April 2010 Archives

April 29, 2010

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

play at risk.JPGMy California securities law firm has been inundated with inquiries from small investors who were sold unregistered private placements even though they were clearly not wealthy or financially sophisticated. Some of these private offerings--such as those issued by Medical Capital Holdings and Provident Asset Management--turned out to be outright frauds.

The private placements that are causing the most trouble were widely sold by stockbrokers who were only allowed to target wealthy individuals that have the financial capability to bear the risk of investing in unregistered and illiquid securities. These qualified investors are referred to as "accredited investors" under the federal securities laws. As discussed in a previous blog posting about accredited investors, an individual will be considered "accredited" if they have a net worth of $1 million or an annual income in excess of $200,000 (or $300,000 when combined with a spouse). The financial threshold for "accredited investors" was established under "Regulation D" which was adopted back in 1982. These requirements have not been updated since they were implemented 28 years ago. According to an analysis conducted by Businessweek, if adjusted for inflation, the accredited investor net worth requirement would increase from $1 million to $2.25 million and the income requirement would increase to $449,000 (single) and $674,000 (married). It is estimated that there were approximately 1.5 million "accredited investors" back in 1982. By 2008, the estimated number of households that were "accredited" swelled to as much as 7.2 million.

With such a low barrier to entry, many small investors were allowed to unwittingly put their retirement savings at risk--often lured by assurances from their stockbroker of high returns, safety and liquidity. An increase in the accredited investor qualification requirements is necessary to curtail the sale of private placements to individuals who can least afford to lose their investment.

See related blog posting:

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

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

April 20, 2010

Charles Schwab Settles YieldPlus Class Action Securities Lawsuit

Charles Schwab has agreed to settle a securities class action lawsuit filed in San Francisco federal court on behalf of investors who purchased its YieldPlus Fund. Without admitting liability, Charles Schwab has agreed to pay the plaintiffs $200 million in order to avoid trial which had been scheduled for May. Losses sought by the plaintiffs in the class action were as much as $802 million. The settlement has yet to be approved by the court. Also, investigations into Schwab's handling of the YieldPlus fund by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are still ongoing.

April 12, 2010

Medical Capital Update: Stockbroker's License Revoked for Violating the Prohibition Against General Solicitations

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for medcap.jpgOn April 12, 2010, the Colorado Division of Securities revoked the securities license of stockbroker John B. Guyette for his role in the sale of Medical Capital Notes to a number of Colorado investors in violation of Rule 502 of Regulation D, which prohibits general solicitations or advertisements in connection with the sale of private placements. Under Regulation D, sales agents may only target potential investors with whom they have a substantial pre-existing relationship.

The types of general solicitations that are prohibited under Regulation D typically include: (1) newspaper advertisements; (2) radio or television broadcasts; and (3) seminars or meetings. Only when there is a substantive and pre-existing relationship, can a stockbroker target a particular investor to purchase a private placement. One of the purposes of the "preexisting relationship" requirement is to ensure that the selling agent is reasonably certain that the targeted investor is sufficiently sophisticated in financial matters to participate in the offering. According to the Securities and Exchange Commission (SEC), the mere fact that sales are directed only to accredited investors does not mean that the solicitation is in compliance. The Alcala Law Firm is pursuing securities arbitration claims on behalf of Medical Capital investors who were improperly targeted by stockbrokers through general solicitations. Many of these investors were financially unsophisticated and/or did not qualify as accredited investors.

See related blog posting:

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

April 1, 2010

IMH Secured Loan Fund Tender Offer (Update 1)

Today, management for the IMH Secured Loan Fund filed with the Securities and Exchange Comission (SEC) a statement [Form SC 14D9] recommending that investors reject the tender offer from MacKenzie Patterson Fuller (MPF) to purchase their units at a price of $1,000 per unit. MPF's offer expires April 26, 2010. MPF is offering investors the opportunity to obtain an immediate cash out of their investment in the fund. IMH's fund manager characterized the tender offer as "an opportunistic attempt to deprive the Members of the Fund who tender Units in the Offer of the potential opportunity to realize a greater long-term value of their investment in the Fund." IMH's fund manager, however, could not provide any guarantees or assurances to investors about the fund's long-term prospects. Before deciding whether to accept or reject the tender offer, investors are strongly urged to read "Item 8 (Additional Information)" contained in the recent SEC filing by the fund's manager.

Investors in desperate need of cash who accept MPF's tender offer may be able to recover some or all of their losses through securities arbitration. The Alcala Law Firm currently represents several investors, many of them elderly or retired, who are pursuing arbitration claims against their financial advisors for inappropriately recommending the IMH fund to them.