California Securities Fraud Lawyer Blog

As repeatedly reported here in the California Securities Fraud Lawyer Blog, we have seen an exponential growth in investor complaints involving the sale of private placements. For those of you unacquainted with the term "private placement," click here.

In a nutshell, private placements are illiquid non-publicly traded investments that are exempt from registration requirements under the Securities Exchange Act. For this reason, only wealthy and sophisticated investors, referred to as "accredited investors," are allowed to invest in them. In order to qualify as an accredited investor, an individual must have a net worth of $1 million or more. However, this does not mean that it is fair game for stockbrokers and investment advisors to sell private placements to anyone with a paper net worth of $1 million. See related blog posting: Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule.

In an effort to protect smaller investors whose only significant asset is their home, the Securities and Exchange Commission ("SEC") recently took steps to limit Regulation D of the Securities Exchange Act of 1933 to exclude an investor's primary residence from the $1 million net worth calculation. Although the rule became effective February 27, 2012, the net worth prohibition actually took effect back in July 2010 when President Obama signed off on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. See blog post: Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

The Bottom Line

We recommend extreme caution to anyone contemplating an investment in a private placement that is limited to accredited investors. Don't be fooled by your financial professional's sales pitch. No matter how you slice it, private placements are illiquid and risky investments. As stated in the fine print: These investments are only appropriate if you are willing to lose your entire investment. Still not convinced? I've got a backlog of cases where clients wrongfully assumed that they could get out of their investment anytime they wanted. They are still waiting.

Related Blog Postings:

• Investor Sues Ameritas Over Recommendation to Use Real Estate Loans to Invest in Private Placements


• FBI Reports 105% Increase in High Yield Investment Fraud Investigations


• IMH Secured Loan Fund | IMH Financial Corporation Lawsuit Information

Today, the Financial Industry Regulatory Authority (FINRA) announced that Wells Fargo Investments, LLC was fined $2 million for making unsuitable investments in connection with the sale of reverse convertible notes and for failing to provide required sales charge discounts on Unit Investments Trust (UIT) transactions. FINRA also took the unusual step of requiring Wells Fargo to pay restitution to customers who did not receive UIT discounts and to those who were placed in unsuitable reverse convertibles. More often than not, FINRA will levy a fine on the brokerage firm and leave investors to fend for themselves and try to recoup their losses through FINRA's securities arbitration process.

What are Reverse Convertible Securities?

Reverse convertibles are short-term investments that are tied to an underlying stock or bond. When the security matures, the investor will receive either 100% of the original investment or a predetermined number of shares. When investing in reverse convertibles, investors risk losing a significant portion of their investment if the value of the underlying stock or bond falls below a certain level at maturity. For example, in a reverse convertible bond fund, an investor may be forced to redeem their bonds at a decreased value.

Wells Fargo's Failure to Review Suitability of Reverse Convertible Transactions

FINRA found that Wells Fargo, through one broker, had recommended hundreds of unsuitable reverse convertible transactions. Of the 21 accounts that were found to have unsuitable reverse convertibles, fifteen of those belonged to elderly customers who were over 80 years old. These customers were exposed to risk inconsistent with their investment objectives that resulted in an overconcentration of reverse convertibles in their accounts.

Wells Fargo's Failure to Provide Eligible Customers with UIT Discounts

UITs offer discounts on purchases that exceed certain "breakpoints" or involve proceeds from another UIT during the initial offering period. FINRA found that Wells Fargo failed to provide eligible customers with "breakpoint" and "rollover and exchange" discounts due to the firm's lack of systems for review to ensure that UIT customers received the proper discount.

As noted in a previous blog posting, ALF is pursuing an arbitration claim against Ameritas Investment Corporation on behalf of an investor who borrowed funds to invest in the IMH Secured Loan Fund (now known as IMH Financial Corporation). In an unusual move, Ameritas responded by filing a cross-claim against the broker who sold the investment seeking "contractual and/or common law contribution and/or indemnity" on the basis that any harm or damage suffered was the result of acts or omissions of the broker. It is believed that the broker in question was, at the time, acting in the capacity of an agent or employee of David White & Associates based in San Ramon, California.

As a result of these developments, ALF is stepping up their investigation into this matter and is reaching out to other IMH investors who purchased through brokers employed or affiliated with Ameritas Investment Corporation and/or David White & Associates. ALF is also interested in speaking with current or former brokers employed or affiliated with Ameritas and/or David White & Associates.

