Private Placements

Published on: January 27, 2012

FINRA Awards Claimants More Than $9 Million

Securities Arbitration recently concluded in a private placement suit between CapWest and 30 claimants. The initial filing with the Financial Industry Regulatory Authority (FINRA) took place in December 2009 and was amended in February 2010 and June 2010. Claimants asserted breach of contract, breach of fiduciary duty, negligence and failure to treat claimants in an equitable and just manner. The allegations of the claimants arose in connection with their investments in Medical Capital Corporation, DBSI, Inc. and Provident Royalties LLC.

FINRA Awards Claimants More Than $9 Million

Including the investments issued by the three companies, tens of millions of dollars in private placements were sold by CapWest. CapWest’s closing in September 2011 was prompted by these private placements. The onset of the “Great Recession” marked the point at which the private placement securities became toxic and many investors holding them suffered substantial losses, they argue.

The claimants have demanded the following amounts in compensatory damages, respective to each company, plus interest, costs and attorney’s fees: $6,055,763, $7,465,763 and $8,300,763. A comment on the decision stated that, “On September 23, 2011, the Panel conducted a hearing to consider Claimants’ motion for sanctions and to preclude. Respondent did not appear. The Panel determined that an attempt was made by the conference operator to contact Mr. H Thomas Fehn, counsel for Respondent, that Mr. Fehn had been notified by FINRA of the date and time of the hearing, and that the operator was unable to reach Mr. Fehn at the phone number provided.” The Securities Arbitration Panel ultimately found CapWest liable and ordered it to pay $7,925,763.00 in compensatory damages, $1,188,863 in attorneys’ fees, and $5,840 in costs. In addition, CapWest was ordered to pay 8 percent per annum interest on the sums awarded.

Published on: January 12, 2012

Investment Attorneys Seeking Victims of Self-Directed IRA Fraud

by InvestorLawyers

Stock fraud lawyers are seeking clients that have been the victim of stock broker fraud through the use of self-directed IRAs. Self-directed IRAs are held by a custodian or trustee and allow for investment in a broader set of assets than traditional IRAs. The custodial processes associated with self-directed IRAs gives investors a sense of security and protection. However, this is often not the case. Because self-directed IRAs’ owners are able to hold unregistered securities, due diligence is often neglected by custodians. As a result, these investments are often a vehicle of stock broker fraud.

Investment Attorneys Seeking Victims of Self-Directed IRA Fraud

The most common IRA custodians are broker-dealers and banks. In traditional IRAs, holdings are limited to mutual funds, CDs, firm-approved stocks and bonds. However, custodians for self-directed IRAs may invest in promissory notes, tax lien certificates, real estate and private placement securities. Investments that tie up retirement funds for a time period that is too long, fail to diversify in order to reduce possible loss or contain a risk for loss that is too high are in breach of advisers’ fiduciary duty and brokers’ suitability standard. In addition, early withdrawals come with a penalty that encourages money remains tied up in them longer.

Another significant danger of self-directed IRAs, and a reason they become a target for fraud promoters, is that they often do not require the custodian or trustee of the IRA to perform audits or keep accurate records.

Published on: December 5, 2011

FINRA Ruling: Ten Individuals, Eight Firms Sanctioned

by InvestorLawyers

Investment attorneys have been on the lookout for investors who have been wronged and suffered losses as the result of brokers or firms misrepresenting and/or recommending private placements without a reasonable basis. On November 29, the Financial Industry Regulatory Authority (FINRA) announced that it would sanction ten individuals and eight firms for doing just that. In addition, FINRA ordered a total of more than $3.2 million in restitution.

According to FINRA’s press release, “the broker-dealers did not have adequate supervisory systems in place to identify and understand the inherent risks of these offerings and, as a result, many of the firms failed to conduct adequate due diligence of these offerings. In addition, some of the firms did not have reasonable grounds to believe that the private placements were suitable for any of their customers.”

This is not the first time that firms have been punished for this type of securities fraud — and it won’t be the last. FINRA sanctioned seven individuals and two firms in April 2011 and, as was seen in the earlier blog post, “A Notice to LaeRoc Income Funds Investors,” future securities arbitration against LaeRoc may involve similar misconduct.

Published on: December 1, 2011

Investment Fraud: Selling Away

by InvestorLawyers

There are many types of selling away schemes, and these schemes can result in significant — and sometimes complete —investor losses. However, with the help of an investment attorney, investor losses can be recovered through securities arbitration.

