

Morgan Stanley denies all the allegations.

Christopher Bass, an Albany investment broker and president and CEO of Swiss Capital Harbor/USA, was arrested Feb. 8 on federal criminal charges of securities fraud for an alleged scheme involving more than 200 investors and $5.5 million. 

According to the criminal complaint, Bass allegedly deceived investors with promises of high returns via investments in his company, which also operated under the name Revisco Finanz. Investigators say the alleged scheme dates back to January 2007. 

Investors’ funds were supposedly invested in several overseas projects, including power plants that authorities now believe may not exist. Court documents say that less than half of investors’ money was used for the purposes conveyed by Bass. Instead, the majority of money went to bankroll Bass’ personal expenses or to repay other investors. 

As reported Feb. 9 by Times Union.com, bank records show that Bass allegedly used $169,858 of investors’ deposits to finance the purchase of his upscale home in Menands, and that at least $700,000 of investors’ money was disbursed to Bass.  Another $550,000 of investors’ deposits was used for payroll expenses at Swiss Capital Harbor, including $200,000 in gross pay to Bass and at least $50,000 to his family members. 

The complaint also says that more than $1.25 million of investors’ deposits was used to repay investors who ultimately demanded to get their money back or income from their investments, which is indicative of a Ponzi scheme.

According to the Times Union.com article, several people who were solicited to invest money with Bass and Swiss Capital Harbor had previously warned state and local authorities more than two years ago that his company was “suspicious” and appeared to be inflating the rate of its returns to investors. 

Bass’ offices, as well as his Park Hill Lane home, were raided last August by U.S. Custom agents. 

Some investors now say they have lost their entire life savings because of Bass’ alleged scheme.

Securities America has a growing public relations problem. Last month, the broker/dealer was charged by Massachusetts regulators for allegedly failing to reveal key information to investors about high-risk notes issued by Medical Capital Holdings. Now, some of Securities America’s top producers are being sued by investors who say they were ill-informed about the risks of the Medical Capital deals that some Securities America advisers touted.

As reported Feb. 7 by Investment News, William Glubiak was named in December in a $7.7 million complaint from about 24 households of investors who purchased investments in Medical Capital Holdings.

Another leading Securities America adviser facing litigation connected to Medical Capital sales is Paula Dorion-Gray. In November, Dorion-Gray was named in a $254,000 complaint that alleges she recommended alternative investments in Medical Capital and another private placement, Provident Royalties LLC.

As for Securities America, it maintains its innocence.

“The Medical Capital situation is highly unfortunate for investors, advisers and broker-dealers alike, all of whom were intentionally defrauded by the principals at Medical Capital,” Securities America spokeswoman Janine Wertheim said in the Investment News article.

“Securities America performed extensive, industry-standard due diligence of Medical Capital, and every person that purchased Medical Capital through SA was an accredited investor, according to their financial suitability documents, and attested to that as well as to their understanding of the risks . . . We plan to vigorously defend our firm and our advisers that sold Medical Capital,” she said.

As investigations continue into the business dealings of Tim Durham and Fair Finance, a motion has been filed on behalf of some Fair Finance investors to appoint a receiver in the case. The motion was filed Feb. 4 by the law firms of Maddox Hargett & Caruso and David P. Meyer and Associates.

“The remaining Fair Finance assets are in imminent danger of being siphoned away by [Tim] Durham and [Jim] Cochran now that their Ponzi scheme has been exposed,” said David Meyer of David P. Meyer and Associates, in a Feb. 4 article in the Indianapolis Business Journal.

In December, Meyer’s law firm, along with the law firm of Maddox Hargett & Caruso, filed a class-action lawsuit on behalf of investors who purchased $200 million in unsecured investment certificates from Akron, Ohio-based Fair Finance. Fair Finance is owned by Durham and Jim Cochran.

Following the November FBI raids on Fair Finance, investors have grown increasingly fearful that the company’s owners may be spending what remains of the company’s finances. The Akron offices of Fair Finance have been closed since the FBI raids, with no word from Durham on when or if his company will ever repay investors.

In December, Ohio Congressman John Boccieri called for an asset freeze on Fair Finance and its owners. He reiterated that plea in late January at a town hall meeting held in Ohio. As reported Jan. 27 by the IBJ, Boccieri was seeking the asset freeze after learning Fair Finance co-owner Jim Cochran had posted an ad on Craigslist for an estate sale at his $3.5 million Naples, Florida, residence. According to the article, the sale went as planned, with Cochran selling off everything from Bentley and Porsche automobiles to a 28-foot boat and a large potted plant.

The Feb. 4 motion for a receiver was filed in Summit County, Ohio. It asks that the receiver take control of Fair Finance and its parent company, Fair Holdings.

Investments in Medical Capital Holdings have resulted in millions of dollars in losses for investors across the country and, in turn, ignited a rash of lawsuits and arbitration claims. The focus of investors’ complaints is on the broker/dealers that sold the investments – known as Medical Capital Notes – and the information they allegedly kept hidden.

Securities America is one of the broker/dealers facing legal action in connection to Medical Capital Holdings. Massachusetts regulators sued the Omaha-based company on Jan. 26, claiming it misled investors about the risks involved in the Medical Capital Notes and the financial health of the issuer, Medical Capital Holdings. According to the complaint, 400 Securities America advisers allegedly sold $700 million of the private placements, half of which are now in default.

One of the advisers is William Glubiak, who was named in a December 2009 complaint involving Medical Capital Holdings. The suit alleges causes of action as unsuitability, misrepresentation and omission of material facts, according to records with the Financial Industry Regulatory Authority.

Paula Dorion-Gray is another adviser for Securities America. She also is facing a lawsuit over private placement deals gone wrong. As reported Feb. 3 by Investment News, Dorion-Gray was named in a $254,000 complaint in November that accuses her of recommending alternative investments in Medical Capital and another private placement, Provident Royalties LLC.

Medical Capital Holdings and Provident Royalties were both charged with fraud this past summer by the Securities and Exchange Commission (SEC).

If you have a story to tell involving Medical Capital Holdings, Securities America and/or Provident Royalties, please contact a member of our securities fraud team.