In a February 16th., 2012, article in InvestmentNews.com, Jason Kephart writes that John Bogle, founder of The Vanguard Group Inc., believes low-cost, passive indexes are the best way to invest — as long as they’re not offered through an exchange-traded fund.

“There’s no question that ETFs are the greatest trading innovation of the 21st century,” Mr. Bogle said today at the Bloomberg Portfolio Manager Mash-Up in New York. “But the question is, ‘Are they the greatest investment innovation?’ and the answer is ‘no.’”

Kephart writes that the ability to trade the funds intraday leads to bad decisions by investors, such as buying high and selling low, which cause them to underperform over the long run. Mr. Bogle even has qualms with the ETF providers for the influx of products, which he says makes it even more difficult for investors to pick the right fund. “There’s something like 2,000 ETFs now,” Mr. Bogle said. “That’s almost as many stocks as there are.”

John Bogle called out BlackRock Inc. for its aggressive product launches. “BlackRock is just making a muddy pool muddier,” he said. BlackRock’s ETF arm iShares offers more than 260 ETFs, seven of which were launched recently. That’s nearly 100 more than the next biggest ETF lineup. Vanguard currently offers 47 ETFs.

The InvestmentNews.com article goes on to say that Mr. Bogle does have one thing in common with BlackRock though — a bullish outlook on stocks over the next decade. He didn’t go as far as BlackRock’s chief executive Larry Fink did recently and claim that investors should be 100% in equities. He did say, however, that the case for stocks to outperform bonds over the next 10 years was “pretty simple.” Bond yields have a 90% correlation to 10-year returns, Mr. Bogle said. With bond yields at historic lows, that should translate to returns of no more than 3% or 4% over the next 10 years, he said. Stocks, meanwhile, should benefit from a strengthening U.S. economy and have returns closer to 7%, he said. “But not without a few bumps along the way.”

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In a February 17th., 2012, article for InvestmentNews.com, Bruce Kelly writes that a broker formally affiliated with Morgan Stanley Smith Barney LLC, Berthel Fisher & Co. Financial Services Inc. and LPL Financial LLC was arrested in Oregon this month for allegedly stealing $584,000 from three investors.

The now ex-broker, James Scott McKee, was charged Feb. 9 with four counts of aggravated theft in the first degree, according to a statement by the City of Eugene Police Department. McKee’s victims included an 81-year-old retiree and a local church, according to a complaint against Mr. McKee filed this Tuesday by the Financial Industry Regulatory Authority Inc.

Mr. McKee persuaded an LPL client in April 2007, to invest $400,000 in a real estate venture. Mr. McKee did not notify LPL or get the firm’s approval for the venture, according to the Finra complaint.

Kelly writes that after the client had a heart attack, she incurred significant medical expenses and contacted Mr. McKee to get her money back, according to Finra. In February 2008, Mr. McKee received two checks for $200,000 from the development and converted those funds to his own use, even though he told the client the funds were still invested in the development. So far, Mr. McKee has not returned the client’s investment, according to Finra.

McKee, 44, from February 2008 to the present,  “committed aggravated theft by deception and fraud with respect to securities or securities business,” according to the police statement.

Kelly writes that according to officials in Eugene, Mr. McKee’s actions included the sale of unregistered securities, the unauthorized liquidation of monies from investment accounts by a financial planner, the unauthorized deposit of those funds into the financial planner’s personal bank account and the subsequent concealment of that liquidation.

Mr. McKee was affiliated with LPL from November 2002 to September 2008 and with Berthel Fisher from that point until November 2010. He then joined Morgan Stanley, where he worked until this October when he was discharged, according to his profile on BrokerCheck.

Finra filed a complaint this week against Mr. McKee alleging that he defrauded investors from February 2006 until September 2011.

Kelly writes that Mr. McKee persuaded investors to invest in various undisclosed outside real estate ventures through material misrepresentations and omissions, according to the Finra complaint. Mr. McKee had a direct or indirect financial interest in those real estate ventures, according to Finra.

McKee’s other alleged victims included an owner of a small office supply company and other unsophisticated investors seeking conservative investments, according to the Finra complaint. Mr. McKee allegedly promised investors unreasonably high returns not supported by the underlying businesses and hid the precarious financial condition of those businesses, according to Finra. He also allegedly lied about how he would use the invested funds, and also allegedly improperly used or converted customer funds for his own benefit, according to the Finra complaint.

The InvestmentNews.com article adds that McKee used money from one customer to pay off another customer who threatened him with legal action for wrongfully taking funds in connection with an earlier transaction, according to Finra.

