FINRA Arbitration

Published on: February 15, 2018

FINRA Bars Former Wells Fargo Advisor for Allegedly Churning Customer Accounts

Money in Wastebasket On February 9, 2017, FINRA Enforcement signed off on a Letter of Acceptance, Waiver and Consent (“AWC”) between FINRA and former financial advisor Matthew C. Maczko (“Maczko” or “Respondent”) (CRD# 1888519). Without admitting or denying FINRA’s findings, Mr. Maczko voluntarily consented to an industry bar from associating with any FINRA member firm in any capacity.

Mr. Maczko first became associated with a FINRA member firm in 1988 as a general securities representative under the employ of UBS Financial Services Inc. (“UBS”) (CRD# 8174). During the course of his career, he worked at UBS for nearly twenty years, and thereafter, from 2008-2016, worked as a registered representative for Wells Fargo Advisors, LLC (“Wells Fargo”) (CRD# 19616).

According to the AWC, “[M]aczko had been terminated on September 2, 2016” by Wells Fargo in connection with the brokerage firm’s “[i]nternal review for adherence to industry standards of conduct based on concerns about the level of trading in a customer account.” Furthermore, the AWC specifically referenced the following instance of alleged excessive trading, or churning, purportedly conducted by Maczko while affiliated with Wells Fargo:

Published on: February 14, 2018

Investors May Have Arbitration Claims Against Former Newbridge Securities Broker Austin Dutton

by InvestorLawyers

broker misappropriating client money A number of investors have recently filed arbitration claims with the Financial Industry Regulatory Authority (“FINRA”) against broker Austin Richard Dutton, Jr. (CRD# 2739167). Publicly available information indicates that Mr. Dutton was previously affiliated with Newbridge Securities Corporation (“Newbridge”) (CRD# 104065) from 2007-2017. Currently, Mr. Dutton is affiliated with Sandlapper Securities, LLC (“Sandlapper”) (CRD# 137906), and conducts his financial advisory business through his own independent firm, Bridge Valley Financial Services, LLC. Upon information and belief, Mr. Dutton marketed certain risky non-traded investment products to a client base which includes Philadelphia law enforcement and firefighters.

According to publicly available information, Mr. Dutton appears to have recommended and sold certain complex and risky non-conventional investments (“NCIs”) including direct participation programs (“DPPs”) and non-traded financial products, including non-traded REITs. In particular, it appears that Mr. Dutton recommended and sold numerous non-traded REITs previously packaged and marketed by Nicholas Schorsch’s firm, American Realty Capital (ARC), now known as AR Global.

FINRA disclosures concerning Mr. Dutton include, but are not limited to, four pending customer complaints and a July 2017 regulatory enforcement proceeding by state securities regulators. Of the pending complaints, three pending customer disputes were filed in December 2017 and all center on allegations of unsuitability, misrepresentations, and omissions of material facts concerning the risks and features of certain securities.

Published on: February 13, 2018

Investors in AEI Accredited Investor Fund V May Have Arbitration Claims

by InvestorLawyers

Investors in AEI Accredited Investor Fund V, L.P. (“AEI V” or the “Limited Partnership) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. AEI V is structured as a Minnesota limited partnership and is based in St. Paul, MN. The Limited Partnership was formed as a capital investment entity for the purpose of investing in a portfolio of income producing commercial real estate.

Money Maze On May 29, 2013, AEI V first offered securities through its private placement pursuant to Regulation D (“Reg D”) of the federal securities laws. The total initial offering amount was $1,915,573, and investors who participated in the offering were required to invest a minimum of $5,000.

In general, limited partnerships — particularly non-traded limited partnerships, such as AEI V — are very complex and risky investments. For this reason, investing in a limited partnership through a private placement is typically only available to accredited investors (to be accredited an investor must have an annual income of $200,000 or joint annual income of $300,000, for the last two years, or alternatively, have a net worth in excess of $1 million).

Published on: January 16, 2018

Investors in Life Settlements Absolute Return I, LLC May Have Arbitration Claims

by InvestorLawyers

Money Maze On December 29, 2017, Life Settlements Absolute Return I, LLC (“LSAR”) – a special purpose vehicle investing in life insurance policies – filed for Chapter 11 bankruptcy relief in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-13030). The Debtors, LSAR I and its wholly owned subsidiary, estimate their assets to be worth between $10,000,001 and $50 million, and their liabilities to be between $100,000,001 and $500 million. According to the Debtors’ First Day Declaration, the Chapter 11 proceeding was necessitated because “[t]he Insureds have outlived their actuarial life expectancy, thereby prolonging LSAR’s receipt of cash from the death benefits of the Policies…” LSAR is wholly-owned by Attilanus, a Delaware limited partnership formed on January 29, 2004.

