Securities Lawyer Blog | Victim of Fraud?

TAG | MedCap

Oct/12

3

FINRA Taking Aim at Nontraded REITs

Comments off · Posted by Securities Lawyer in FINRA

Broker-dealers’ falling short in due diligence when selling complex, illiquid products has been a focus of FINRA examinations and fines since the market collapse of 2008, writes Bruce Kelly of InvestmentNews.com. FINRA recently fined and sanctioned a handful of broker-dealers that sold two series of private placements that imploded in 2009 — Medical Capital Holdings Inc. notes and preferred shares of Provident Royalties LLC.

This according to comments made last Thursday by Susan Axelrod, executive vice president of member regulation sales practices at FINRA. “In several instances, FINRA examiners have found that firms selling these products failed to conduct reasonable diligence before selling a product and failed to make a determination that the product was suitable for investors.”

“Finra examiners have noted that in the instances of REITs that have experience financial difficulties, red flags existed and should have been considered by firms prior to the product being offered to firm clients,” according to Ms. Axelrod’s prepared comments to the Securities Industry and Financial Markets Association’s Complex Products Forum, which was held in New York.

Ms. Axelrod said that distributions, or dividends, of nontraded REITs are on FINRA’s radar.

“Nontraded REITs may also borrow funds to make distributions if operating cash flow is insufficient,” she said. “And excessive borrowing may increase the risk of default or devaluation. In addition, nontraded-REIT distributions may actually be a return of principal,” she said.

Susan Axelrod added that financial advisers, therefore, “must use caution when discussing distributions with investors, particularly when making comparisons to other dividend-paying investments.”

“FINRA examiners are also reviewing advertising, sales literature and correspondence between brokers and investors, and — in some instances — have found misrepresentations of product features, such as distributions and share values,” she said. “All of these issues raise investor protection concerns.”

(Nontraded REITS = Nontraded real estate investment trusts)

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, represents clients nationwide. For a free consultation on how to potentially recover your financial losses call: 888-760-6552, or you may visit our website and complete the online form at: http://www.securitieslawyer.com.

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Dec/11

8

DeWaay Financial Network Facing Bankruptcy Because of DBSI Lawsuits

Comments off · Posted by Securities Lawyer in FINRA

In an InvestmentNews.com article by Bruce Kelly, he writes that failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC have forced dozens of broker-dealers to close, be sold or seek bankruptcy protection.

Failed real estate tenant-in-common syndicator DBSI Inc. is threatening to have the same result, with DeWaay Financial Network LLC claiming in federal court last month that bankruptcy looms, due to lawsuits by clients who bought DBSI securities.

Kelly writes that DeWaay Financial Network asked a federal judge in Delaware in October for a temporary injunction to halt eight arbitration claims that investors have filed with the Financial Industry Regulatory Authority Inc. stemming from DBSI losses.

DeWaay Financial Network “lacks sufficient funds to satisfy the claims in eight arbitration claims pending against it — let alone the potential claims of 304 other customers that have not yet brought suit. The threat posed by these mounting costs and the attendant potential for liability hangs over defendant’s limited funds like the Sword of Damocles,” according to the firm’s memorandum, which was filed in U.S. District Court in Delaware on Oct. 19.

“Absent injunctive relief, that sword’s descent is imminent and in all likelihood would force defendant to declare bankruptcy,” according to the memo.

DeWaay’s request for an injunction is part of its strategy to create a settlement with investors, president Matt Stahr said.

“We still feel like we’re in the right,” as the firm did its due diligence on the DBSI products, but the costs of defending the firm in individual arbitration claims are prohibitive, he said. The firm has made substantial progress toward reaching a settlement but hasn’t had a hearing yet regarding its request for an injunction, Mr. Stahr said.

DBSI raised $1 billion from investors by selling real estate deals through independent broker-dealers. The real estate firm declared bankruptcy in 2008, writes Kelly.