McKee also allegedly recommended that a local church invest in a local coffee shop in which he had a business interest, and knew that the investment was not consistent with church’s stated objectives and financial needs, according to Finra. He also allegedly falsified the church’s account documents to prevent his firm and securities regulators from discovering the unsuitable nature of the investments, according to Finra.

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In a February 14th., 2012, article in InvestmentNews.com, Bruce Kelly writes that LPL Financial, LLC, is on the hook for a $1.4 million arbitration awarded to an elderly couple who bought real estate deals. According to the attorney for the plaintiffs, the property investments relied on “tricks” to boost their yields before they collapsed.

Heinrich and Araceli Hardt, bought two tenant-in-common exchanges, one in 2007 and another in 2008, from former LPL broker David Glenn, according to a separate, continuing lawsuit the investors have filed against the sponsor of the real estate deals, Direct Invest LLC.

“There was a fraudulent picture painted of investors receiving monthly income checks from the properties,” said the attorney. That cash flow “would replace the income received from income-producing properties that they were selling,” he said. “The monthly check is the focal point of sale” by the broker, he said. The investors asked for damages of $8 million.

Kelly writes that the Finra panel issued the award Friday and, as is typical, gave no explanation for its decision. According to the award, the Hardts, both 76, made several allegations, including federal securities fraud and elder abuse. The Hardt’s claim was also filed against two other broker-dealers, Orchard Securities LLC and Meridian Capital Partners LLC, but the plaintiffs dismissed those claims in December.

“While we do not know the factual or legal basis for this award, the arbitration panel did not make a finding of elder abuse in this matter,” said Michael Herley, a spokesman for LPL. “Given the amount of the award in comparison to the alleged damages, we believe that the arbitrators rejected many, if not most, of the claimants’ claims.”

Also, Mr. Herley added that LPL played no tricks on its clients. “The TIC investors, including the Hardts, approved the operating budgets for the investment programs each year, which included projected revenue, expenses and cash flow. Thus, it’s more than a little disingenuous to say the investors were ‘tricked’ into anything, as they were included in the budgeting process.”

Known as a TIC, Kelly writes, the vehicle is a form of real estate ownership in which two or more parties have a fractional interest in the property. TICs gained in popularity after a favorable 2002 Internal Revenue Service ruling that allowed investors to defer capital gains on real estate transactions involving the exchange of properties. After the real estate bubble burst, many TIC investors saw their properties falter.

Further, one of the biggest TIC sponsors, DBSI Inc., declared bankruptcy in 2008, and broker-dealers that sold those deals have faced dozens of arbitration complaints filed with Financial Industry Regulatory Authority Inc.

The InvestmentNews.com article said that this claim against LPL did not involve DBSI but another sponsor, Direct Invest. The broker, Mr. Glenn, left LPL in 2010 and is now affiliated with United Planners’ Financial Services of America. Mr. Glenn was not named in the complaint.

“When these deals were structured, they used tricks,” the attorney said. A euphemism known as a “yield enhancement” for the TICs relied on “borrowed money” and “returning investors’ money back to them,” he said.

Kelly writes that the two real estate deals in question were “not producing any natural cash flow,” their lawyer claims. Distributions were made for a couple of years, and then “the money ran out. The defense in the case is, everybody was doing it. And we said, ‘No, this is wrong.’ It was clear LPL knew that these yields were not being generated by [the properties] but by financial trickery.”

“Reserve accounts were established to pay for anticipated expenses, such as tenant improvements and leasing commissions,” Mr. Herley said. “These accounts were typically required by the lender and were disclosed in the offering documents, which were offered only to accredited investors.”

Mr. Herley added that the structure of the programs and the projected cash flows were described and disclosed in comprehensive private-placement memoranda. “As everyone knows, the commercial real estate market experienced an unexpected and historical decline beginning in 2008 which also impacted these programs,” Mr. Herley said.

In the federal lawsuit, which was filed last year in U.S. District Court for the Southern District of California, the Hardts purchased their first TIC in December 2007 at a price of $3.7 million, with $1.6 million in cash and the remainder the assumption of a loan. They bought the second TIC in March 2008 at a purchase price of $4.2 million. About $1.8 million was in cash, with the balance the assumption of a loan. Both TICs owned commercial properties in the suburban Boston market. By the end of 2009, the Hardts stopped receiving payments on both deals, according to the lawsuit.

