FINRA Arbitration

Published on: December 20, 2017

LPL Loses $462,000 Arbitration Claim Involving Former Broker Charles Fackrell

broker misappropriating client money On December 18, 2017, LPL Financial LLC (“LPL”) lost a FINRA arbitration concerning customer claims related to former LPL broker Charles Fackrell. The three-member FINRA panel issued a $462,000 aggregate award to six of Mr. Fackrell’s former clients, an amount which must be satisfied by LPL within 30 days. As we discussed in a previous blog post, Mr. Fackrell (CRD# 5369665) pled guilty last year to one count of securities fraud for operating a $1.4 million Ponzi scheme. According to prosecutors handling the investigation, beginning around May 2012, Mr. Fackrell first engaged in the fraudulent scheme by misappropriating investor funds solicited from at least 20 victims, many from Wilkes County, North Carolina.

In addition to asserting claims of negligence and violations of the North Carolina Securities Act, Mr. Fackrell’s former clients brought claims against LPL for breach of contract, failure to supervise, principal/agent liability, and negligent retention of an agent.

As detailed in publicly available court documents, Mr. Fackrell abused his position of trust with his clients, steering them away from legitimate investments to purported investments with “Robin Hood, LLC,” “Robinhood LLC,” Robin Hood Holdings, LLC,” and “Robinhood Holdings, LLC,” as well as related entities (collectively, “Robin Hood”). These entities were controlled by Mr. Fackrell and provided him with a conduit through which to cover his own personal expenses, including hotel expenses, groceries, purchases at various retail shops, and to make large cash withdrawals.

Published on: December 18, 2017

Summit Healthcare REIT Shares May Be Worth Less Than $2 A Share

by InvestorLawyers

Money Bags Investors with losses in Summit Healthcare REIT (“Summit”), a non-traded real estate investment trust (Non-Traded REIT), may have arbitration claims if a broker or advisor made a recommendation to purchase the shares without a reasonable basis or misled the customer as to the nature of the investment. Summit, headquartered in Lake Forest, California, invests in a diversified, income-producing portfolio of assets in the healthcare sector, focusing its investments on operators of senior housing facilities in the United States. Summit acquires, leases, and manages healthcare real estate and invests in the healthcare sector and diversifies by property type, location, and tenant. Publicly-available information suggests that shares of Summit have significantly decreased in value and are now worth less than $2 a share.

MacKenzie Realty Capital has reportedly offered to purchase up to 330,000 shares of Summit for only $1.34 per share in a tender offer – which would leave investors who sold facing a significant loss on the original purchase price. Secondary market providers that allow investors to bid and sell illiquid products such as Non-Traded REITs value Summit shares at between $1.50 and $1.56, and the sponsor estimates their value at $2.53 a share.

Unfortunately for many investors in Summit, it would appear that any attempt to exit their illiquid investment will incur a substantial loss. Aside from their illiquid nature, non-traded REITs also present significant additional risks. One of these risks has to do with their high cost. In most instances, non-traded REITs are sold through a network of independent broker-dealers and associated financial advisors, who earn steep commissions (ranging up to 10%) on sales of non-traded REITs to investors. In addition to the sales commission charged, non-traded REITs typically charge other expenses, including certain due diligence and administrative fees (that can range anywhere from 1-3%).

Published on: December 15, 2017

Investors in CNL Lifestyle Properties, Inc. May Have Arbitration Claims

by InvestorLawyers

Apartment Building CNL Lifestyle Properties, Inc. (“CNL Lifestyle”) is a publicly registered non-traded real estate investment trust (“REIT”) that is based in Orlando, FL. Because CNL Lifestyle 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.

Non-traded REITs pose many risks that may not be immediately apparent to investors (or adequately explained by financial advisors and stockbrokers who sell them). To begin, one of the more readily apparent risks associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%. In addition, non-traded REITs like CNL Lifestyle 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.

Another significant risk associated with non-traded REITs has to do with their liquidity. Unlike traditional stocks and publicly traded REITs, non-traded REITs do not trade on a national securities exchange. Therefore, many investors in non-traded REITs who were uninformed of their liquidity issues have come to learn that they can only redeem shares of the investment directly with the sponsor (and only then on a limited basis, and often at a disadvantageous price), or alternatively, sell the shares through a limited and fragmented secondary market. Finally, most non-traded REITs are structured to experience a future ‘liquidity event’ – which might entail listing the shares on an exchange or liquidating the entire portfolio – although such an event will typically only occur after a number of years (e.g., 5-7 years).