The InvestmentNew.com article said that according to court filings, the eight DeWaay Financial Network clients suing the firm in Finra arbitration bought $2.9 million in DBSI securities. DeWaay Financial Network so far has spent $46,000 defending those claims and expects to spend another $1.1 million in defense costs. Beyond those investors, DeWaay Financial Network sold DBSI securities to an additional 304 clients, and the firm’s total exposure exceeds $24 million.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with DeWaay Financial Network LLC, and/or were sold DBSI TICs, through DeWaay or other broker/dealers, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Nov/11

30

Due Diligence on Private-Placements Labeled ‘Sloppy’

Comments off · Posted by Securities Lawyer in FINRA

In a November 25, 2011, article in InvestNews.com, Bruce Kelly writes that broker-dealers who sold billions of dollars in allegedly fraudulent private placements failed massively in their due-diligence responsibilities to investors, according to the assessment of forensic accountant and expert witness Gordon Yale, who has worked on more than 50 legal claims brought by investors against broker-dealers stemming from the failed deals. The clients bought private placements issued by DBSI Inc., Medical Capital Financial Corp. and Shale (Provident) Royalties.

The Securities and Exchange Commission, SEC, had charged Medical Capital Financial and Provident Royalties with fraud in 2009; DBSI filed for bankruptcy protection in 2008.

Kelly writes that broker-dealers’ due diligence showed incredible “sloppiness,” according to Mr. Yale, a certified public account and principal of Yale & Co.

“It was basically the same recklessness with which major investment banks conducted their mortgage-backed-securities business, but it was done by middle- or lower-tier firms and [with] a different set of products. You need to understand the underlying business and management’s representations about the performance of that business, and then begin performing due-diligence procedures that are either going to corroborate those representations or not,” Mr. Yale said.

“Another failure was that everyone seemed to rely on the fact that [MedCap] payments had been made in a timely way,” he said.

THEY “PAY TILL THEY DON’T”

“The word was, “They’re paying.’ So what? That’s how all Ponzi schemes work. They pay till they don’t,” said Mr. Yale, who has served as an expert witness for a dozen different plaintiff’s lawyers in lawsuits stemming from more than $100 million in claims. The overwhelming majority were settled, and Mr. Yale testified in only one.

The investor won that claim last year, with an award of $1.2 million in damages and legal fees against Securities America Inc.and an affiliated broker.

The broker-dealers that sold $3.6 billion in MedCap notes, Shale Royalties preferred shares, and DBSI tenant-in-common exchanges, partnerships and notes have said that they performed appropriate due diligence. In several regulatory actions that involved fines or restitution to investors, the B-Ds neither admitted nor denied the findings. Regulators, however, recently have issued fines and sanctions that support Mr. Yale’s assertion.

The InvestmentNews.com article said that in September, for example, the Financial Industry Regulatory Authority Inc. levied a $10,000 fine and a six-month suspension against Brian Boppre, former president of Capital Financial Services Inc. Capital Financial was a leading seller of both Medical Capital Financial and Provident Royalties, and Mr. Boppre “knew of an issuer’s failure to make payments to its investors and was also aware of other indications of the issuer’s problems but approved the offering as a product available for the firm’s brokers to sell to their customers,” according to Finra. Mr. Boppre also “failed to conduct adequate due diligence of the offerings before allowing firm brokers to sell this security,” according to Finra.

WE ARE “SEEING A SHIFT’

One due-diligence executive said that broker-dealers have made some changes in the wake of the private-placement failures and are working more closely with third-party due- diligence analysts. “From an industry standpoint, we’re seeing a shift in trying to bring some standards as it relates to how these deals should be structured,” said Anthony J. Chereso, president of FactRight LLC.

“It’s an absolute necessity. There also needs to be some clarity as to what Finra and the regulators are expecting of the broker-dealers,” Mr. Chereso said. “We need to have the broker-dealers more involved in the process of managing the due diligence.”

“We encourage the broker-dealers to participate in the on-site visits [to companies issuing private placements] with us, to walk along with us in the due-diligence process. That way, they will know firsthand what some of the potential issues are,” said Yale.

After the SEC in July 2009 alleged that Medical Capital and its leading executives had committed fraud, executives with Securities America insisted that they performed “industry-leading” due diligence on private placements that they sold.

“It’s untrue, because basically what Securities America did, I believe, was to rely on management representations made by Medical Capital or rely on third-party due diligence that relied on management representations,” he said.

“Securities America continually enhances its policies and procedures in order to best serve its customers,” said Janine Wertheim, senior vice president and chief marketing officer of Securities America, who didn’t directly address Mr. Yale’s comments.

