March 2010 Archives

March 31, 2010

California Stockbroker Discipline Report for March 2010

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

Gary Thomas Armitage of Healdsburg, California, formerly with EPlanning Securities was barred from association with any FINRA member in any capacity for engaging and participating in private securities transactions without notifying his employing firm.

Francisco P. Esparza of Tustin Ranch, California, formerly with J.P. Turner & Company and LPL Financial Corporation was fined $10,000 and suspended from association with any FINRA member in any capacity for 15 business days for making unsuitable recommendations to his customers to buy closed-end funds (CEFs) purchased in an initial public offering (IPO) and selling them in the short term without fully understanding the pricing of CEFs and the risks and rewards of the investments.

James William Geis of Mission Viejo, California, formerly with Crown Capital Securities, L.P. was barred from association with any FINRA member in any capacity for participating in private securities transactions of related offerings without his employing firm's prior approval which consisted of oil and gas "working interests" and preferred stock.

Jeffrey Alan Gielau, Anaheim Hills, California, formerly with Thrivent Investment Management was fined $5,000 and suspended from association with any FINRA member in any capacity for three months for altering documents in connection with transactions that customers requested.

March 29, 2010

Morgan Stanley to Pay Over $7 Million for Dispensing Unsuitable Early Retirement Investment Advice

The Financial Industry Regulatory Authority (FINRA) has fined Morgan Stanley $3 million and ordered it to pay restitution of more than $4.2 million to a group of investors who were encouraged to take early retirement and begin making systematic withdrawals from their Individual Retirement Accounts by relying on Section 72(t) of the Internal Revenue Code. Normally, individuals under the age of 59 ½ who take money out of their IRA are subject to a 10% early withdrawal penalty. This penalty, however, can be avoided if the distributions "are part of a series of substantially equal periodic payments" that last for five years or until the individual reaches the age of 59 ½, whichever is longer.

According to FINRA, customers in their 50s were told that, even though they had not yet reached the minimum distribution age, they could retire now and start taking systematic withdrawals from their accounts. The customers were assured that they could withdrawal 10 percent from their IRA each year without reducing their principal. The customers were not aware that the amount of income promised was unreasonably high and was based on aggressive and unsuitable investment strategies. A more appropriate and realistic withdrawal rate would have been between 3% - 5% per year. FINRA's former Chief of Enforcement Susan L. Merrill publicly commented that: "Brokerage firms and brokers who serve investors considering retirement must ensure that their customers are given suitable investment recommendations based upon reasonable assumptions of market performance and are given thorough disclosure of investment risks. The supervisory failures of Morgan Stanley and its management led to losses suffered by customers at a vulnerable time in their lives--retirement--which could have been avoided."

March 23, 2010

Medical Capital Executives Face Criminal Investigation

DOJseal.jpgThe Orange County Register reports that court records filed with the federal court in Orange County, California, reveal that Sidney Field and Joseph Lampariello, two former top Medical Capital Holdings executives, are currently under federal criminal investigation for their involvement in the troubled company whose private placement offerings were allegedly part of a massive Ponzi scheme. Former Medical Capital CEO Field and President Lampariello filed an emergency request with the court seeking permission to use $150,000 per month in frozen assets to defend themselves in parallel investigations by the SEC and the United States Department of Justice. Judge David O. Carter denied the request.

Click here for all Medical Capital blog postings.

March 22, 2010

Massachusetts Securities Regulators Subpoena Six Brokers Over Sale of Medical Capital Holdings and Provident Royalties

mass-quarter.jpgThe Bay State has stepped up its investigation into the fraudulent sale of private placements by securities brokers. Today, the Massachusetts Securities Division announced that it issued 6 subpoenas to National Securities; QA3 Financial; CapWest Securities; Independent Financial Group; Investors Capital; and Centaurus Financial seeking information related to the sale of Medical Capital Holdings Inc. and Provident Royalties. Earlier this year, the Commonwealth of Massachusetts filed a securities fraud lawsuit against Securities America charging the firm with misleading investors in the sale of Medical Capital Notes. [See Massachusetts Regulators Charge Securities America With Securities Fraud]

Although the Commonwealth of Massachusetts is primarily concerned with the sale of Provident Royalties and Medical Capital Notes to residents of that state, the fraudulent sale of risky private placements has affected thousands of investors across the nation and is now the subject of intense scrutiny. Several of the brokers that were subpoenaed by Massachusetts have been subjected to an influx of customer arbitration claims and securities class action lawsuits. [See: Medical Capital Class Action or Arbitration: Investors Should Consider Their Options and related blog postings discussed therein.]

