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.

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 they misled them 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.