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woodbridge mortgage fundsIf you invested in a Woodbridge promissory note(s) upon the recommendation of broker Peter David Holler (CRD# 838897), you may be able to recover your losses through securities arbitration before FINRA.  As disclosed by FINRA on May 21, 2018, registered representative Peter Holler has been suspended from the securities industry for a period of two years.  From 2001 through August 2017, Mr. Holler was affiliated with Securities Service Network, LLC (BD No. 13318) (“SSN”) in their Bristol, TN office.  FINRA BrokerCheck indicates that Mr. Holler was discharged from his employment with SSN on or about August 10, 2017 due to his alleged participation in “unapproved and undisclosed outside business activity…”

Pursuant to a Letter of Acceptance, Waiver, and Consent (“AWC”), through which Mr. Holler neither admitted or denied FINRA Enforcement’s findings, he accepted both the two-year suspension, as well as monetary penalties including a $10,000 fine and disgorgement of $49,790 in commissions received through the sale of unregistered Woodbridge securities to various investors.  As encapsulated in the May 2018 AWC, Mr. Holler purportedly violated FINRA Rule 3280(b), an industry rule that prohibits brokers from participating in private securities transactions, without first providing written notice to their employer firm.  Such written notice must set forth in detail the proposed transaction, as well as the financial advisor’s proposed role with regard to the contemplated transaction and whether he or she will receive any compensation in connection with the transaction.

According to FINRA Enforcement’s findings, from September 2016 – August 2017, Mr. Holler solicited various investors to purchase unregistered securities in certain Woodbridge Mortgage Investment Funds as offered through the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA.  Further, FINRA Enforcement determined that Mr. Holler sold approximately $1.4 million in Woodbridge promissory notes to some 19 individuals, 9 of whom were SSN customers.  In derogation of FINRA Rule 3280, Mr. Holler purportedly did not provide SSN with prior written notification of these private securities transactions.

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financial charts and stockbrokerOn October 16, 2017, NYSE Regulation — the regulatory enforcement subsidiary of NYSE Arca, Inc. (“NYSE”) — filed a Complaint against Wedbush Securities Inc. (“Wedbush”) (CRD# 877), and its founder, Mr. Edward Wedbush.  The Complaint centers on Wedbush’s alleged systemic failure to supervise certain trading purportedly conducted by its owner and founder, Mr. Wedbush, who allegedly devoted “several hours each trading day actively managing and trading in more than 70 accounts.”

As alleged by NYSE Regulation, “Despite Mr. Wedbush’s active trading in dozens of customer, personal, and proprietary accounts, Respondents failed to implement any process to monitor or supervise Mr. Wedbush’s order entry, trade executions, or trade allocations…” in certain accounts controlled by Edward Wedbush (“Controlled Accounts”).  Further, NYSE Regulation has alleged that Mr. Wedbush utilized a separate trading platform only accessible to him and, moreover, “regularly instructed a Firm employee to enter orders under a general account, waiting until the end of the trading day to allocate executed trades…” among the various Controlled Accounts.  In this manner, as has been alleged by NYSE Regulation, Respondents’ practice of allocated trades in the Controlled Accounts at the conclusion of the trading day violated Wedbush’s own written supervisory procedures (“WSPs”).

By purportedly failing to properly designate the Controlled Accounts for which orders were being entered (and “[i]nstead allocating trades to accounts after the fact based on Mr. Wedbush’s discretion”), NYSE Regulation has asserted that such activity exposed numerous customers to a host of conflicts of interest, as well as “opportunities for fraud, manipulation and customer harm” in contravention of NYSE Arca Rule 9.14-E (Account Designation).  Additionally, NYSE Regulation has alleged violations of various NYSE Arca and Exchange Act Rules, including NYSE Arca Rule 2.28 (Books and Records), as well as Exchange Act Rules 17a-3 and 17a-4.  Among other things, these rules are designed to prevent against practices such as “cherry picking,” whereby traders choose to allocate the best performing and most profitable trades to certain accounts, to the detriment of non-favored accounts.

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woodbridge mortgage fundsIf you invested in Woodbridge upon the recommendation of former financial advisor Frank Roland Dietrich (“Dietrich”), you may be able to recover your losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”).  According to FINRA BrokerCheck, a number of investors have already filed claims against Mr. Dietrich and his former employer, broker-dealer Quest Capital Strategies, Inc. (“Quest Capital”) (CRD# 16783).  Publicly available information suggests that Quest Capital has disavowed any prior knowledge of Mr. Dietrich’s alleged business activity conducted away form the firm in selling purportedly non-approved Woodbridge investments.  Nevertheless, Mr. Dietrich’s alleged “selling away” activity, to the extent it may have occurred while he was still affiliated with Quest Capital, may give rise to Quest Capital being held vicariously liable for the negligence and/or misconduct of its former employee.