“One of the problems is that many of the firms relied on third-party due-diligence vendors,” Mr. Yale said.

“They viewed those reports as the end of the process, rather than the beginning. There’s a notice to [Finra] members, 05-48, that basically says you can outsource any function, but you can’t outsource your responsibility for compliance with federal securities laws or regulations,” Mr. Yale said.

“In many instances, the issuer paid those third-party due-diligence providers,” he said. “To believe that due-diligence functions stops with some independent — or purportedly independent — provider is a mistake.”

ACCOUNTANTS

To perform true due diligence, firms must use accountants to dig into the offering documents, Mr. Yale said.

“Why didn’t Securities America impose a third-party, independent CPA firm to verify the results of the [MedCap] loan pool histories? That was supposedly the primary business,” he said. “Or why didn’t they hire a CPA to look at the loan files? That’s state-of-the-art due diligence.”

“That’s what any private-equity firm would do and a whole lot more,” Mr. Yale said. “Neither Securities America nor any other firm whose documents I’ve seen ever did that.”

One third-party due-diligence analyst who wrote reports about Medical Capital Financial was “almost wringing his hands over Medical Capital investments in health-care-related businesses, particularly owner-occupied real estate,” Mr. Yale said.

The analyst, whom Mr. Yale declined to identify, “stated in his reports that this was not their expertise. The next-most-obvious question is: What did the financial statement say about those investments, and how are they performing?” he asked.

“So you need to go look at the investments that are disclosed in the footnotes to the financial statements, and you see a bunch of them are delinquent. Where was the follow-up?” Mr. Yale said as written by Bruce Kelly for InvestmentNews.com.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with these or other stockbrokers/brokerages, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Sep/11

14

Capital Financial Services Inc to Pay $200K to Settle FINRA Allegations it Sold Unsuitable Private Placements

Comments off · Posted by Securities Lawyer in FINRA

Bruce Kelly writes in a Sept. 13th, 2011, article in InvestmentNews.com that a broker-dealer who sold millions of dollars of failed private placements reached a $200,000 settlement with the Financial Industry Regulatory Authority Inc. last month, with the money going to the investors.

In a Finra letter of acceptance, waiver and consent, Capital Financial Services Inc. of Minot, N.D., “failed to have reasonable grounds to believe that private placements offered by Medical Capital Holdings Inc. and Provident Royalties LLC, pursuant to Regulation D, were suitable for any customer.”

Capital Financial Services Inc., also “failed to conduct adequate due diligence” on the two series of offerings and to put in place a supervisory system to achieve compliance when selling the private placements, according to the Finra letter. The firm has 332 affiliated registered representatives. John Carlson is the firm’s president.

The InvestmentNews.com article goes on to say that Capital Financial has recently drawn attention for its due-diligence policies. In April, the Securities and Exchange Commission alleged that Capital Financial’s due diligence on Provident Royalties private placements fell short, and the firm “never conducted independent verification of any of the offering materials provided by Provident.” The status of that case is still pending, according to the firm’s profile on Finra’s BrokerCheck system.

Those potential problems, according to Finra, included a custodian’s refusing to hold the MedCap notes, a clearing firm’s valuing the notes at zero on client account statements; the firm’s receiving two third-party due-diligence reports that highlighted Medical Capital’s recent failure to pay interest and a communication from a another third-party due-diligence analyst who indicated that MedCap executives weren’t allowing the analyst access to all its records.

Kelly writes that according to the SEC, the firm’s brokers sold $63 million of Provident Royalties preferred stock from 2006 to 2009. The Finra action focuses on 36 Capital Financial brokers who sold $11.8 million of MedCap notes in 2008 and 2009, allegedly after several “red flags” were raised about those notes.

Also stated was another alleged shortcoming of Capital Financial, was its failure to look at the financial records of Medical Capital and Provident Royalties. The firm “never obtained financial information about MedCap and its offerings from independent sources, such as audited financial statements,” according to the Finra letter, which uses similar language regarding sales of Provident Royalties.

By Sept. 1, the firm was to pay $80,000 to the court-appointed receiver for Medical Capital and $120,000 to the court-appointed receiver for Provident Royalties.

The firm consented to the Finra action without admitting to or denying its findings.

Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you feel you have become a victim of Capital Financial Services, Inc., call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

 

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