California Securities Fraud Lawyer Blog

San Diego-based First Allied Securities has agreed to pay $1.95 million in a settlement with the Securities and Exchange Commission (SEC) relating to the firm's failure to supervise the activities of former broker Harold Jaschke who was the subject of a related SEC action for churning, conducting unauthorized trades and giving unsuitable recommendations.

According to the SEC, Jaschke had engaged in a high-risk short-term treasury bond trading strategy for two municipalities who were his clients, the City of Kissimmee, Florida and the Tohopekaliga Water Authority. Jaschke reaped commissions of more than $14 million while trading for the two municipalities who had combined unrealized losses of approximately $60 million. When Jaschke's unusual trading activity raised red flags and generated an exception report, First Allied did not follow its customary practice of sending the customer a "negative response letter" to notify them of the suspicious activity. As its name implies, a negative response letter does not require a response from the customer unless they want to question the activity. After a nine-month delay, the firm became concerned enough that it ultimately decided to send a "positive response letter," which requires a written confirmation from the customer. However, according to the SEC's order, First Allied's letter failed to adequately alert the customers about the suspicious activity and falsely stated that the letter was being sent as part of First Allied's "annual review" process. No one at the firm, other than Jaschke, spoke with the customers about the situation. The customers signed and returned the letter based on misinformation given to them by Jaschke.

First Allied terminated Harold Jaschke on August 13, 2008. The SEC's action against him is still pending.

Today, the Securities and Exchange Commission (SEC) filed a securities fraud lawsuit against Sean David Morton of Manhattan Beach, California, alleging that Morton falsely claimed he would use his psychic expertise to provide investment guidance. The SEC also alleged that Morton lied to investors about his investing track record.

The SEC's complaint includes a lengthy and detailed analysis showing that Morton's predictions over the years have proven to be wildly inaccurate. Below are a few examples of the false claims that the SEC has accused Morton of making:

• In his July 20,2006, newsletter Morton wrote: "I have called ALL the highs and lows of the market, giving EXACT DATES for rises and crashes over the last 14 years."
• During a November 21,2001, radio broadcast, Morton said: "I'll give you the exact date...April 2002...[B]etween April and June of 2002 [the DJIA] is going to be the steady rise in the market. That's where it's going to really pick up and pick up stability. By December of next year,...it'll be back up into the realm [of] high 11,000, 12,000 or so..." In reality, the DJIA ended the year at 8,431.
• Morton's Website touts the "ASTONISHING PSYCHIC HITS" he has made in predicting "The EXACT dates for prices of GOLD" from 2004 to 2007" and that he "predicted exact dates for the post 90's decline of the [DJIA] and NASDAQ,and has given the exact levels--and timing--of their subsequent rise and fall."

According to a UPI news report, Morton claims that he predicted the stock market crash but his trader refused to act on his advice saying it would be irresponsible. Morton also said that all the money was gone and the he was filing for personal bankruptcy. As of today, his website www.delphiassociates.org is still active.

In my California-based securities law practice, most of my clients that own a home qualify as "accredited investors" within the meaning of Regulation D which exempts private placements from federal securities registration requirements. Rule 501 of the Securities Act of 1933 defines an accredited investor as any person with a net worth (or joint net worth with a spouse) in excess of $1,000,000 at the time of purchase. According to an SEC Interpretive Release (See Question 255.13), when calculating an investor's net worth, their residence is included.

Financial advisors or stockbrokers who sell private placements are subject to the rules and standards promulgated by the Financial Industry Regulatory Authority (FINRA). According to FINRA, stockbrokers who act as selling agents for private placements are required to conduct a due diligence investigation of the offering so that they understand the nature of the investment and its risks. Also, before recommending a private placement to a particular customer, the stockbroker must perform a suitability analysis by examining the customer's overall financial situation and investment objectives. Because a home can represent an investor's largest asset, net worth alone should never be used to determine whether an investment is suitable. A customer's status as an accredited investor does not release a stockbroker from the suitability requirements.