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The following appeared on FINRA’s website’s ‘Disciplinary Actions, November, 2011:

Tom Douglas Hamsher (CRD #1708793, Registered Supervisor, Webb City, Missouri)

submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Hamsher consented to the described sanction and to the entry of findings that he made misrepresentations and omitted to disclose material facts to many of his customers in connection with the purchase or sale of preferred securities of financial institutions, in conversations and correspondence with multiple member firm customers who purchased the securities on Hamsher’s recommendation. The findings stated that after Hamsher’s resignation, the firm subsequently settled claims from many of Hamsher’s customers, including allegations of material misrepresentations and omissions involving preferred securities of financial institutions, for aggregate payments of approximately $8.9 million.

(FINRA Case #2009018421001)

This ends the FINRA website’s information.

Tom Hamsher, a former Wachovia Securities, LLC, and Wells Fargo Securities, LLC, broker, was accused of making false statements in connection with the sale of the Federal National Mortgage Association or “Fannie Mae” (“FNMA”) and the Federal Home Loan Mortgage corporation or “Freddie Mac” (“FMCC”). Hamsher falsely represented that the preferred securities were “bonds,” and that when they matured, the customers would recover their initial investment.

It has been reported that Hamsher falsely represented that the preferred securities were backed by the full faith and credit of the United States government, which misled investors into believing that their principal was guaranteed against loss. It has been reported that Wachovia and Wells Fargo paid approximately $8.9 million to settle their customer claims based upon Hamsher’s false statements.

Soreide Law Group, PLLC is currently investigating the sale of the preferred securities of financial institutions, including many cases against Wachovia Securities, L.L.C. and Wells Fargo Securities, L.L.C.

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Bruce Kelly writes in a February 9th., 2012 article for InvestmentNews.com that securities regulators are taking a close and careful look at a fast-growing alternative investment known as a nontraded business development company.

The InvestmentNews.com article states that the North American Securities Administrators Association is “gearing up to draft a statement of policy” on nontraded BDCs, said Arkansas securities commissioner A. Heath Abshure. Such a statement would include review policies and standards governing the drafting of an offering document for a new fund, he said.

“The attention is on the marketplace,” he said. In the past, one or two filings per year for a new nontraded BDC were typical, he said. Now, there are at least ten either raising money or in line to become offerings, market sources said.

FINRA, the Financial Industry Regulatory Authority Inc. is also putting the spotlight on nontraded BDCs. That could include an investor alert that may be released by the end of March.

This notice would highlight similar concerns about the product Finra expressed in its investor alert in September about nontraded real estate investment trusts, including “know your customer” guidelines and the lack of liquidity in a nontraded investment, the executive said.

“We’ve heard the same rumblings for a while,” said Michael Forman, chief executive of Franklin Square Capital Partners, the parent company of FS Investment Corp., one of the biggest sellers of nontraded BDCs. “Finra is looking at some kind of release. We’ve talked to some of the states, and there will be new NASAA guidelines for BDCs. In the past, REIT guidelines have been loosely applied, so [the industry] needs new guidelines.”

“We are looking at a number of new products being sold to investors and BDCs are one of them,” Finra spokeswoman Nancy Condon said. “Firms need to do the necessary due diligence and consider whether they are suitable for a particular investor. We conduct account reviews and as part of those reviews we review for suitability.”

Kelly writes that there is no doubt, nontraded BDCs are hot right now. FS Investment Corp. raised $1.35 billion from sales at independent broker-dealers last year. That made the company the second-largest program sponsor of public, nontraded investments, according to Robert A. Stanger & Co., an investment bank that focuses on such programs, including nontraded real estate investment trusts.

The total nontraded BDCs raised almost $1.5 billion last year, according to Stanger said. That’s compared with $369 million in 2010, and just $94 million in 2009.

This surge in the number of nontraded BDCs either raising money or in the pipeline reminded one independent-broker-dealer executive of the tremendous growth in the past ten years of nontraded REITs. “The money-raising sort of reminds me of the hot days in REITs,” said Eric Schwartz, chief executive of Cambridge Investment Research Inc.“There’s the sex appeal of a private-equity situation, combined with the yield play when people are nervous about almost every other type of investment.”

He added: “Performance will tell the story. Three or four years from now, if the sector is raising $5 billion a year, will there be enough [private company debt] out there to buy?”

Kelly writes that the sales commission on nontraded BDCs typically is 7%, and the product is supposed to be sold only to those investors with a net worth of $250,000 or more, or a net income of at least $70,000 combined with a net worth of at least $70,000. Investors also are supposed to be informed of the product’s illiquidity. BDCs invest in the debt and equity of small to middle-market companies, with the debt instruments ranging from the senior-secured level to below-investment- grade, or “junk,” an asset class typically not available to retail investors.

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