The primary risk associated with investing in life settlements (or viaticals) concerns the possibility that the insured (who has sold his or her life insurance policy to the investment sponsor) will outlive the money set aside by the sponsor to pay for continued life insurance premiums. In such a scenario, the investors in the life settlements may then be called upon to pay future premiums in order to ensure that the policy remains in force until maturity. When some investors refuse to pay, the remaining investors are left to cover higher premium payments, or else allow the policy to lapse.

Further, as appears to be the case with LSAR, when the sponsor can no longer afford to service the debt on its own credit facilities, then the sponsor may well be forced to seek bankruptcy protection. As outlined in LSAR’s Chapter 11 First Day Declaration, “Beginning in July 2009, in order to fund premium payments on the Policies… LSAR (as the borrower) and the Employees’ Retirement System of the Government of the Virgin Islands (“GERS”) and Attilanus (as lenders) extended a credit facility to LSAR, whereby Attilanus made an initial loan to LSAR in the principal amount of $500,000 and GERS made a loan to LSAR in the principal amount of $1,160,263.”

Published on: January 15, 2018

KBS REIT II Investors May Have Arbitration Claims

by InvestorLawyers

Money in Wastebasket Investors in KBS Real Estate Investment Trust II, Inc. (“KBS II” or the “Company”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to purchase KBS II was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. KBS II was formed as a Maryland REIT on July 12, 2007. The Company is based in Newport Beach, CA, and in line with its business model, is “[i]nvested in a diverse portfolio of real estate and real estate-related investments. As of September 30, 2017, the Company owned ten real estate properties (consisting of nine office properties and an office campus consisting of eight office buildings).”

Because KBS II is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who purchased shares through the initial public offering (“IPO”) upon the recommendation of a broker or financial advisor. Pursuant to the Company’s offering, 182,681,633 shares of KBS II common stock were sold through its primary offering, for gross proceeds of $1.8 billion. Further, the Company sold 30,903,504 shares of common stock under its dividend reinvestment plan, for gross proceeds of $298.2 million. According to publicly available information through filings with the SEC, as of September 30, 2017, the Company had redeemed 25,723,025 shares sold under the offering for $244.6 million.

Non-traded REITs, such as KBS II, are complex and risky investment vehicles that do not trade on a national securities exchange. Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs, meaning that investors who wish to sell their shares can only do so through a direct redemption with the issuer or through a fragmented and illiquid secondary market.

Published on: January 12, 2018

Investors in Roundstone Healthcare Capital V May Have Arbitration Claims

by InvestorLawyers

Money Maze Investors in Roundstone Healthcare Capital V, L.P. (“Roundstone V” or the “Limited Partnership”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution if the recommendation to purchase Roundstone V was unsuitable or if a broker or investment advisor who sold Roundstone V made a misleading sales presentation.

Roundstone V is structured as a Delaware limited partnership and is based in Acton, MA. The Limited Partnership was formed in 2009 as a capital investment entity, to invest in discounted portfolios of medical receivables. On March 27, 2009, Roundstone V first sold securities through its private placement offering pursuant to Regulation D (“Reg D”) of the federal securities laws.

Investors who participated in the offering were required to invest a minimum of $10,000. Shortly after commencing its initial offering of up to $25,000,000 in investor capital, the Limited Partnership sold $4,459,000 of securities through private placement by May 18, 2009.

Published on: January 10, 2018

Investors in Business Development Corporation of America May Have Arbitration Claims

by InvestorLawyers

financial charts and stockbroker Investors in Business Development Corporation of America (“BDCA”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if a broker or financial advisor made the recommendation to invest in BDCA without a reasonable basis, or misled the investor as to the nature of the investment. BDCA is a non-traded business development company headquartered in New York, New York. As a business development company (“BDC”), BDCA focuses on providing flexible financing solutions to various middle market companies, including first and second lien secured loans and debt issued by mid-sized companies.

As an investment vehicle, BDCs first emerged in the early 1980’s following legislation passed by Congress making certain amendments to federal securities laws. These legislative changes allowed for BDC’s — types of closed end funds — to make investments in developing companies and firms. Many brokers and financial advisors have recommended BDCs as investment vehicles to their clientele, touting the opportunity for retail investors to earn enhanced dividend income while participating in private-equity-type investing previously unavailable to the average retail investor.

