February 2010 Archives

February 28, 2010

California Stockbroker Discipline Report for February 2010

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

Donald Dunakin, formerly with GunnAllen Financial and Delta Equity Services Corporation in El Dorado Hills, California, was barred from association with any FINRA member in any capacity for making unsuitable recommendations to customers who had to borrow money in order to purchase securities.

Jeffrey Allan Forrest, formerly with Associated Securities Corp. in Van Nuys, California, was was barred from association with any FINRA member in any capacity. Forrest was also permanently barred by the SEC along with his company Wealthwise, LLC of San Louis Obispo, California, for failing to disclose material conflicts of interest when recommending that his clients invest in a high-risk hedge fund that made undisclosed subprime investments.

Ramon Oller, formerly with Morgan Stanley & Co. of Laguna Woods, California, was fined $5,000 and suspended from association with any FINRA member in any capacity for six months for failing to disclose material facts, such as state income tax liens, on his securities registration form.

Max Safdie, a broker with Moors & Cabot in San Francisco, California, and formerly with Wedbush Morgan Securities was suspended from association with any FINRA member in any capacity for 30 business days for making misrepresentations to a third-party lending institution in order to assist a family member in obtaining a loan.

Louise M. Batchelor, formerly with Allstate Financial Services, San Diego, California, was permanently barred from association with any FINRA member in any capacity and was suspended by the California Department of Insurance because she was charged with six felony counts of theft and forgery.

John Anthony Marrone, a broker with Nexcore Capital, Inc. in San Diego, California, and Morgan Stanley & Co. in Santa Monica, California, was suspended from August 18, 2009 to December 10, 2009, for noncompliance with an award in an arbitration filed against him by Morgan Stanley.

February 26, 2010

Provident Royalties Bankruptcy Update: Investors Should Look Before They Leap

Thumbnail image for Thumbnail image for provident.jpgOn February 26, 2010, the Chapter 11 trustee for the Provident Royalties LLC, et al. bankruptcy matter submitted a proposed plan that would, among other things, ask investors to assign any rights they may have against third parties such as stockbrokers who made unsuitable recommendations to invest in securities offered by Provident Royalties and Provident Asset Management. The proposed liquidation plan asks investors to assign to the Liquidating Trustee all claims against third parties who may have committed acts which make them liable under contract, tort, general corporate or securities laws to the individual Investors. Individual holders who vote "yes" will automatically assign all of their claims. The proposed Liquidation Plan also contains an "Opt-Out Election" for investors who feel that they may be better off pursuing an individual claim rather than a group claim.

To further complicate this situation, brokerage firms Next Financial Group, Inc.; QA3 Financial Corp.; and Securities America, Inc. are already embroiled in a putative class action lawsuit for their role as selling agents in the Provident Energy and Shale Royalties securities offerings. Investors who choose to do so, can also opt out of the class action.

In other words, investors who purchased Provident Energy and Shale Royalties interests currently have three alternate ways to recover their losses from stockbrokers: (1) approve the pending Chapter 11 liquidation plan; (2) participate in the putative class action (assuming they were customers of the above class action defendants); or (3) opt out of both and pursue an independent securities arbitration claim. The first two options are still awaiting approval from the court. The third option, securities arbitration, is immediately available. Although every individual investor's situation is different, opting out of a group claim may make more sense when the investor has a particularly meritorious claim or when there are additional unsuitable investments involved that are not covered by any of the group claims. Before making a decision, investors should explore each of these options with a great deal of care.

February 24, 2010

Medical Capital Securities Fraud Lawsuit Update

Thumbnail image for Thumbnail image for medcap.jpgOn 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.

February 23, 2010

SEC Files Securities Fraud Lawsuit Against Two Sacramento Men For Misappropriating $10 Million From Investors

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.

February 22, 2010

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

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.

sheep_herd.jpgMass-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

Are Securities Arbitration Cases More Financially Rewarding for Investors than Class Actions?

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

February 19, 2010

Variable Annuity Exchanges and Replacements: Stockbroker Liability for Failing to Facilitate a Tax-Free 1035 Exchange

taxes1.jpgToday'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 the trading of warrants, futures, options and direct participation programs (DPPs).

February 16, 2010

IMH Secured Loan Fund Investigation Update No. 2

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: (1) the advisor misled the customer 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.

February 12, 2010

California Stockbroker Discipline Report for January 2010

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.

February 11, 2010

Medical Capital Securities Fraud Update

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for medcap.jpgOn 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?

Are Securities Arbitration Cases More Financially Rewarding for Investors than Class Actions?

February 8, 2010

IMH Secured Loan Fund Investigation Update 1

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.

February 7, 2010

State of California to Receive $779,795 in Regulatory Action Over the Unsuitable Sale and Exchange of Variable Annuities

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.