March 19, 2010

IMH Secured Loan Fund Tender Offer

This is the third update from the ongoing investigation on behalf of individuals who invested in the IMH Secured Loan Fund private placement. On March 16, 2010, a tender offer statement was filed by real estate management company MacKenzie Patterson Fuller (MPF). According to MPF's website, the firm specializes in "turning discounted illiquid real estate securities into attractive marketable assets." Under the terms of the proposed tender offer, MPF is offering to pay $4,000,000 to acquire 4,000 units which equates to $1,000 per unit.

Meanwhile, IMH Financial Corporation has been busily amending their SEC registration statement (Form S-4). Click here for an up-to-date listing of all SEC filings for IMH.

Was the IMH Secured Loan Fund a suitable investment for you? See previous blog posting.

March 18, 2010

Provident Asset Management is Finally Expelled by FINRA for Securities Fraud in Connection with Massive Ponzi Scheme

Thumbnail image for Thumbnail image for Thumbnail image for provident.jpgThe Financial Industry Regulatory Authority (FINRA) has finally expelled Provident Asset Management for committing outright securities fraud in a Ponzi scheme that involved the marketing of a series of private placements under the names "Provident Energy" and "Shale Royalties." In typical FINRA-fashion, the expulsion was accomplished through a settlement in which the firm neither admitted nor denied any wrongdoing. FINRA's expulsion did not come about until more than 6 months after the Securities and Exchange Commission filed a securities fraud lawsuit against Provident Asset Management in July 2009 and Provident Royalties, LLC filed for bankruptcy in June 2009. Meanwhile, FINRA also announced today that their head of enforcement, Susan Merrill, is stepping down to return to private practice.

According to FINRA, the self-regulatory agency is conducting a broader investigation into the more than 50 broker-dealers who sold the Provident Energy and Shale Royalties private placements to their customers, which may lead to more settlements and potential fines. Disgruntled investors have already begun filing securities arbitration claims against some of these broker dealers alleging unsuitability, fraud and misrepresentation.

For more information, please visit the following recent blog postings:

March 15, 2010

Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

scale_balance.jpgDefrauded investors who are deciding whether to participate in a securities class action or to "opt out" and pursue an individual arbitration claim should take into consideration the results of several independent studies that examined potential recoveries under each alternative. An investor's likely recovery is only one of the many factors that need to be considered. However, getting the best possible recovery is clearly an important consideration.

Securities Class Actions: According to a study of securities class action cases conducted by economic consulting firm NERA for the year ending 2009, the ratio of settlements to investor losses has remained around 2.5% for the last few years. That is equivalent to recovering 2.5 cents for every dollar lost. According to NERA, as investor losses increase, recoveries increase at a much lower rate. However, recently filed class actions flowing from the credit crisis have led NERA researchers to speculate that investors may achieve potentially higher settlements in the near future.

A second study of securities class action settlements that was conducted by Cornerstone Research came to a similar conclusion and found that the median settlement rate for class actions in 2009 was 2.3% percent of estimated damages. However, settlement rates varied widely depending upon a large number of variables including the type of case involved and the jurisdiction where the case was filed. Neither study focused on cases against broker-dealers.

Securities Arbitration: After analyzing nearly 14,000 securities arbitration awards between 1995 and 2004, researchers Edward S. O'Neal, Ph.D. and Daniel R. Solin, Esq. concluded that the expected recovery for a large arbitration claim against a major brokerage firm was 12% of the amount claimed (excluding legal costs). During their analysis, the two men determined that the expected recovery for claims decreased along with an increase in both the dollar amount of the claim and the size of the brokerage firm. For example, an arbitration claim against one of the top 20 brokerage firms seeking damages of $20,000 or less has an expected recovery of 28%, whereas a claim above $250,000 has an expected recovery of only 12%. Expected returns against smaller firms were significantly better. A $100,000 claim against a non-top 10 brokerage firm has an expected recovery of 40%. According to my own research of arbitration awards for cases decided in San Francisco during 2009, investors recovered approximately 79% of their claimed damages.

As small as the arbitration award percentages may seem, they are significantly better than the 2.5% recovery rate for securities class action cases. Based on my own experience having handled scores of arbitration cases, I remain convinced that securities arbitration provides investors with a significantly greater opportunity to recover a larger share their investment losses than a class action will.

See also: Securities Arbitration vs. Class Actions: Consider Your Options

March 5, 2010

First Allied Securities Enters Into $1.95 Million Settlement with SEC Over Failure to Supervise Broker

sec crest.bin.jpgSan 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.

March 4, 2010

California Stock Psychic Sued by SEC for Securities Fraud

Thumbnail image for pyschic.jpgToday, 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,'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 is still active.

March 3, 2010

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

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.

danger sign.jpgFinancial 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 one or more of 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.

Related Blog Posts:

Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

It's Time to Change the Accredited Investor Rule for Private Placements