As recently reported, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, and certain of its affiliated entities, filed for Chapter 11 bankruptcy protection on December 4, 2017 (U.S. Bankruptcy Court for the District of Delaware – Case No. 17-12560-KJC).  The SEC has alleged that Woodbridge, through its owner and former CEO, Mr. Robert Shapiro, purportedly utilized “more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

Beginning as early as 2012, Woodbridge and its affiliates offered securities nationwide to numerous retail investors through a network of in-house promoters, as well as various licensed and unlicensed financial advisors.  Woodbridge investments came in two primary forms: (1) “Units” that consisted of subscriptions agreements for the purchase of an equity interest in one of Woodbridge’s seven Delaware limited liability companies, and (2) “Notes” or what have commonly been referred to as “First Position Commercial Mortgages” or “FPCMs” consisting of lending agreements underlying purported hard money loans on real estate deals.

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On June 5, 2018, the SEC filed a Complaint in U.S. District Court in the Central District of California (Case 2:18-cv-05008), charging Ralph T. Iannelli and Essex Capital Corporation (“Essex”) with violations of the antifraud provisions of the federal securities laws.  The SEC has alleged that Mr. Iannelli — acting through his equipment leasing company, Essex — perpetrated a long-running fraud in connection with an $80 million securities offering involving approximately 70 investors.  The Complaint is accessible below:

Essex SEC Complaint

As alleged by the SEC, from 2014 – 2017, Mr. Iannelli attracted investor capital through the sale of promissory notes that paid a high rate of return (typically 8.5%, but as high as 10% per annum).  In certain of its marketing materials, Essex claimed that 100% of investor funds would be utilized to purchase equipment, and that investors would be paid back on their investment within a 3-year time frame.  In actuality, however, the SEC has alleged that Essex’s business was anything but profitable: “Unbeknownst to the investors… the representations Iannelli made about their investment were materially false and misleading.”  By 2014, the SEC has alleged that Essex spent only $2.3 million, or approximately 9% of capital it had raised that year through the sale of promissory notes ($20 million) and certain bank loans ($6 million), to actually purchase equipment.

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woodbridge mortgage fundsIf you invested in Woodbridge Units or Notes, as further defined below — based upon a recommendation by financial advisor Frank Capuano — you may be able to recover your losses through securities arbitration before the Financial Industry Regulatory Authority (“FINRA”).  Publicly available information through FINRA BrokerCheck indicates that Frank Capuano was formerly affiliated with broker-dealer Royal Alliance Associates, Inc. (“Royal Alliance”) (CRD# 23131) in Mount Holyoke, MA, from 1989 – July 2015.

Pursuant to an Acceptance, Waiver & Consent (AWC) entered into by Mr. Capuano and FINRA on or about May 2, 2016, the former Royal Alliance stock broker, without admitting or denying any wrongdoing, consented to a one year industry suspension.  In connection with the AWC, FINRA alleged that Mr. Capuano:

“engaged in undisclosed and unapproved private securities transactions.  The findings stated that he offered and sold approximately $1.1 million in notes to nine of his firm’s customers … The findings also stated that he received over $34,000 in commissions in connection with these transactions.  The findings further stated that he did not seek or obtain approval from his firm before participating in these private securities transactions, nor did he disclose them to his firm.” (emphasis added)

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woodbridge mortgage fundsInvestors who have lost money in Woodbridge Wealth or in any of the Woodbridge Mortgage Funds may be able to pursue recovery of their losses through securities litigation or FINRA arbitration. Since the news of Woodbridge’s bankruptcy and a lawsuit filed by the Securities and Exchange Commission broke in late 2017, facts have emerged suggesting that Woodbridge investors have likely lost a substantial portion of their principal.  Further, although so-called First Position Commercial Mortgages (“FPCMs”) and Woodbridge units are securities according to state and federal regulators, Woodbridge FPCMs were not registered as securities with government regulators as required by law, and in many instances were sold by unregistered, unlicensed persons.

In other instances, stockbrokers and financial advisors who were licensed and associated with Financial Industry Regulatory Authority (FINRA)-registered firms sold Woodbridge securities to investors, notwithstanding the fact that the Woodbridge securities were not registered.

FINRA arbitration claims have reportedly been filed against the following stockbrokers and investment advisors concerning alleged sales of Woodbridge securities:

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broker misappropriating client moneyOn May 30, 2018, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Mr. Steven Pagartanis, alleging that the East Setauket, NY stockbroker purportedly “[d]efrauded at least nine retail investors of approximately $8 million by soliciting and selling them securities using false and misleading statements from 2013 to at least February 2018 (the ‘Relevant Period’).”  During the Relevant Period, Mr. Pagartanis was affiliated with Cadaret, Grant & Co., Inc. (“Cadaret”) (CRD# 10641) from 2012 – 2017 and, thereafter, with Lombard Securities Incorporated (CRD# 27954) (“Lombard”).