Published on: December 14, 2017

Former Wells Fargo Brokers Barred for Recommending Risky Over-Concentration in Oil & Gas Investments

by InvestorLawyers

money whirlpool The Financial Industry Regulatory Authority (“FINRA”) has barred former Wells Fargo (CRD# 126292) financial advisors Charles Henry Frieda (CRD# 5502319) and Charles B. Lynch, Jr. (CRD# 3004877) for allegedly engaging in a pattern and practice of recommending an unsuitable over-concentration in energy-sector securities to numerous customers. On April 12, 2016, Mr. Lynch was discharged by Wells Fargo for “loss of management confidence,” as reported on Wells’ Form U-5 filing with regulators. His partner, Mr. Frieda, remained at Wells until September 2017.

Pursuant to FINRA Rule 9216, on November 27, 2017, both Messrs. Lynch and Frieda submitted a Letter of Acceptance, Waiver and Consent (“AWC”) for the purposes of proposing a settlement to certain alleged industry rule violations. Specifically, it was alleged by FINRA Enforcement in the AWC that “From November 2012 to October 2015” both former Wells Fargo advisors “[r]ecommended an investment strategy that was unsuitable for certain retail customers” and purportedly involved the brokers recommending “[a]n over-concentration in energy-sector securities, some of which were speculative, resulting in significant customer losses.”

As part of the AWC, FINRA Enforcement alleged that Messrs. Lynch and Frieda violated FINRA Rule 2111. In relevant part, Rule 2111 – the so-called suitability rule – mandates that a broker “must have a reasonable basis to believe that a recommended… investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable due diligence….”

Published on: December 13, 2017

FINRA Bars Broker for Failure to Produce Documentation Concerning Annuity Sales

by InvestorLawyers

stock market chart As part of its ongoing regulatory focus on variable annuity (“VA”) sales misconduct, the Financial Industry Regulatory Authority (“FINRA”) has recently barred a former Next Financial Group (“Next Financial”) (CRD# 46214) broker. Registered representative JoeAnn Walker (CRD# 2210194) was previously affiliated with Commonwealth Financial Network (1998-2006), LPL Financial LLC (2006-2015), and most recently, NEXT Financial – until her termination by her former employer in October. According to FINRA, it was conducting an inquiry into whether Ms. Walker was engaging in possible unsuitable VA sales practices.

As we have discussed in several recent blog posts, FINRA has ramped up its efforts in recent months to target VA sales practice misconduct. Since handing down a $20 million fine against MetLife Securities, Inc. (“MSI”) in May, 2016 (in addition, FINRA ordered MSI to pay $5 million to customers in connection with allegations of making negligent material misrepresentations and omissions on VA replacement applications), FINRA enforcement has continued to fine numerous member firms and investigate certain financial advisors concerning variable annuity sales practice issues.

In particular, FINRA has targeted brokers recommending unsuitable VAs, in the first instance, as well as recommending the sale of one VA for another in order to generate commissions (a practice akin to churning, and commonly referred to as “switching”). According to publicly available information through FINRA, Ms. Walker has three prior customer complaints, each of which resulted in a settlement. Most recently, in March 2016, a customer initiated a dispute against Ms. Walker, alleging “… unauthorized sales of various stocks, unauthorized and unsuitable purchases of variable annuities and unauthorized mutual fund switches between June 2014 and June 2015.” That FINRA proceeding alleged damages of $208,764 and ultimately settled for $175,000.

Published on: December 12, 2017

Former Bolton Capital Broker Paul Smith Indicted for Alleged Haverford Group Scheme

by InvestorLawyers

Stealing Money Paul Wescoe Smith, formerly associated with Bolton Global Capital, was the subject of a civil action and a criminal indictment filed by the United States Securities and Exchange Commission and the Department of Justice, through the United States Attorney for the Eastern District of Pennsylvania, on December 7, 2017. Smith, age 63, a resident of Wayne, Pennsylvania, has been accused of misconduct in connection with the sale and operation of a Ponzi scheme known as the Haverford Group.

Smith worked in the securities industry as a registered representative of several brokerage firms from 1982 until 2017, including with Bolton Global Capital from May 2007 to February 2017. Smith allegedly sold unregistered securities in a purported hedge fund known as The Haverford Group to more than a dozen investors.

Bolton Global Capital, Smith’s employer, reportedly notified Smith’s customers in early 2017 that their accounts were being transferred to another “financial representative” but reportedly gave no indication that Smith had been terminated and accused of wrongdoing in connection with The Haverford Group.

Published on: December 9, 2017

Woodbridge Group of Companies Receives Court Approval on its First Day Bankruptcy Court Motions

by InvestorLawyers

woodbridge mortgage funds As recently discussed in our blog, on Monday, December 4, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in Delaware Bankruptcy Court (Case No. 17-12560-KJC). Woodbridge has asserted that a restructuring of its debt was necessary due to increased operating and development costs, in addition to expenses associated with ongoing litigation and regulatory compliance. As we have discussed in several previous blog posts, Woodbridge continues to face considerable regulatory scrutiny in connection with allegations of offering and selling unregistered securities, in addition to allegations of possible misconduct by Woodbridge and its President, Robert Shapiro.