Related Blog Posts:

• Here come the lawyers! (Nov. 7, 2011)


• IMH Financial Corporation's CEO Shane Albers unloads stock at a premium of $8.02 per share (Aug. 15, 2011)


• IMH's Financial Troubles Reported in Wall Street Journal (Jan. 19, 2011)


• All IMH Posts

Many investors do not realize that the terms Financial Analyst, Financial Advisor, Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are simply generic terms or job titles commonly used by stockbrokers and investment advisors. Equally as troubling are the use of titles or designations, such as "Senior Specialist," that are designed to gain the trust and confidence of elderly investors and retirees. The use of such designations is often little more than a marketing tool to attract business from the rapidly growing pool of investors who are 65 years or older.

Recently, our law firm filed a securities arbitration claim against a financial advisor who touted his qualification as a "Certified Senior Advisor" (CSA) and assured a group of elderly women who attended a free lunch seminar that his firm "worked exclusively with senior investors to protect their financial assets and standard of living." Based on these assurances, they believed that their financial advisor had their best interests in mind when he recommended that they invest the bulk of their assets in a risky high-yield investment.

Our clients are now seeking damages through arbitration before the Financial Industry Regulatory Authority (FINRA). The organization that granted the broker his CSA designation, cannot provide any direct assistance to these investors. Although the Society of Certified Senior Advisors (SCSA) has a mechanism for disciplining CSA designees who fail to adhere to their Code of Professional Responsibility, the SCSA's primary method of discipline is to simply revoke the financial advisor's CSA designation.

FINRA Oversight of Senior Designations

In November 2011, FINRA published a Regulatory Notice urging brokers to pay closer attention to the use of senior designations that imply an expertise or specialty in advising senior investors. According to a survey conducted by FINRA, 68% of firms allow the use of senior designations by their representatives. Of those firms that permit the use of senior designations, 66% require the approval and verification of the credentials, 23% require approval but do not verify credentials, and 11% do not require approval of the certification and do not verify the credentials.

There are a variety of senior designations in use by brokers including: Certified Senior Advisor (CSA), Certified Senior Consultant (CSC), Chartered Senior Financial Planner (CSFP), Chartered Advisor for Senior Living (CASL), Certified Retirement Planning Counselor (CRPC), Accredited Retirement Plan Consultant (ARPC) and Certified Retirement Services Professional (CRSP). FINRA is most concerned with those titles that have little, if any, meaningful qualification standards. California law also precludes broker-dealers and investment advsiors from using senior-specific credentials in the offer or sale of securities where such credentials are non-existent or where the organization does not have reasonable standards for ensuring competency of certified individuals. According to FINRA: "[i]nvestors are unlikely to differentiate between designations that represent an enhanced level of proficiency in dealing with financial matters relevant to senior investors versus a designation that is simply a marketing tool." A brokerage firm that allows the use of any title that conveys expertise in advising for retirement or senior investors where such a specialty does not exist could be in violation of industry rules and also the anti-fraud provisions of the federal securities laws and FINRA rules.

There's No Such Thing as a Free Lunch

A common tactic used by bogus "senior specialists" is the hard to resist free-meal seminar. Elderly investors should be particularly wary of salesmen who are pushing variable or indexed annuities. It is particularly important to make sure that the sales person is properly licensed. Before investing, all investors, especially seniors, should check out a broker's disciplinary history using FINRA's BrokerCheck service.

A number of our California securities law firm clients who suffered investment losses in the IMH Secured Loan Fund (now known as IMH Financial Corporation) have reported receiving a mass-mailed solicitation letter from a law firm located in Florida. California investors should think twice before hiring an out of state law firm to handle their case. For more information, see related blog posting: Why having a California licensed securities arbitration lawyer is so important

More IMH Blog Posts:

• IMH Financial Corporation's CEO Shane Albers unloads stock at a premium of $8.02 per share


• Investor Sues Ameritas Over Recommendation to Use Real Estate Loans to Invest in Private Placements


• Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

Today, the Consumer Financial Protection Bureau named Hubert H. Humphrey III to direct the newly created Office of Older Americans, which was established to focus on elder financial abuse - especially in connection with reverse mortgages and retiree bankruptcies. Based on the cases that have come through our securities law firm, other areas that need immediate attention include: high yield investments and variable annuities.

