California Securities Fraud Lawyer Blog

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. According to an SEC Interpretive Release (See Question 255.13), when calculating an investor's net worth, their residence is included.

Financial 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 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.

The Alcala Law Firm was recently contacted by several California investors who invested in the IMH Secured Loan Fund, LLC, a private placement managed by Scottsdale based Investors Mortgage Holdings, Inc. The Financial advisors who sold the IMH Secured Loan Fund to these investors also sold them other private placements, including Medical Capital and Provident Asset Management, two speculative investments that turned out to be ponzi schemes and are now the subject of numerous securities fraud lawsuits.

Before recommending any investment, particularly risky and speculative private placements, financial advisors have a fiduciary duty to adequately disclose the risks involved and also to exercise due diligence in determining whether such investments are suitable for the customer. The Alcala Law Firm is in the process of investigating the possibility of filing securities arbitration claims before the Financial Industry Regulatory Authority (FINRA) to recover investment losses related to these private placements.

Pacific Cornerstone Capital, Inc. of Irvine, California, and it's CEO were fined a total of $750,000 by the Financial Industry Regulatory Authority (FINRA) for making false and misleading statements to purchasers of Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC. The two private placements raised approximately $50 million from 950 investors who purchased them either directly from Cornerstone or through a nationwide network of stockbrokers and investment advisers. Without admitting or denying FINRA's charges, the firm and its CEO consented to the following findings:

• The firm had no reasonable basis for including representations in its offering documents that the targeted yield for a $100,000 investment was in excess of 18 percent over two to four years
• Periodic update letters from the firm's CEO gave investors unrealistic performance estimates that misrepresented the true financial condition of each company.
• The firm and its CEO failed to adequately supervise and monitor the sale of the private placement offerings.

Striker debentures can now be added to the growing list of private-placement offerings that were marketed through a network of stockbrokers that have recently become embroiled in securities fraud lawsuits. This week, the SEC alleged that Striker Petroleum, LLC deceived approximately 540 investors into purchasing $57 million worth of fraudulent debentures. The SEC is alleging that Striker was selling the debentures to pay off prior debenture holders and to pay fixed returns to investors who had invested in Legacy oil and gas properties.

According to one industry news source, the Striker debentures were sold through a nationwide network of stockbrokers, including CapWest Securities. As a result, many investors who purchased Striker debentures may also have been sold interests in Provident Asset Management and Medical Capital--two private placements that are already the focus of SEC and investor lawsuits. As we noted in a recent blog posting on this very subject: Brokers who recommended these investments have a lot of explaining to do.

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Since my last two blog postings about the Medical Capital securities class action lawsuits pending in California, I have heard from several investors that were defrauded into purchasing not only Medical Capital Holdings, but also Provident Asset Management. Brokers who recommended either one of these investments have a lot of explaining to do. Before recommending any investment, brokers have a fiduciary duty to exercise due diligence in determining whether an investment is appropriate and suitable for their customer. Defrauded investors interested in recouping their investment losses should consider all of their legal options, including the filing of a securities arbitration claim against their stockbroker or investment advisor that recommended the investment.

Below is a brief overview of the Provident Asset Management and Medical Capital securities fraud matters.

Provident Asset Management

On July 1, 2009, the SEC charged Provident Royalties LLC, Provident Asset management, and its founders with securities fraud for running what is alleged to be a $485 million Ponzi scheme involving at least 7,700 investors. The complaint also names as defendants numerous entities through which Provident raised funds: Provident Energy 1, LLP; Provident Energy 2, LLP; Provident Energy 3, LLP; Shale Royalties II, Inc.; Shale Royalties 3, LLC; Shale Royalties 4, LLC; Shale Royalties 5, LLC; Shale Royalties 6, LLC; Shale Royalties 7, LLC; Shale Royalties 8, LLC; Shale Royalties 9, LLC; Shale Royalties 10, LLC; Shale Royalties 11, LLC; Shale Royalties 12, LLC; Shale Royalties 13, LLC; Shale Royalties 14; LLC Shale Royalties 15, LLC; Shale Royalties 16, LLC; Shale Royalties 17, LLC; Shale Royalties 18, LLC; Shale Royalties 19, LLC; and Shale Royalties 20, LLC.

In addition, a consolidated securities class action is currently pending in the U.S. District Court for the Northern District of Texas against Cedar Brook Financial Partners, LLC; Next Financial Group, Inc.; QA3 Financial Corp. and Securities America, Inc. for their role in recommending these investments to their brokerage clients. Customers who were defrauded by these firms can participate in the class action or, in the alternative, pursue their own independent securities arbitration claim.

Medical Capital Holdings

On September 18, 2006, a class action lawsuit was filed in the Central District of California against the following brokerage firms Securities America, Inc., Ameriprise Financial, Inc., CapWest Securities, Inc, and Cullum & Burks Securities, Inc on behalf of investors that invested in Medical Capital Notes issued by Medical Provider Financial Corp. III, IV, V and/or VI.

On November 13, 2009, a separate class action lawsuit was filed in the Central District of California against National Securities Corporation for their involvement in recommending Medical Capital Notes to their customers.

There are also many other brokerage firms who aggressively sold Medical Capital Notes and Provident/Shale interests to their customers who were omitted from the various class action lawsuits, including some large brokerage firms and smaller regional firms. In addition to the class action defendants discussed above, I have heard from investors who invested in Medical Capital through brokers working with Okoboji Financial Services, Redwine Securities and others that are still being reviewed.

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Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

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