California Securities Fraud Lawyer Blog

On June 7, 2010, an IMH Secured Loan Fund Unitholder, filed a proposed class action lawsuit captioned, Charlotte Wood, on behalf of herself and all others similarly situated v. IMH Secured Loan Fund, LLC, IMH Financial Corporation, Investors Mortgage Holdings, Inc., IMH Holdings, LLC, IMH Management Services, LLC, Shane Albers, William Meris and Steven Darak (the "IMH Defendants"), before the United States District Court for the District of Arizona (the "Wood Action"), as well as an application to enjoin the vote from proceeding. In summary, the Wood Complaint alleges that the Conversion Transaction was: (1) being effectuated pursuant to a false and misleading Consent Solicitation and other false statements by the IMH Defendants, and (2) that the Conversion Transaction was both procedurally and substantively unfair to IMH Unitholders. Therefore, the complaint alleges, the Conversion Transaction is a breach of both the IMH Defendants common law fiduciary obligations to the Unitholders and their duties under the Fund's Operating Agreement.

On June 9, 2010, the IMH Defendants announced that they had obtained a sufficient number of votes to move forward with the Conversion Transaction, although the vote had not been certified, thereby mooting Wood's injunction motion. According to the preliminary results reported by IMH, 64.67% of the total membership interests submitted a vote with 57.48% of the net votes being cast in favor of the Conversion Transaction. On June 10, 2010, the IMH Defendants further announced that they were voluntarily dismissing the action entitled, IMH Secured Loan Fund, LLC v. David I. Kurtz, an individual, on behalf of himself, and all other persons similarly situated, Case No. 2:10-01071-ROS (the "Kurtz Action"), which they had filed before the Arizona court, alleging that certain Unitholders were trying to interfere with the vote.

On June 14, 2010, the "Committee to Protect IMH Secured Fund," filed an action and injunction motion similar to the Wood Action, before Vice Chancellor Leo Strine in the Chancery Court for the State of Delaware. Thereafter, the Vice Chancellor Strine held a short telephonic hearing indicating that he was denying any application for injunctive relief, but that the any harm to the Unitholders as a consequence of the Conversion Transaction and the attendant vote, could be compensated for by monetary damages. Wood has re-filed her action before Vice Chancellor Strine, and intends to continue her action for damages on behalf of the Unitholders.

Click here for more blog postings about the IMH Secured Loan Fund

My securities law firm represents several IMH investors, some of them unaccredited investors who never should have been allowed to purchase the fund in the first place. A large percentage of these investors purchased the IMH Secured Loan Fund from brokers registered with Independent Financial Group. My clients want their money back as soon as possible. The quickest way to accomplish this was to cash out at the price of $1,000 per unit as part of the tender offer from MacKenzie Patterson Fuller (MPF) which expired on April 26, 2010. Admittedly, the $1,000 per unit price is a steep discount from the $4,406.86 per unit book value reported by IMH in the Form 10-K recently filed with the SEC for the period ending December 31, 2009. However, investors currently have no way to sell or redeem their units at this or any other price. The next opportunity for investors to sell their units may be as part of an initial public offering (IPO)--assuming the company's restructuring plan is approved by investors and the company can pull off a successful IPO under what may prove to be very challenging market conditions. IMH management anticipates that the initial IPO price will be set at a discount to the book value per share price.

There is at least one group lead by LGM Capital Partners LLC that is opposing IMH's plan and advising members to vote against the reorganization. On May 18, 2010, "The Committee to Protect IMH Secured Loan Fund" filed a statement with the SEC advising members to reject management's restructuring plan. Additional information was filed by the committee on May 20, 2010. Click here to download the committee's "talking points" which was intended for use by broker dealers when advising customers about IMH management's proposal.

Investors have until 5. p.m. on June 14, 2010, to cast their vote on management's proposal to restructure the company. If management's plan is approved, investors will be allowed to exchange one ownership unit for 220.3419 shares of Class B or Class C common stock. When investors cast their vote, they must elect whether to receive Class B stock, Class C stock, or some combination of the two. Those who do not make an election will automatically receive Class B common stock in exchange for their membership units.

Many investors are understandably confused about the different classes of shares. Investors who elect to receive Class B shares will receive a fixed percentage of series B-1, B-2 and B-3 stock. Class B shares cannot be sold immediately after the IPO. Series B-1 shares can be sold 6 months after the IPO. Series B-2 shares can be sold 9 months after the IPO, while Series B-3 shares may not be sold until 12 months after the IPO. Class C shares, on the other hand, can be sold immediately after the IPO. Investors who want to liquidate their investment at the next available opportunity may want to convert some or all of their units into Class C shares, rather than Class B shares. Investors who can afford to hold onto their investment long-term and are optimistic about the company's prospects may want to choose Class B shares.

Below is a chart that was presented to investors during a video produced by IMH's management in support of the restructuring plan.

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Click here for more blog postings about IMH Secured Loan Fund.

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.

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.

• MPF's Letter to Members
• MPF's Advertisement in Investor's Business Daily

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.

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 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.

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.

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.

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.