In a statement by Raj Date, a senior Treasury advisor, he stated that seniors are targeted by fraudulent practices and, according to the CFPB, are losing almost $3 billion a year from such abuses. Such poor investment advice is an important issue for seniors who often have more assets than younger investors and are in a position where they have to make complex financial decisions. A representative of the AARP explained that older Americans are being talked into investing in annuities using money from a reverse mortgage - a practice that she says is a very bad investment decision.

One concerning practice is the growing prevalence of financial advisers with a so-called "senior certification." Humphrey intends to work to make sure that financial advisors do not mislead older investors by telling them that they specialize in seniors.

Another questionable investment strategy is the use of reverse mortgages, which are comprised of hard to understand terms and high fees. Humphrey intends to address the issue of reverse mortgages along with other scams and fraudulent sweepstakes directed at senior investors.

According to Humphrey's blog post regarding his new position, the Office of Older Americans will give seniors the tools they need to detect financial scams and make informed financial choices.

Barr M. Rosenberg, co-founder and chairman of Orinda, California, investment firm AXA Rosenberg agreed to pay $2.5 million to settle securities fraud charges that involved hiding a computer error that caused $217 million in losses to his clients. As part of the settlement, Rosenberg will also be banned from the securities industry His company, AXA Rosenberg, which is owned by french company AXA SA, has also agreed to pay $242 million to settle civil charges.

The following information regarding broker misconduct and disciplinary actions taken against California stockbrokers was released by the Financial Industry Regulatory Authority (FINRA) in May, June, July and August 2011:

Midas Securities, LLC, in Anaheim, CA, was fined $80,000 in connection with a finding by FINRA that they failed to reasonably supervise registered representatives in the sale of unregistered securities.

Brecek & Young Advisors, Inc., in Folsom, CA, was censured and fined $125,000 in connection with a failure maintain adequate supervisory procedures and a failure to supervise its representatives in complying with applicable securities laws with respect to variable annuities.

Ronald Lee Gershon, with Oppenheimer & Co. Inc in Los Angeles, CA, was suspended from association with any FINRA member for 10 days and fined $5,684.75 in connection with the recommendation and sale of unsuitable securities to a customer of Oppenheimer, including auction rate securities and preferred securities that were below investment grade.

Ernesto Zuniga Gomez, formerly with Merrill Lynch, Pierce, Fenner & Smith in San Diego, CA, was barred from association with any FINRA member in connection with the use of verbal authorization forms that falsely stated customer approval for the transfer of funds from their accounts to other customers' accounts.

Jerrold Robin Sexton, formerly with Capital Growth Resources in El Cajon, CA, was barred from association with any FINRA member in connection with findings that Sexton received checks from a customer to be invested in a company he represented as safe. The customer did not know that the company was Sexton's company and that Sexton would use the funds for personal and business expenses.

Mark Andrew Sibert, formerly with Uvest Financial Services Group, Inc. in San Diego, CA, was barred from association with any FINRA member in connection with findings that he engaged in private securities transactions without approval from Uvest and solicited his firm's customers to invest in his company, which was supposed to raise money to invest in real estate and gold-mining.

Ace Diversified Capital, Inc. and chief compliance officer Lynnwood Jen in San Gabriel, CA, were jointly fined $25,000 in connection with a failure maintain adequate supervisory procedures for complying with applicable securities laws with respect to private placements. The findings state that the firm sold interest in Medical Capital Holdings, Inc. without a permit to engage in the sale of private placements.

Carla Wendy Cooper, formerly with Crowell, Weedon & Co. in Los Angeles, CA, was barred from association with any FINRA member in connection with forging a LOA for a customer to authorize the transfer of funds into the account of Cooper's relatives' account.

Priscilla Sabado, formerly with AXA Advisors in Irvine, CA, was barred from association with any FINRA member in connection with findings that she sold investments in Texas oil and gas projects without consent of her member firm.

Our securities law firm is currently pursuing a securities arbitration case on behalf of California investors who suffered losses in the Highland Floating Rate Advantage Fund [Symbols: XSFRX (Class A); XLACX (Class C); XLAZX (Class Z).] These funds are also referred to as "leveraged" loans because the borrowers typically have a significant level of debt relative to equity. The Highland Floating Rate Advantage Fund's share price declined 8% in 2007 and more than 50% in 2008.

