FINRA Arbitration

Published on: December 5, 2017

Woodbridge Group of Companies Files for Chapter 11 Bankruptcy Protection

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. Further, according to bankruptcy filings, Woodbridge has received information requests from state securities regulators in approximately 25 states. The investigations conducted by securities regulators at both the federal and state level have centered on allegations of offering and selling unregistered securities that are not exempt from registration.

In addition, at the federal level, the SEC has raised allegations of possible misconduct by Woodbridge and its President, Robert Shapiro (“Shapiro”). On Friday, December 1, Mr. Shapiro resigned as Woodbridge’s CEO. As of Monday, December 4, according to bankruptcy proceeding filings, Woodbridge owes approximately $750 million to an estimated 8,998 noteholders who invested in various Woodbridge funds. Holders of these notes are entitled to a fixed rate of interest generally ranging from 4.5 – 13%, payable on a monthly basis, and repayment of principal upon maturity (typically within 12-20 months of issuance) of the note.

Woodbridge operates through a complex structure of interrelated companies (numbering about 250) which are owned either directly or indirectly by RS Protection Trust, an irrevocable Nevada trust, of which Mr. Shapiro is the trustee and his family members are the sole beneficiaries. Included among the various Woodbridge entities or mortgage funds are the following:

Published on: December 5, 2017

Woodbridge Mortgage Investment Fund 3, LLC Subject To Texas Cease-and-Desist Order

by InvestorLawyers

woodbridge mortgage funds On March 18, 2016, the Securities Commissioner of the State of Texas (“Securities Commissioner”) entered a Cease and Desist Order (“Order”) against Woodbridge Mortgage Investment Fund 3, LLC (“Woodbridge 3” or “Respondent”). Respondent Woodbridge 3 is a Delaware-organized limited liability company formed in or around 2014. Woodbridge 3 is one of a number of mortgage funds offered by the Woodbridge Group of Companies, LLC (“Woodbridge”), the successor firm to Woodbridge Structured Funding, LLC. Woodbridge is headquartered in Sherman Oaks, CA, and its principal and controlling person is Robert H. Shapiro (“Shapiro”).

In connection with the Securities Commissioner’s Order, State of Texas securities regulators made the following findings of fact concerning their investigation into Woodbridge 3:

The Bureau determined that Respondents Woodbridge 3 and Shapiro offered and sold “First Position Commercial Mortgages” (“FPCMs” or “The Note Program”) to investors in Texas that fell within the definition of a security;

Published on: December 4, 2017

Bank of America/Merrill Lynch Strategic Return Notes (SRNs) Collapse In Value

by InvestorLawyers

Money in Wastebasket Bank of America Merrill Lynch’s (“Merrill Lynch”) brokerage unit offered Strategic Return Notes (“SRNs”) to customers, resulting in losses of as much as 95% of the principal invested. First issued in November 2010 and maturing November 27, 2015, the SRNs were designed to be linked to Merrill Lynch’s own proprietary volatility index (the “VOL”) which was designed to calculate the volatility of the S&P 500 Index. The SRNs, which were issued at $10 per share, ultimately matured at just $0.50 per share. Thus, investors in Merrill Lynch’s proprietary SRN’s were subjected to an enormous 95% loss on their principal investment.

In recent years, many investors have been solicited by their financial advisor to purchase so-called structured notes, which are often presented to customers as a higher-yielding, but still relatively safe alternative to fixed-income investments such as bonds. Structured notes are issued and backed by financial institutions. As hybrid products containing both a bond component and an embedded derivative, structured notes are designed to provide an investor with a return based on an equity index (or some other benchmark), as opposed to an interest rate typically associated with a traditional bond investment.

In theory, a structured note is supposed to provide an investor with an opportunity to earn enhanced income (in excess of the very low interest rates offered in the current environment on most bond investments), while also providing some downside cushion. In practice, however, many structured notes engineered by various investment banks and sold by their brokers have proved to be horrendous investments.

Published on: November 30, 2017

SII Investments Non-Traded REIT Sales Subject of Massachusetts Complaint

by InvestorLawyers

Apartment Building As recently reported, on September 20, 2017, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed an Administrative Complaint (“Complaint”) against SII Investments, Inc. (“SII”) (CRD# 2225) in connection with the brokerage firm’s marketing and sales of non-traded REITs to certain Massachusetts investors. SII is an independent broker-dealer within National Planning Holdings, which was recently acquired by Boston-based LPL Financial.

The Complaint essentially alleges that for the past several years, SII has engaged in “[d]ishonest and unethical conduct and failed to supervise its agents by allowing systemic inflation of its clients’ liquid net worth while maintaining contradictory and unclear rules related to the purchase of non-traded real estate investment trusts… .” Of significance, Massachusetts securities regulations mandate that “[n]o more than 10% of a client’s liquid net worth can be concentrated in one specific non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs in general.”