As reported on December 6, Woodbridge’s First Day Motions in Delaware Bankruptcy Court (“Motions”) were successful. The Bankruptcy Court issued certain interim authorizations to help ensure Woodbridge’s ability to continue operations in the ordinary course during its restructuring process. For instance, the Bankruptcy Court approved Woodbridge’s request to access debtor-in-possession (“DIP”) financing through a California private direct lender specializing in real estate debt investments, Hankey Capital, LLC (“Hankey”).

This DIP financing, combined with cash on hand generated by Woodbridge’s operations, is intended to support continued business operations during the restructuring process. In signing off of on Woodbridge’s request to borrow $6 million for a day through its DIP financing, Judge Kevin Casey indicated “The request here is a relatively modest one.” In addition to receiving approval on its initial DIP financing request, Woodbridge also received approval for, among other things, cash to pay employee salaries and benefits.

Published on: December 8, 2017

Woodbridge FPCM Investors May Have Legal Rights

by InvestorLawyers

If you are have invested in Woodbridge Wealth or in any of the Woodbridge Mortgage Funds, you may have questions concerning your rights in light of Woodbridge’s recent bankruptcy filing.

Investors who purchased Woodbridge FPCMs through a stockbroker or financial advisor may have viable FINRA arbitration claims if the brokerage firm did not perform adequate due diligence before recommending the Woodbridge investment. Law Office of Christopher J. Gray, P.C. offers a confidential, no-obligation consultation to Woodbridge investors.

Woodbridge Wealth, a California-based firm, sells structured financial products to investors, often through intermediary brokers. Woodbridge has reportedly raised over $1 billion by selling investors instruments known as First Position Commercial Mortgages (“FPCMs”). The Woodbridge Funds advertise that their management team’s substantial experience lets them maintain a successful lending model and find lending opportunities that are favorable for investors. Investors do not have any role other than providing money. An FPCM consists of a promissory note from a Woodbridge Fund, a loan agreement, and a non-exclusive assignment of the Woodbridge Fund’s security interest in the mortgage for the underlying hard-money loan. The Woodbridge Funds pool money from multiple investors for each hard-money loan. The Woodbridge Funds’ promissory notes effectively guarantee the underlying hard-money loans, and the Woodbridge Funds’ advertising materials state that the Woodbridge Funds are obligated to make payments to FPCM investors even if the hard-money borrower defaults.

Published on: December 8, 2017

SEC Files Civil Complaint Alleging Churning Against Two New York Stockbrokers

by InvestorLawyers

Piggy Bank in a Cage The Securities and Exchange Commission (“SEC”) has filed a civil complaint (“Complaint”) in federal court against Mr. Zachary S. Berkey of Centerreach, NY and Mr. Daniel T. Fischer of Greenwich, CT, alleging that these financial advisors made unsuitable trades at the expense of customers. The Complaint addresses alleged conduct that occurred when Messrs. Berkey and Fischer were both employed by Four Points Capital Partners LLC (“Four Points”) (CRD# 43149).

According to the Complaint, Messrs. Berkey and Fischer allegedly conducted “in-and-out trading” that was almost certain to incur losses for investors, while at the same time yielding commissions to the financial advisors. Further, the Complaint indicates that ten (10) Four Points customers lost a total of $573,867, while Messrs. Berkey and Fischer earned commissions of $106,000 and $175,000 on these losing trades, respectively.

The SEC Complaint alleges that because the customers incurred significant costs with every transaction and the securities traded were held for short periods of time, the price of the securities had to rise significantly in order to realize even a minimal profit.

Published on: December 7, 2017

Woodbridge Group of Companies Tells Investors Bankruptcy Is “Effort To Recapitalize Debt And Establish Stronger Financial Platform”

by InvestorLawyers

woodbridge mortgage funds On December 4, 2017, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. As we have previously highlighted in a series of blog posts, Woodbridge has come under considerable regulatory scrutiny over the past year, both by the Securities and Exchange Commission (“SEC”), and various state securities regulators including officials in Arizona, Colorado, Idaho, Massachusetts, Michigan, Pennsylvania, and Texas.

In a letter to investors dated December 5, Woodbridge announced the bankruptcy filing and stated that “[t]he Company took this action in an effort to recapitalize its debt and establish a stronger financial platform.”

In the investor letter, Woodbridge elaborated as follows concerning the purported reasons for the bankruptcy: “While Woodbridge continues to be a leading developer of high-end real estate, as the business has grown, increased operating and development costs have been exacerbated by the unforeseen costs associated with ongoing litigation and regulatory compliance. This combination of rising costs and regulatory pressure led to a loss of liquidity, resulting in an inability to make our regularly scheduled one-year Notes payment due December 1, 2017. So you understand, this unpaid obligation incurred by Woodbridge prior to December 4, 2017 is now frozen and will be considered as general unsecured claims in the restructuring proceedings.”