Recently, there has been a surge in investor complaints involving private placements that were sold by broker-dealers who were acting as selling agents. Private placements that are creating a lot of investor complaints include: Medical Capital, IMH Secured Loan Fund, Provident Asset Management, Striker Petroleum and DBSI. Some of the broker dealers who actively sold these private placements are Securities America, QA3 Financial, National Securities, CapWest, Independent Financial Group, just to name a few. Please contact us if you have any questions about unsuitable private placements.

On February 24, 2010, a federal judge granted a motion to dismiss filed by Sidney Field and David Lampariello in the securities fraud lawsuit filed by the Securities Exchange Commission ("SEC"), SEC v. Medical Capital Holdings, Inc., et al., before the U.S. District Court for the Central District of California. Field was the CEO of Medical Capital Corporation and Lampariello was the company's COO. The motion to dismiss was granted with leave to amend. This means that the SEC has the opportunity to file an amended complaint in the next 14 days in order to clarify certain allegations regarding how the private placement memorandum and other offering documents were distributed to investors.

As noted in previous blog postings, Medical Capital Notes were sold to investors through a nationwide network of broker-dealers who acted as selling agents for the company. Many investors have filed securities arbitration claims against broker-dealers alleging fraud, misrepresentation and unsuitability. Brokerage firms that have been targeted by Medical Capital investors include Securities America, QA3 Financial, National Securities, CapWest and others. Click here for more Medical Capital blog postings.

Today, the Securities and Exchange Commission (SEC) filed a securities fraud lawsuit in Sacramento federal court charging two Sacramento-area men with the misappropriating approximately $10 million from over 100 investors who were falsely promised that the funds were safe, liquid, high-yield investments that were secured by deeds of trust. Charged in the complaint were Lawrence "Lee" Loomis, John Hagener, Loomis Wealth Solutions, LLC ("LWS"), and Lismar Financial Services, LLC.

The SEC has requested monetary penalties, disgorgement of ill-gotten gains and injunctive relief. Click here to download the SEC's complaint.

Yesterday's article in Investment News confirms my opinion about the disadvantages of pursuing mass-arbitration claims before the Financial Industry Regulatory Authority (FINRA), which I try to avoid in my California securities law practice. On the heals of the Medical Capital class action lawsuits, law firms have begun filing mass-arbitration claims against broker-dealers such as Securities America and Capital Financial Services, often grouping as many as 15 individual Medical Capital investors into a single arbitration case in what almost amounts to a "mini-class action." In response, broker-dealers have vowed to vigorously defend these claims.

Mass-arbitrations can be very profitable for law firms hoping to earn large contingent fees by aggregating as many clients as possible into a single arbitration. Unfortunately, the best interest of the individual investor/client may suffer as a result. The challenge of taking a mass-arbitration claim to hearing and proving that each client is independently entitled to an award can be great. As part of their defense strategy, broker-dealers are filing motions to sever these claims into separate individual arbitrations which will undoubtedly delay and disrupt the entire process. When clients start getting separated from the herd, will mass-arbitration attorneys still be interested in representing those clients who had marginal claims to begin with? Undertaking a mass-arbitration raises a number of ethical issues for attorneys attempting to jointly represent a diverse group of unrelated clients who may have varying levels of commitment to pursue their claims. A client recently showed me a proposed contingent fee agreement given to them by a mass-arbitration law firm that would essentially force them to accept a settlement if 60% of the other clients agreed to settle.

Combining customer claims into a single arbitration often makes sense from a practical and economic standpoint, such as when the clients are related or are customers of the same financial advisor. However, individuals with strong cases may be better off going it alone rather than joining a mass-arbitration and being lumped together with other investors who may have weaker facts. Before deciding to become part of a mass-arbitration claim, clients should explore their options with a great deal of care.