According to the Complaint, SII’s own internal policies and procedures also would also appear to have been violated by some of SII’s alleged conduct. For example, on SII’s own suitability and disclosure forms used for the sales of non-traded REITs, the full value of variable annuity products was listed as part of a client’s liquid net worth. However, as referenced in the Complaint, SII’s own “[C]ompliance Guide states ‘There must not be any representation or implication that variable annuities are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions.’”

Published on: November 29, 2017

FINRA Bars Former United Planners Broker Jerry Lou Guttman For Alleged Private Securities Transactions

by InvestorLawyers

Cage Money Former United Planners Broker Jerry Lou Guttman allegedly sold over $7,000,000 worth of unregistered securities to customers of his former employer. Guttman allegedly sold membership interests in at least six different limited liability companies to 31 customers and seven non-customers without first disclosing the sales to United Planners, according to a recent Letter of Acceptance, Waiver, and Consent (AWC) issued by the Financial Industry Regulatory Authority (FINRA). According to the AWC, Mr. Guttman neither admitted to nor denied the conduct charged by FINRA.

Guttman was a financial advisor and a registered representative of United Planners Financial Services of America from 2001 to October 2017. Guttman has also allegedly been the subject of three previous customer complaints. During his career, Guttman has been affiliated with Guttman Financial Group, Nationwide Planning & Benefits, Champion Entertainment Group, Walled Lake Properties, and Serenity Management.

FINRA Rule 3280 prohibits associated persons from participating in any manner in a private securities transaction without first providing written notice to the registered representative’s employing firm. The notice to the employer must occur before the private securities transaction begins. There are other requirements imposed by the rule, including that the employing firm must approve the transaction.

Published on: November 29, 2017

Investors in United Development Funding IV May Have Arbitration Claims

by InvestorLawyers

Building Demolished Investors who purchased shares in United Development Funding IV (“UDF IV”) upon the recommendation of their financial advisor – pursuant to a misleading sales presentation or if the recommendation to invest lacked a reasonable basis or was otherwise unsuitable – may be able to recover their losses in FINRA arbitration. UDF IV is one of a number of successive funds offered by the real estate finance limited partnership, United Development Funding (“UDF”), headquartered in Grapevine, TX. UDF IV was formed as a Maryland REIT in May 2008. By December 31, 2012, UDF IV had issued 17,642,839 common shares in exchange for gross proceeds of approximately $352.5 million.

Unlike other non-traded UDF funds, UDF IV is unique in that, while it was initially distributed as a non-traded REIT, in June 2014 UDF IV went public and listed its shares (NASDAQ: UDF, now OTC: UDFI). UDF IV operates as a real estate investment trust (“REIT”), focusing on originating, purchasing, participating in, and holding investment secured loans for the acquisition and development of parcels of real property as single-family residential lots, as well as the construction of new homes and the development of mixed-use master planned residential communities.

By late 2015, following allegations of misconduct by a Dallas hedge fund manager, UDF’s share price suffered a severe decline. The allegations raised concerned the overall UDF business model and called into question whether the UDF enterprise was propping up poorly performing investments in earlier funds with new investor capital raised from later fund vintages.

Published on: November 28, 2017

Woodbridge Mortgage Funds Subject of Pennsylvania Orders to Show Cause

by InvestorLawyers

woodbridge-300x82 As recently reported, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, continue to face considerable regulatory scrutiny in connection with allegations of offering and selling unregistered securities. For the past year on the federal level, the Securities and Exchange Commission (“SEC”) has been conducting an investigation into Woodbridge. In that regard, according to a publicly available court filing, the SEC “[i]s investigating the offer and sale of unregistered securities, the sale of securities by unregistered brokers and the commission of fraud in connection with the offer, purchase and sale of securities” by Woodbridge and its affiliated companies and agents.

Concurrently at the state level, Woodbridge has been the subject of investigations by various state securities regulators in Arizona, Texas, Massachusetts, Pennsylvania, and Michigan (as well as recent inquiries made by the Colorado Division of Securities). Several of these investigations have resulted in regulators issuing cease-and-desist orders, requiring Woodbridge to stop offering and/or selling unregistered securities, and furthermore, to stop otherwise violating applicable securities laws.

For example, on or about April 24, 2017, the Commonwealth of Pennsylvania Department of Banking and Securities, Bureau of Securities Compliance (the “Bureau”) entered into a Consent Agreement and Order (“Consent Order”) with Woodbridge. As part of the Consent Order, Respondent Woodbridge — without admitting or denying any of the allegations raised by the Bureau — agreed to pay an administrative assessment of $30,000, and additionally agreed to adhere to Pennsylvania’s state securities laws which prohibit, among other things, selling unregistered securities that are not exempt from registration.