As alleged by the SEC in its Complaint filed in federal court in the Eastern District of New York (SEC v Pagartanis Complaint), Mr. Pagartanis purportedly solicited certain of his customers — many of them retirees who relied upon his advice and investment recommendations — to invest in what was touted as a safe and conservative investment “[w]ith a fixed percentage return, generally between 4.5 and 8 percent annually.”  Specifically, the SEC alleged that Mr. Pagartanis informed at least five investors that they were investing in the common stock of Genesis Land Development Co. (“GDC”), a Canadian real estate firm listed on the Toronto Stock Exchange.  According to the SEC’s Complaint, in actuality the investment capital raised by Mr. Pagartanis was allegedly funneled to an LLC sharing the name Genesis, for which Pagartanis was the sole member and owner of the LLC.

The SEC has alleged that Mr. Pagartanis conducted a fraudulent scheme, under which he purportedly “[t]ransferred the money raised to his personal bank account, to other entities he controlled, and used around $1.8 million to make monthly interest payments to his customers.”  In typical Ponzi-like fashion, the scheme reportedly collapsed in early 2018 when Mr. Pagartanis failed to pay investors their monthly interest payments.

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Money MazeBased upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments.  In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions.  Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.

In January 2017, FINRA issued the following guidance with respect to investments in non-traded NCIs:

“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”

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money backing hard money real estate dealAs we have detailed in numerous blog posts, the Woodbridge Group of Companies, LLC (“Woodbridge”) and certain of its affiliated entities filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware (Case No. 17-12560-KJC) on December 4, 2017.  From the outset of this Chapter 11 proceeding, investors in Woodbridge Notes (“Noteholders”) have taken the position that they hold secured, perfected liens in various real estate deals.

By way of background, beginning as early as July 2012, Woodbridge and its affiliates offered securities nationwide to investors in at least two forms: (1) subscription agreements for the purchase of equity interests or units in one of Woodbridge’s seven Delaware limited liability companies (“Units”); and, (2) lending agreements, some of which were referred to as “First Position Commercial Mortgage Notes,” “mezzanine loans,” “construction loans,” and “Co-Lending Opportunities” (collectively, “FPCMs”).

On March 27, 2018, the Debtors, the Unsecured Creditors Committee and the Ad Hoc Noteholders Committee all agreed on a plan of reorganization that was encapsulated in a Term Sheet filed with the Bankruptcy Court.  However, the Term Sheet failed to address whether or not Woodbridge Noteholders who invested in FPCMs do, in fact, hold secured, perfected liens.  Accordingly, on March 27th a Woodbridge FPCM investor – retired 85 year old attorney Lisa La Rochelle – filed an adversary proceeding (the “Owlwood Complaint”) in an effort to resolve the looming question of whether some $800 million in FPCMs should be treated as secured debt for purposes of disposition of the Chapter 11 proceeding.

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Piggy Bank in a CageAs recently reported, third-party real estate investment firm MacKenzie Realty Capital (“MacKenzie”) launched an unsolicited tender offer to purchase up to 1 million shares of Carter Validus Mission Critical REIT, Inc. (“Carter Validus”) shares for $3.36 per share.  The tender offer is set to expire on June 25, 2018.  While the Carter Validus Board has recommended that shareholders reject the offer, the non-traded REIT’s share repurchase program is already fully subscribed for 2018.  Further compounding the problem, Carter Validus recently reported that its largest tenant by revenue — Bay Area Regional Medical Center, LLC in Webster, TX — has declared bankruptcy.  Currently, investors seeking immediate liquidity on their Carter Validus investment have limited options at their disposal.

Headquartered in Tampa, Florida, Carter Validus is a publicly registered, non-traded REIT that is focused on investing in net leased data centers and healthcare properties.  As recently reported, Carter Validus’ portfolio consists of 66 properties, including 3 data centers and 63 healthcare properties.  The REIT’s offering, declared effective by the SEC in December 2010, closed in June 2014 after raising approximately $1.7 billion in investor equity.

As a publicly registered non-traded REIT, Carter Validus was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or financial advisor.  Many ordinary investors may be unaware of the high up-front commissions (typically between 7-10% of the initial investment) associated with non-traded REITs like Carter Validus.  Further, some investors may have been improperly steered into Carter Validus, without first being fully informed of the investment’s complex nature and inherent risks.

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