Articles Posted in Securities America

The Financial Regulator for the Commonwealth of Massachusetts recently announced a settlement with five brokerage firms–Ameriprise Financial Services, Commonwealth Financial Services, Lincoln Financial Advisors, Securities America and Royal Alliance Associates–over the unsuitable sale of a particularly risky real estate investment trust referred to as a “non-traded REIT” due to the fact that this type of REIT has limited liquidity and cannot be freely sold on the open market. See related blog post: Investors Beware: Non-Listed REITs

  • Inland Real Estate Trust, Inc.
  • Inland Western Real Estate Trust, Inc.

Thumbnail image for Thumbnail image for Thumbnail image for FINRA-1.gifSecurities America, Inc. has entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and will pay a fine of $100,000 in connection with the sale of two private placements. As part of the settlement, Securities America agreed to the following findings:

  • The firm failed to have a supervisory systems in place designed to identify misrepresentations or misleading statements made to customers regarding two private placements: (1) the IMH Secured Loan Fund and (2) Medical Provider Funding Corporation (aka “Medical Capital”).
  • Securities America’s email monitoring system failed to identify several emails that misrepresented the liquidity and safety of the IMH Secured Loan Fund.

Investor hopes of recovering some of their Medical Capital securities fraud losses were dashed today when the court appointed receiver made the following announcement in his Fourteenth Status Report:

The film asset “The Perfect Game” was released in Mexico on April 2, 2010,

and on April 16, 2010 in the United States and Canada. Box office receipts have not met projections and the Receiver does not expect a return from the theatrical sales of the film. The Receiver has terminated the distribution agreement for cause, and has taken various actions to protect the receivership’s interest in the film.

Thumbnail image for Montana_Seal.pngOn August 4, 2010, the Montana Securities and Insurance Commissioner filed a disciplinary action against Securities America and several of the firm’s top executives alleging securities fraud in connection with the sale of the failed Medical Capital private placement. The Montana lawsuit seeks the imposition of fines and restitution on behalf of four different groups of investors identified in the lawsuit and also to provide appropriate restitution to all Montana participants. Montana’s disciplinary action is similar to the lawsuit filed by the Commonwealth of Massachusetts against Securities America back in January 2010.

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Thumbnail image for FBI Seal.pngAccording to an FBI report on Securities Fraud before the Senate Judiciary Committee, there was a 105% increase in High Yield Investment Program investigations by the Bureau in 2009. My California securities law firm has also experienced a similar surge in investor complaints involving high-yield investments like Medical Capital Notes, which were sold through a network of brokerage firms such as Securities America, a firm that is now the subject of numerous securities fraud lawsuits and class action lawsuits.

High Yield Investment Programs (“HYIP”) may seem like the ideal investment for retirees seeking greater income. However, for most investors, the acronym HYIP really stands for “Hazardous to Your Investment Portfolio.” Promising large returns with seemingly no risk, these high yielding investments have raised millions of dollars from unsuspecting investors. In reality, many of these to-good-to-be-true investments turned out to be nothing more than Ponzi Schemes that needed to bring in new investor money in order to continue paying existing investors. During the recent financial crisis, many of these Ponzi schemes ultimately fell apart when the pool of available investors evaporated.

High yield investments are often sold through private placements that can only be purchased by “accredited investors.” Because private placements are typically high risk investments with limited liquidity, they are only suitable for wealthy and sophisticated investors who can bear the risk of loss.

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.]

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.

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.

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.

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.