Investment Fraud: Selling Away

Selling away occurs when a broker or investment adviser sells an investment to a client that is not included in the client’s account or in the investment products that are offered by the firm. These private securities often include investments in private placements, private non-traded REITs, privately-held companies, limited partnerships, real estate and promissory notes. While all of these private securities can be real investments, they are sometimes used as a means for defrauding clients.

If a broker wants to complete a private securities transaction, he or she must provide the firm with written notice that details the transaction, and the transaction must be approved by the firm. If the transaction is not approved by the firm, the broker cannot participate in any way with the transaction. If the broker does not comply with the firm’s order, or does not attempt to gain approval, “selling away” has occurred.

Published on: November 28, 2011

Wells Investment Securities Fined for Misleading Marketing

by InvestorLawyers

On November 22, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine Wells Investment Securities Inc. for using misleading marketing materials. The materials were used in the sale of Wells Timberland REIT Inc., for which Wells was the wholesaler and dealer-manager, and the fine imposed by FINRA was $300,000.

Wells Timberland REIT is a non-traded Real Estate Investment Trust that invested in timber-producing land. Because it was the wholesaler, Wells was responsible for the review, approval and distribution of the marketing materials. According to FINRA’s investigation, Wells distributed 116 sales materials and advertising that contained exaggerated, unwarranted and misleading statements concerning the REIT from May 2007 through September 2009.

One of the misleading statements contained in the offering prospectus was that Wells Timberland intended to qualify as a Real Estate Investment Trust for the Dec. 31, 2006 tax year when, in fact, it did not qualify until the Dec. 31, 2009 tax year. Furthermore, most of the sales literature and advertisements either did not adequately express the significance of the investment’s non-REIT status or suggested that the investment was a REIT when it had not yet qualified. In addition, the FINRA investigation found that the supervisory procedures of the firm did not adequately monitor whether sensitive customer information that was stored on laptops was adequately safeguarded through the use of encryption technology.

Published on: November 17, 2011

A Notice to LaeRoc Income Funds Investors

by InvestorLawyers

LaeRoc Funds, a real estate investment firm that, according to its website, has managed assets totaling more than $650 million over the last 23 years, is currently attempting to raise another $12 million to $15 million to pay off debt for its LaeRoc 2005-2006 Income Fund. The fund’s debt totals at least $49 million. This “cash call” could be a negative sign for individuals invested in the fund. In addition, an article in Investment News states that, “The fund’s leaders have said that they will foreclose on one of its holdings, the Country Club Plaza shopping center in Sacramento, Calif., by the end of the year if they can’t raise enough money.”

A Notice to LaeRoc Income Funds Investors

The due diligence and sales practices of FINRA-registered brokerage firms who solicited this fund, along with the LaeRoc 2002 Investment Fund, are currently being investigated. In total, the two LaeRoc Funds purchased eight properties, costing a total of more than $180 million, and still owe mortgage debt totaling $105 million.

According to investors of the fund, the investment was represented as fixed income and conservative. If it can be proven that the investments were misrepresented, or the full extent of the risks associated with them were not disclosed, investors who believed the investment to be conservative may have a claim for a securities arbitration case. FINRA Rules state that firms must perform a “reasonable” investigation of the securities recommended as private placements, like the LaeRock Fund. Private placements — offerings made under Regulation D of the Securities Act of 1933 — are not exempt from the federal securities law’s antifraud provisions, even though exemptions are provided by Regulation D from registration requirements of Section 5 of the act.

Published on: November 11, 2011

TICs Dangerous for Many Investors

by InvestorLawyers

TICs, or tenancies-in-common, are complicated deals which allow real estate sellers to avoid capital gains tax by rolling their proceeds into other properties. TICs are also known as 1031 exchanges and, according to Jason Zweig, author of “In Real Estate, Simple Wins,” in a recent article in The Wall Street Journal, “were tailor-made for a real estate bubble.” From 2004 to 2008, $13 billion was spent by investors on TICs. These investments were untraded, privately-placed securities and stakes in each TIC could be sold to as many as 35 investors. Each investor would receive a stake in the potential sale and rental income of the property, which could be residential, retail or commercial.

TICs Dangerous for Many Investors

The positive side of TICs is that investors are able to avoid capital gains taxes, receive a regular income from the investment and, in the event of the investor’s death, the asset can be bequeathed to heirs. However, while TICs are suitable for some specialized clients, they are not appropriate for many investors. Regardless, these investments have been sold — with some disastrous results — as such.

“When there’s a simple way and a complicated way to solve a problem, the middleman will almost always make more money off the complicated solution — but you might not,” Zweig notes.