Related Blog Post:

Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

[For California Residents] Why Having a California Licensed Securities Arbitration Lawyer is So Important

Today's blog posting examines another recent trend that I am seeing both at my California securities law practice and at the University of San Francisco Investor Justice Clinic where I am an adjunct law professor. In the past few weeks, there has been a sudden increase in complaints from investors who were advised to replace their old variable annuity contracts with new ones and, to make matters worse, their financial advisors (i.e., stock broker and/or investment advisor) failed to exercise due diligence by making sure that the transaction qualified as a tax-free exchange pursuant to Section 1035 of the Internal Revenue Code. In a "1035 exchange," a variable annuity owner replaces their current annuity contract with a new one without paying any tax on the income and investment gains attributable to the old variable annuity. However, if an investor simply surrenders their old annuity in return for cash and uses the cash to purchase a new annuity, the ability to perform a 1035 exchange can be lost and the investor will have to pay taxes on the surrender. Any financial professional who fails to facilitate a 1035 exchange of a customer's variable annuity opens themselves up to a securities arbitration claim seeking damages for the customer's fees, costs and taxes incurred as a result.

Another problem that often arises when exchanging or replacing a variable annuity is the potential for surrender charges. Customers are subject to charges whenever an annuity is surrendered before expiration of the applicable surrender period, which typically runs for 6 to 8 years from the date of purchase. Surrender charges also reduce the amount that an investor will have available to reinvest in a new annuity, thereby lowering the investor's potential return. Also, when a new replacement annuity is purchased, the investor's funds will be subject to a new surrender period, which means that their funds will be locked up for an additional 6-8 years.

Variable Annuities Are Inappropriate for Seniors

The high fees, surrender charges and market risk associated with variable annuities make them a poor investment choice for many elderly investors or seniors over the age of 65. If an investor is 65 years or older, under California law, any attempted annuity replacement is considered unnecessary unless the selling agent can demonstrate that the replacement conferred a "substantial benefit" to the customer.

Increased Regulation and Oversight of Variable Annuities

Recently, the Financial Industry Regulatory Authority (FINRA) adopted new rules governing broker recommendations to purchase and exchange of variable annuities. The rules also require brokerage firms to implement supervisory procedures to detect and prevent 'inappropriate exchanges" of variable annuities. Variable annuities are now one of the handful of securities products that have their own custom suitability requirements, along with oil and gas partnerships and naked options.

This is the second update from the Alcala Law Firm's investigation on behalf of IMH Secured Loan Fund, LLC investors. On February 16, 2010, IMH Financial Corporation filed a second amended registration statement (Form S-4/A) with the Securities and Exchange Commission (SEC) as part of their ongoing effort to restructure the company with a view towards ultimately filing for an initial public offering (IPO). IMH's filing of a Form S-4/A registration statement with the SEC is not an actual IPO. To commence an IPO, IMH will need to go through a separate registration process with the filing of a Form S-1 and a prospectus. Once IMH's Form S-4/A filing is approved by the SEC, IMH will solicit investor approval of the restructuring. Investors are urged to carefully read the registration statement, partcularly the "Risk Factors" section.

Was IMH Secured Loan Fund a Suitable Investment for You?

Stockbrokers and investment advisors who acted as selling agents for IMH may be liable to their customers if they misled them into believing that IMH was a conservative fixed-income investment; and (2) the recommendation to invest in IMH was unsuitable for that particular customer. Although each situation is different, some of the factors that would make a recommendation to invest in IMH unsuitable include: (a) IMH was a solicited investment recommended by a stockbroker or investment advisor; (b) the financial condition of IMH and the risks of investing were misrepresented; (c) the customer is an unsophisticated investor; (d) the customer had a conservative or moderately conservative investment objective and a low risk tolerance; (e) the investment comprised a large percentage of the customer's portfolio or their entire portfolio was concentrated in unsuitable and illiquid investments recommended by their financial professional; and (f) the customer is unable to bear the financial risks.

Click here for all IMH Secured Loan Fund blog postings.