Unlike their peers, the Highland Floating Rate funds have continued to disappoint investors. Compared to the performance of other loan participation funds, the Highland Floating Rate Funds are in a class by themselves due to their five-year history of negative returns. In June 2011, the Highland Floating Rate Advantage Fund and the Highland Floating Rate Fund [Symbol: XLFAX] were merged into the Highland Floating Rate Opportunities Fund. Below are the 5-year return results for the Highland Floating Rate Opportunities Funds:

Highland Floating Rate Opportunities Fund 5 Year Return*

Class C Shares [HFRCX] -20.41%
Class B Shares [HFRBX] -19.80%
Class A Shares [HFRAX] -18.39%
Class Z Shares [HFRZX] -16.96%

*Source: lipperleaders.com

Highland's sales literature claims that its floating rate funds seek "capital preservation and the management of credit risk while utilizing leverage to increase yield potential." Investors were attracted to the Highland Floating Rate Funds because they supposedly offered a higher return without adding any significant risk. One of the main reasons the Highland Floating Rate funds performed so poorly is that they invested heavily in loans that were rated as below investment grade or "junk."

Securities Regulators Urge Investors to Use Caution when Investing in Floating Rate Funds

The Financial Industry Regulatory Authority (FINRA) recently issued an "investor alert" to warn investors who may be attracted to the high return promised by floating rate funds. In promoting these investments, FINRA expressed concern about brokers who downplay the potential risks while emphasizing the higher returns.

According to FINRA, floating rate funds have become increasingly popular since 2008 - having grown from $15 billion to $60 billion as of April 2011. These bank-loan funds are highly coveted during periods where investors are concerned with spiked interest rates. Although the funds are low in interest-rate risk, they carry a much higher credit risk. They often extend their portfolios to lower quality borrowers who typically have a higher rate of default than investment-grade bonds. Floating rate funds and other risky high-yield investments should play a very minor role in any investment portfolio--if at all.

IMH Secured Loan Fund / IMH Financial Corporation Update

IMH just disclosed in the company's latest filing with the Securities Exchange Commision (SEC), that former CEO Shane Albers transferred 313,484 shares of stock to NW Capital as part of his separation agreement with IMH at a price of $8.02 per share. According to the SEC filing, NW Capital paid Albers $1.2 million over and above the estimated fair value for the IMH stock. By my calculation, this means the "fair value" given to Albers' IMH stock was approximately $4.25 per share. IMH investors who purchased ownership units for $10,000/each, paid the equivalent of $45.38 per share--thus, according to these latest figures, IMH has declined by more than 90%.

There are several lawsuits pending against IMH and the original principals of the company, including a class action lawsuit. In addition, numerous investors have filed lawsuits and securities arbitration claims against their stockbrokers or financial advisors who recommended IMH. In fact, our securities law firm is currently representing a group of investors who filed an arbitration claim against Scottsdale, Arizona, financial advisor Randolf Albers who recommended and sold IMH to his clients through Albers Financial Group and Sunset Financial Services, Inc. Randy Albers is the father of IMH's former CEO Shane Albers.

Click here for more blog postings about IMH Financial Corporation (formerly known as the IMH Secured Loan Fund, LLC)

Citigroup Global Markets, Inc has been fined $500,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise and detect securities fraud committed by former Smith Barney sales assistant Tamara Moon who worked in the firm's Palo Alto, California, branch office. (Smith Barney is a division of Citigroup Global Markets, Inc. and is now doing business as part of Morgan Stanley Smith Barney, LLC.) As reported in a previous blog posting, Tamara Moon was barred from the industry back in 2009 for bilking as much as $750,000 from elderly and vulnerable customers, including her own father, by taking advantage of Smith Barney's lax supervision. According to FINRA, the firm failed to detect or investigate numerous "red flags" that should have alerted them to Moon's fraud. Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement noted that "Citigroup had reason to know what she was doing and could have stopped her."

Although the firm agreed to reimburse customers and pay a $500,000 fine, the firm consented to the entry of FINRA's findings without having to admit or deny the charges. The practice of paying a substantial fine without having to admit any findings of wrongdoing is a standard procedure in FINRA settlements.

