California Securities Fraud Lawyer Blog

Securities America Fined $100,000 Over IMH Secured Loan Fund & Medical Capital Sales Practices

Fri, 26 Apr 2013 10:44:25 -0800

Securities America, Inc. has entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and will pay a fine of $100,000 in connection with the sale of two private placements. As part of the settlement, Securities America agreed to the following findings:

The firm failed to have a supervisory systems in place designed to identify misrepresentations or misleading statements made to customers regarding two private placements: (1) the IMH Secured Loan Fund and (2) Medical Provider Funding Corporation (aka "Medical Capital").

Securities America's email monitoring system failed to identify several emails that misrepresented the liquidity and safety of the IMH Secured Loan Fund.

One particular email exaggerated the safety of IMH by describing it as a "very safe, sleep at night investment."

Other emails used the words "principal protection" in describing the risk to principal for both IMH and Medical Capital.

In addition to the $100,000 fine, Securities America must conduct a comprehensive review of its supervisory system and make necessary revisions to prevent similar violations.

UBS Willow Fund L.L.C. Class Action Update

Tue, 02 Apr 2013 13:41:13 -0800

On December 20, 2012, a class action complaint was filed on behalf of all investors who purchased or held the UBS Willow Fund L.L.C. at any time after January 1, 2008. The matter of Ken Boudreau vs. UBS Willow Management L.L.C, UBS Alternative and Quantitative Investments L.L.C, UBS Fund Advisor, L.L.C., Bond Street Capital L.L.C, Sam S. Kim, George W. Gowen, Stephen H. Penman, Virginia G. Breen and Meyer Feldberg was filed in the U.S. District Court for the Southern District of New York. The class action complaint alleges that the UBS Willow Fund made material false and misleading representations and omissions that were communicated to investors through the fund's offering materials and quarterly summaries. As alleged in the complaint, the Willow Fund fundamentally changed its stated investment strategy in January 2008 and began aggressively trading in credit default swaps ("CDS") without disclosing this fact to investors. Eventually, in October 2012, investors were notified that the fund was liquidating primarily because it had suffered significant losses from trading in CDS. The class action seeks damages in excess of $200 million.

In addition to recovering losses through a class action, investors who have suffered significant losses should fully explore their other legal options, including the filing of a securities arbitration claim directly against their financial advisor. Individuals with meaningful claims can often obtain a much larger potential recovery through arbitration. See related blog post: Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

Update: FINRA Appeals Charles Schwab Class Action Ban

Wed, 27 Feb 2013 07:47:24 -0800

This is an update to our February 21, 2013, blog post: Charles Schwab Allowed to Prevent Customer Class Action Lawsuits.

Yesterday, a spokesperson for the Financial Industry Regulatory Authority (FINRA) announced that an appeal had been filed with the National Adjudicatory Council (NAC)--an internal appeal board that reviews initial decisions rendered in FINRA enforcement actions. However, an NAC decision may not put an end to this important issue because NAC decisions can be appealed to the Securities Exchange Commission (SEC).

If the FINRA ruling is ultimately upheld, brokerage firms will be able to prevent customer class action lawsuits and require all customers to pursue individual claims through FINRA's securities arbitration program. A bar on class actions would have the greatest impact on investors with claims that are too small to pursue individually and also the legions of investors who are unaware that any wrongs have been committed until they receive notice that a class action lawsuit was filed on behalf of all affected investors.

Related blog posts:

Charles Schwab Allowed to Prevent Customer Class Action Lawsuits

Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

Securities Arbitration vs. Class Actions: Consider Your Options

Frequently Asked Questions (FAQs) About Securities Arbitration

Elder Financial Abuse is Underreported and Under-Prosecuted

Mon, 25 Feb 2013 11:38:59 -0800

Although instances of elder financial abuse are on the rise, a report by The MetLife Study of Elder Financial Abuse reminds us that elder financial abuse is by and large "underreported, under-recognized, and under-prosecuted."

If you witness or experience any form of elder abuse, immediately contact Adult Protective Services in the county where the senior resides.

Click here for a nationwide directory of elder abuse prevention resources.

Recently, public and private organizations have stepped up their efforts to raise awareness about the financial exploitation of elderly investors. Below is a collection of links and resources aimed at protecting seniors from financial abuse.

Kiplinger Magazine: The Crime of the 21st Century. Click here to download Special Report from Kiplinger's Personal Finance

Investor Protection Trust: A nonprofit organization devoted to investor education. Elder Investment Fraud and Financial Exploitation Prevention Program

AARP: Five Tips to Help You Avoid Investment Fraud

Charles Schwab Allowed to Prevent Customer Class Action Lawsuits

Thu, 21 Feb 2013 10:56:35 -0800

Today, a Financial Industry Regulatory Authority ("FINRA") hearing panel ratified Charles Schwab's inclusion of a clause in their customer agreement that prevents customers from pursuing class action claims against the firm. After agreeing to pay $225 million to settle a class action lawsuit in connection with the beleaguered YieldPlus ultra short-term bond fund, Schwab promptly modified their customer agreement preventing customers from participating in class actions and requiring all disputes to be submitted to FINRA's securities arbitration dispute resolution program. At this early stage, it is unclear whether FINRA's Department of Enforcement will appeal the ruling. However, it is safe to assume that other brokerage firms may soon be following Schwab's lead and amending their customer agreements to prevent class actions.

What Does This Mean for Investors?