The following information regarding broker misconduct and disciplinary activities taken against California stockbrokers was released by the Financial Industry Regulatory Authority (FINRA) in January 2010:

Robert Lee Mandeville, formerly with Securian Financial Services in Newport Beach, California, and Morgan Stanley in Laguna Woods, California, was fined $35,000 and suspended from association with any FINRA member in any capacity for five months for allegedly engaging in unauthorized trades in customer accounts and making unsuitable trades in customer accounts.

Kale Edgar Evans, formerly with First Allied Securities in San Diego, California, and TD Waterhouse (now known as TD Ameritrade) was barred from association with any FINRA member in any capacity based on findings that Evans engaged in unsuitable and excessive trading in a young customer's account, misappropriated approximately $127,450 from the customer's savings account for his own purposes and gave the customer a $35,000 check as a settlement without his firm's knowledge or consent.

On February 10, 2010, the court-appointed receiver in the Medical Capital fraud case, Thomas Seaman, filed his seventh status report in the matter of Securities and Exchange Commission vs. for Medical Capital Holdings, Inc. et al. that is pending in the U.S. District Court for the Central District of Northern California. As of January 31, 2010, the receivership has collected cash in the amount of $24,023,994.25 and disbursed funds in the amount of $5,602,179.15, leaving funds on hand in the amount of $17,306,596. The receiver plans to continue disposing of assets and raising funds for the benefit of investors; however, with investors owed approximately $1.079 billion, the $17,306,596 currently on hand still leaves investor's about $1.061 billion short.

There are additional legal remedies available to Medical Capital investors to recoup their losses, which can be pursued simultaneously with the court-appointed receiver's efforts, including class action lawsuits and arbitration before the Financial Industry Regulatory Authority (FINRA).

Related Blog Posts:

Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

Is Mass-Arbitration in the Client's Best Interest?

The following blog update is being provided in response to recent inquiries from blog readers seeking information regarding the ongoing investigation by the Alcala Law Firm on behalf of IMH Secured Loan Fund, LLC investors:

• On January 15, 2010, Investors Holdings Mortgages, Inc. filed an amended Form S-4 with the Securities Exchange Commission (SEC) seeking member approval to restructure the company into a newly formed Delaware corporation named IMH Financial Corporation with the hope that IMH may someday become a publicly traded company listed on the New York Stock Exchange (NYSE). Click here to download a copy of the amended Form S-4 that was filed on January 15, 2010.


• IMH's Form S-4 filing lists a toll-free number and website address established to allow members to vote on the proposed restructuring. However, as of the date of this blog posting, both the website and the toll-free number were unavailable. A recorded message for the "telephone proxy voting center" states that the campaign is not active.

The Alcala Law Firm's investigation is focused on potential misconduct committed by stockbrokers who sold the IMH Secured Loan Fund to unsuspecting investors, many of them retired. Stockbrokers registered with the Financial Industry Regulatory Authority (FINRA), have a fiduciary duty to exercise due diligence to determine whether such investments are suitable for their customers and to adequately disclose the risks associated with investing in speculative and highly illiquid private placements such as the IMH fund.

Please contact us if you have additional information regarding this matter.

The state of California will receive $779,795 as its share of a multi-state settlement with Nationwide Life Insurance Co. and Nationwide Life and Annuity Insurance Co. who agreed to pay a fine totaling $2.1 million due to the alleged unsuitable exchange or replacement of two variable annuities developed for and sold by financial advisory firm Waddell & Reed, known as the Waddell & Reed Advisors Select Plus Annuity and the Waddell & Reed Select Annuity. The regulators contend that Nationwide failed to exercise proper supervision and control over the sale and exchange of these variable annuities. Nationwide's settlement agreement was entered into with insurance regulators for California, Kansas, Missouri, Minnesota and Wisconsin.

As part of the settlement, customers from California, Kansas, Missouri, Minnesota and Wisconsin who replaced their United Investors Life Insurance Company annuity with a Waddell & Reed Select or Select Plus annuity between January 1, 2001, and August 31, 2002, will receive a notice advising them about their right to receive reimbursement of fees and charges incurred and other applicable remedies such as rescission and modification of their policies.