Published on: November 28, 2017

Investors in GWG Renewable Secured Debentures May Have Arbitration Claims

by InvestorLawyers

Financial Fraud If you have sustained losses in an investment in GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment, you be able to recover losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”) if the investment was sold pursuant to a misleading sales presentation or the recommendation to purchase the securities lacked a reasonable basis. GWG Holdings, Inc. (“GWG”) began selling what it termed Renewable Secured Debentures (“Debentures”) in 2012. In certain instances, financial advisors and brokers recommending these Debentures reportedly solicited their clients to invest without first fully disclosing the Debentures’ many risks. In fact, in some instances, financial advisors reportedly made false and misleading oral and written statements concerning these investments offered by GWG, describing them as safe, low-risk, liquid and/or guaranteed. Further, some financial advisors may have recommended these Debentures without taking into account a customer’s specific investment objectives, risk tolerance, as well as other relevant factors which all touch upon the suitability of a specific investment.

In actuality, these Debentures were anything but safe, liquid investments. In structuring the Debentures, Minnesota firm GWG purchased life insurance policies in the secondary market at a discount to their face value and then packaged these policies into the Debentures, to be sold to investors. In structuring the overarching investments, GWG planned to continue paying on the insurance policy premiums, while paying investors interest, ultimately hoping to collect more upon maturity of the policies than GWG had initially paid to purchase, finance and service the policies. GWG required a minimum investment of $25,000 – with the optionality to make additional investments at $1000 increments. The Debentures had varying maturity terms and interest rates, ranging from six (6) months at an annual interest rate of 4.75% to seven (7) years at an interest rate of 9.5%.

Significantly, as stated in the GWG Prospectus, the life insurance policies underlying the investments do not serve as collateral for the Debentures, but rather acted as collateral for GWG on a line of credit to purchase the insurance policies, in the first instance. In addition to the risk of default without secure collateral in place, the GWG Debentures are extremely illiquid in nature. This means that investors do not have ready access to their initial capital commitment prior to maturity (unless such a request is due to death, bankruptcy, or disability). Further, there is no active trading market for GWG’s Debentures, making resale extremely difficult.

Published on: November 27, 2017

Mass. Regulator Serves Woodbridge With Cease-And-Desist Order

by InvestorLawyers

Money Bags On May 4, 2015, the Commonwealth of Massachusetts Securities Division (“Division”) entered a Cease and Desist Order (“Order”) against certain Woodbridge Mortgage Investment Funds. With respect to the Order, these mortgage funds — which are offered by Woodbridge Wealth (“Woodbridge”) of Sherman Oaks, CA — include: Woodbridge Mortgage Investment Fund 1, LLC, Woodbridge Mortgage Investment Fund 2, LLC, and Woodbridge Mortgage Investment Fund 3, LLC (collectively, the “Woodbridge Funds”). These Woodbridge Funds, and other similar fund iterations, have been offered nationwide by Woodbridge through a network comprised primarily of independent broker-dealers and financial advisors.

Through its findings of fact, the Division noted that the Woodbridge Funds, all Delaware limited liability companies, sought to “[r]aise money from individuals in Massachusetts, by offering and selling ‘First Position Commercial Mortgages…’” Significantly, the Division determined that Woodbridge’s First Position Commercial Mortgages (“FPCMs”) were not registered as securities in either Massachusetts or on the federal level, nor were these FPCMs exempt from registration. In nearly all instances, in order to recommend an investment in a security, the issuer and/or broker or promoter soliciting the investment must either register the security, or seek exemption from registration (e.g., exemption through Regulation D via private placement).

The Order indicated that in response to a Division subpoena, “[W]oodbridge identified 144 Massachusetts residents who invested in [FPCMs] between January 1, 2012 to present. The 144 Massachusetts Investors reside in cities and towns across the Commonwealth, including Springfield, Worcester, Gloucester, Truro, Plymouth, Dorchester, and Boston.” Finally, the Division determined that Charles N. Nilosek, a resident of Plymouth, MA, was promoting and selling FPCMs through his two business entities, Position Benefits, LLC and SHP Financial LLC. Of concern, the Division noted that Mr. Nilosek was not registered in any capacity with the Division, the SEC, or FINRA. Further, Position Benefits, LLC was not registered in any capacity with the Division, the SEC, or FINRA.

Published on: November 27, 2017

Texas Securities Regulators Bar Former VSR Broker Mickey Long From Selling Alternative Investments

by InvestorLawyers

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Oil field at sunset.

On October 4, 2016, the Texas State Securities Board (the “Board”) entered a Disciplinary Order (“Order”) against Respondents Calton & Associates, Inc. (CRD# 20999) (“Calton”) and stockbroker M. F. Long II (CRD# 1778299) (“Mickey Long”). The Respondents consented to the entry of the Order and its associated findings of fact and conclusions of law.

The Order indicates that, from June 6, 2002 – June 30, 2016, Mickey Long was registered with the State of Texas as an agent of VSR Financial Services, Inc. (“VSR”). For the majority of that time frame, Mickey Long was registered as an investment adviser representative of VSR. On June 30, 2016, Mickey Long applied for registration with the State of Texas as an agent of Calton.