Once again, breach of fiduciary duty ranks as the most frequently alleged customer claim according to our mid-year review of securities arbitration cased filed with the Financial Industry Regulatory Authority ("FINRA"). Other commonly alleged claims include negligence and misrepresentation.

So far this year, customers have prevailed and been awarded damages in 48% of the cases that went to hearing. This is the highest win ratio reported by FINRA over last five years. The lowest ratio of winning cases occurred in 2007 when only 37% of arbitration cases received any sort of damage award at all. For more information about arbitration awards, see our analysis of San Francisco arbitration awards for the year 2009.

What is a Stockbroker's Fiduciary Responsibility?

The dictionary definition of the word fiduciary simply states: "involving confidence or trust." A fiduciary relationship can arise whenever someone places their trust and confidence in another. Investment advisors have always been considered fiduciaries under federal law. Stockbrokers, on the other hand, are generally not subject to a fiduciary duty under the federal securities laws; however, courts have found that stockbrokers have a fiduciary duty under certain circumstances. Although the laws of each state differ on this issue, stockbrokers are considered fiduciaries in California and many other states. The leading California case on a stockbroker's fiduciary duty is Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App. 2d 690, 69 Cal. Rptr. 222 (1968), which held that the stockbroker-customer relationship is fiduciary in nature and "imposes on the broker, the duty of acting in the highest good faith." Furthermore, if the stockbroker has discretionary control over the customer's account, the courts will impose a more heightened fiduciary duty.

A breach of fiduciary duty can arise whenever a broker places his or her own interests ahead of their customer's. Claims for breach of fiduciary duty usually overlap with other causes of action such as negligence, misrepresentation, unsuitability, overconcentration, and churning.

Adopting a Uniform Fiduciary Duty Standard for Brokers and Advisors

The different fiduciary standards that apply to stockbrokers and investment advisors has been under attack lately. According to a study by the Securities and Exchange Comission ("SEC"), many investors do not understand the distinction between a stockbroker and an investment advisor. Under a mandate from the Dodd-Frank Act, the SEC recommended the adoption of a uniform fiduciary duty applicable to both stockbrokers and registered investment advisors ("RIAs"). The uniform standard proposed by the SEC, states:

The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

Although the SEC stated that it would formally propose a new standard by July 2011, adoption has been delayed leaving many to doubt whether a "uniform" fiduciary duty for all financial professionals will become a reality any time soon.

In addition to a potential securities fraud investigation by the Securities and Exchange Commssion (SEC), Life Partners Holdings has been overrun with bad news over the past 30 days. Life Partners' share price dropped significantly when allegations regarding inaccurate life expectancies began circulating in December.

For more bad news, see summary below:

• May 16, 2011: Life Partners requests a 15-day extension for filing its 2011 Annual Report after receiving a Wells Notice from the SEC on May 9, 2011, regarding potential securities fraud violations. Click here for related blog posting.
• May 31, 2011: Life Partners announces that it is experiencing delays in the filing of its Annual Report because of an estimated $10.9 million impairment charge and the need for a reexamination by their independent auditor, Ernst & Young.
• June 2, 2011: Life Partners chief executive proclaimed that the delay in filing the Annual Report is due to the SEC's interference and their attempt to "unnerve the Auditors."
• June 3, 2011: Ernst & Young resigns as Life Partners' auditor stating that Life Partners should revise its revenue-recognition policy. Nasdaq notifies Life Partners that it is out of compliance with Nasdaq listing rules due to its failure to file its Annual Report.
• June 17, 2011: Life Partners' previous auditor, Eide Bailly declares that the audit for 2009 "may have material misstatements related to improper revenue recognition" and could no longer be relied upon.

Click here for more blog postings about about life settlements.

Steven Kobayashi, a former UBS Financial Services Advisor in Walnut Creek, California, has agreed to serve over 5 years in prison for securities fraud. Kobayashi was charged with forging customer signatures and misappropriating over $5.4 million in client funds. As previously posted in this blog, Kobayashi settled a Securities and Exchange Commission lawsuit back in March 2011 for defrauding investors who invested in Life Settlement Partners LLC. Click here for related blog posting.

Click here for answers to frequently asked questions about the SEC's new securities fraud whistleblower program. The new rules will not become effective until 60 days after they've been published in the Federal Register.