While BDCs may arguably offer an attractive investment opportunity, non-traded BDCs, such as BDCA, are very complex and risky investment products. Non-traded BDCs, as their name implies, do not trade on a national securities exchange, and are therefore illiquid products that are hard to sell (investors can typically only sell their shares through redemption with the issuer, or through a fragmented and illiquid secondary market). Further, non-traded BDCs such as BDCA have high up-front commissions and fees (typically as high as 10%), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager.

Published on: January 9, 2018

Investors in Inland Land Appreciation Fund II May Have Arbitration Claims

by InvestorLawyers

investing in real estate through a limited partnership Investors in Inland Land Appreciation Fund II, L.P. (“Inland II” or the “Limited Partnership) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution. Inland II is based in Oak Brook, IL and is structured as a Delaware Limited Partnership. The Limited Partnership was formed in June 1989, to invest in undeveloped land on an all-cash basis and realize the upside appreciation upon resale. In October 1989, the Partnership commenced an offering of limited partnership units at $1,000 per unit. In connection with this initial offering, Inland II received $50,476,170 in gross offering proceeds, and accepted all unit holders into the partnership. The General Partner is Inland Real Estate Investment Corporation.

Pursuant to their business model, Inland II purchased, on an all-cash basis, 27 parcels of undeveloped land and two buildings. All of these investments were made in the Chicago, IL metropolitan area. Initially, the partnership anticipated holding the properties for a period of 2 -7 years from the time of land portfolio acquisitions. However, due to several factors, including lengthy rezoning and entitlement processes, the Limited Partnership’s holding period greatly exceeded their initial estimates.

According to publicly available documents filed with the Securities and Exchange Commission (“SEC”), as of December 31, 2016, the Limited Partnership had a remaining parcel of land it had yet to sell.

Published on: January 2, 2018

ARC Healthcare Trust III Approves its Plan of Liquidation

by InvestorLawyers

Building Demolished As we discussed in a recent blog post, investors in American Realty Capital Healthcare Trust III Inc. (“ARC HT III”) may be able to recover losses on their investment in FINRA arbitration. Sponsored by AR Global, ARC HT III is a publicly registered non-traded real estate investment trust (“REIT”) based in New York, NY. As its name implies, this non-traded REIT is primarily focused on investing in healthcare-related assets including medical office buildings, seniors housing and other healthcare-related facilities.

ARC HT III raised approximately $168 million in investor equity prior to cancellation of its offering, due in large part to a series of scandals concerning AR Global. As recently as July 2017, ARC HT III announced an estimated net asset value (“NAV”) per share of $17.64. Investors who participated in the offering bought in at $25 per share. Additionally, on July 18, 2017, the ARC HT III Board determined that it would cease paying distributions beginning in August 2017.

One of the risks associated with investing in non-traded REITs concerns the viability of the distribution payment. At its discretion, the board of a non-traded REIT may well decide to substantially reduce, or altogether suspend, payments of distributions to investors. This is troubling, particularly because many investors are advised to purchase non-traded REITs as a means of earning enhanced income. Another risk associated with investing in non-traded REITs has to do with their high up-front commissions, typically between 7-10%. In addition, non-traded REITs like ARC HT III generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. These fees act as an immediate ‘drag’ on any investment and can serve to compound losses.

Published on: December 26, 2017

Investors in American Finance Trust May Have Arbitration Claims

by InvestorLawyers

Apartment Building American Finance Trust (“AFIN”), formerly known as American Realty Capital Trust V, Inc., is a publicly registered non-traded real estate investment trust (“REIT”) that is based in New York, NY. Incorporated on January 22, 2013 as a Maryland REIT, AFIN is a diversified REIT with a focus on retail properties. As of September 30, 2017, AFIN owned a total of 517 properties. Because AFIN is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

AFIN commenced its initial public offering in April 2013, which closed approximately six months later, raising $1.6 billion in investor equity. Investors who participated in the IPO paid $25 per share. In February 2017, AFIN completed a merger with another affiliated non-traded REIT: American Realty Capital – Retail Centers of America.

Non-traded REITs pose many risks that may not be readily apparent to investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments. One significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%. In addition to high commissions, non-traded REITs like AFIN generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. Such high fees (perhaps as high as 13-15%) act as an immediate ‘drag’ on any investment and can serve to compound losses.