Click here to download a copy of the settlement agreement.

The Alcala Law Firm was recently contacted by several California investors who invested in the IMH Secured Loan Fund, LLC, a private placement managed by Scottsdale based Investors Mortgage Holdings, Inc. The Financial advisors who sold the IMH Secured Loan Fund to these investors also sold them other private placements, including Medical Capital and Provident Asset Management, two speculative investments that turned out to be ponzi schemes and are now the subject of numerous securities fraud lawsuits.

Before recommending any investment, particularly risky and speculative private placements, financial advisors have a fiduciary duty to adequately disclose the risks involved and also to exercise due diligence in determining whether such investments are suitable for the customer. The Alcala Law Firm is in the process of investigating the possibility of filing securities arbitration claims before the Financial Industry Regulatory Authority (FINRA) to recover investment losses related to these private placements.

On January 26, 2010, Securities America, the beleaguered brokerage firm that is already subject to a multitude of securities fraud lawsuits, including a pending class action in California, was charged by the State of Massachusetts with misleading investors in the sale of notes issued by companies owned by Medical Capital Holdings, Inc. The regulatory complaint alleges that Securities America ignored red flags and deliberately failed to disclose the risks involved when selling $697 million worth Medical Capital Notes to unsophisticated investors. According to the complaint, investors were told that the notes were secured and low risk when, in reality, the notes were "unregistered, speculative, high risk securities, which were draped in the mantle of safety."

Our securities law firm has been contacted by investors who purchased Medical Capital Notes from stockbrokers at Securities America, National Securities Corporation, CapWest, QA3 Financial and others. We are in the process of filing securities arbitration claims before the Financial Industry Regulatory Authority (FINRA) seeking to recover Medical Capital losses from these brokerage firms, pending further investigation.

Related Blog Posts:

Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

Is Mass-Arbitration in the Client's Best Interest?

For more blog posts, select a category below.

During my year-end review of securities arbitration award results for San Francisco, California, I made a conscious effort to limit my analysis to investor disputes involving stockbroker misconduct and breach of fidcuciary duty.

For 2009, there was a 43% increase in the number of securities arbitration cases filed with FINRA nationwide. Based on my analysis of the two-dozen or so cases that went all the way to hearing in San Francisco, I found that customers prevailed about 37.5% of the time. On a national basis, FINRA reports that investors won 45% of the 304 cases that went all the way to hearing. Are San Franciso Bay Area investors less likely to prevail in a FINRA arbitration hearing? I don't think so. When I look at the arbitration awards for San Francisco cases, I noticed the following factors that can lead to a poor result:

• Investors who went to the arbitration hearing alone without an attorney did very poorly. Out of 8 arbitration cases analyzed, only one self-represented investor was awarded anything at all--the grand sum of $792 on a claim $37,500.


• If only attorney-represented cases are considered, the percent of winners jumps from 37.5% to 53%. This confirms my belief that investors who have meritorious cases may have a better than average chance of winning.


• Attorney-represented investors that did win recovered approximately 79% of their claimed compensatory damages. The reliability of this figure is somewhat questionable, however, because the damage amounts claimed could have been overstated. Also, the recovery rate was somewhat skewed by a large 7-figure award to a single customer. These results, together with other award studies that I'm familiar with, underscore the fact that arbitrators can be fairly stingy in their awards. (More on the subject of arbitrators below).


• I was not surprised to see that certain arbitrators repeatedly found against customers. Because the arbitration rules give each side the limited ability to remove arbitrators from their case, a great deal of care and attention must be paid when selecting arbitrators. An unfortunate side effect of this system is that customers often end up with arbitrators who are "middle of the road" and have a tendency to "split the baby."

In summary, if you have a case that is truly meritorious, don't be discouraged. Rather than try to go it alone, retain an experienced securities attorney who can effectively pursue your claim and ensure that fair-minded arbitrators are appointed to your case.