According to a statement issued by Schwab, customers are better served through FINRA's arbitration process because class action litigation is "cumbersome" and a "less effective" means of resolving disputes. Schwab is partially correct. As noted in a previous blog post, customers with meritorious cases may be able to recover a larger percentage of their losses in arbitration. See Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

From an investor's perspective, class actions are anything but "cumbersome." Very little is required of investors who elect to become members of the class action. In return for this low level of participation, investors usually reap much smaller potential rewards. Arbitration, on the other hand, requires the investor to prove their case on an individual basis. In return for this added level of commitment, customers with valid arbitration claims can expect greater potential rewards.

The investors who have the most to lose are those with claims that are too small to justify the added burden of filing an individual arbitration claim. Although FINRA offers a simplified arbitration program for claims under $50,000, some customers with very small or questionable claims would be better off taking a "pennies on the dollar" class action settlement.

_______________________________________________

The Bottom Line

While it is true that investors are getting cut off from another avenue of relief, little has changed for most investors. FINRA's dispute resolution program--flawed as it may be--still offers the best option for investors who have meaningful claims.

Updated February 27, 2013: FINRA Appeals Charles Schwab Class Action Ban

Merrill Lynch Enters the Non-Listed REIT Market

Fri, 15 Feb 2013 13:49:07 -0800

As noted in a recent blog post, we have seen an influx of cases involving non-traded Real Estate Investment Trusts ("REITs"). We have also been trying to spread the word about the hazards of these little understood investment vehicles through our blog postings. [See Investors Beware: Non-Listed REITs] With all the negative attention given to non-traded REITS, it came as a surprise to learn that Bank of America's Merrill Lynch subsidiary had recently begun offering the Jones Lang LaSalle Income Property Trust, Inc. to it's "mass-affluent" customers (i.e., investors with a net worth between $100,000 to $1 million, excluding their home).

Suitability: Moderate Risk Investors Need Not Apply

For a detailed discussion of suitability criteria and risk factors, be sure to read the prospectus. Below is a summary of the minimum suitability criteria established by this REIT:

The minimum amount that can be invested in this REIT is $10,000.

The REIT can only be sold to investors who have either: (1) a minimum net worth of $250,000; or (2) a minimum gross annual income of at least $70,000 and a minimum net worth of at least $100,000.

Investors may not invest more than 10% of their liquid net worth in this REIT, either alone or in combination with other similar illiquid investments.

Investors should not be lulled into a false sense of security about the safety of this REIT. Notwithstanding the REIT's stated investment objective to "preserve and protect our stockholder's capital investments," when push comes to shove, Merrill Lynch's attorneys will argue that the REIT's prospectus clearly stated that the investment "involves a high degree of risk" and that investors should only purchase this security if they can afford the "complete loss" of their investment. Thus, this investment is only suitable for investors who have a high risk tolerance.

Illiquidity: Consider a Publicly Traded REIT

As previously stated, there is no public market for this REIT. All sales are subject to the REIT's share repurchase plan which require investors to hold their shares for at least a year before they are available for repurchase. Furthermore, the REIT may suspend repurchases if there is a run on the bank and honoring repurchase requests would adversely affect operations of the REIT. This is exactly what happened to a number of REITs and other privately offered real estate investments that were adversely affect by the recession in 2008.

As we stated in a previous blog post: If you are convinced that a REIT is an appropriate investment, do what sophisticated institutional investors do and invest in a publicly traded REIT instead.

ALF Pursues Securities Arbitration Claim Against Wells Fargo Advisors Over Sale of Dividend Capital Total Realty Trust

Wed, 23 Jan 2013 11:21:48 -0800

The Alcala Law Firm, a California securities law firm that works with clients and attorneys nationwide, is currently representing a client in a FINRA securities arbitration proceeding seeking to recover investment losses associated with the Dividend Capital Total Realty Trust Inc. that was recommended by a Wells Fargo Advisors, LLC stockbroker. Dividend Capital Realty Trust is a Real Estate Investment Trust ("REIT") that is not-publicly traded--often referred to as a non-traded REIT. ALF continues to investigate sales practice violations by stockbrokers who improperly recommended the Dividend Capital Total Realty Trust and other non-traded REITs to investors. For many investors, non-traded REITs such as the Dividend Capital Total Realty Trust are unsuitable investments. For more information, please contact us.

See related blog posts:

Investors Beware: Non-Listed REITs

Tue, 15 Jan 2013 11:13:56 -0800

Our securities law firm has seen an influx of complaints involving Non-Listed Real Estate Investment Trusts (REITs) that were marketed and sold to investors looking for a moderate risk fixed-income investment offering an attractive yield. However, like most investments, high risk and high returns are closely related.

Investing in these types of REITs can be fraught with perils that most investors fail to appreciate until it's too late. The very complexity of a REIT investment is a risk factor in and of itself. Other risks include lack of liquidity and transparency. In short, investing in Non-Listed REITs is risky and is usually not suitable for investors seeking a conservative or even moderate risk fixed income investment. Most Non-Listed REITs can only be sold to investors who have a minimum net worth of $250,000 (excluding home equity, furnishings and automobiles). Even for qualified investors who are willing to assume more risk, Non-Listed REITs should only represent a small portion of an investor's overall portfolio.

The Liquidity Trap

Because Non-Listed REITs do not trade on a major exchange, investors will find it extremely difficult to sell their shares. The ability to redeem shares directly through the company is also very limited and subject to a reduction or penalty if an investor wants to get their money out in a short period of time, with typical holding periods ranging between 1-4 years. For example, if an investor wanted to redeem a $100,00 investment in the Dividend Capital Total Realty Trust REIT less than 1 year from the date of their investment, they would only receive $92,500. If they wanted to redeem 1-2 years after purchase, they would receive $95,000. The REIT keeps the difference.

The above discussion of risks is merely the tip of the proverbial iceberg. Always read the prospectus before investing. If you don't understand what you're getting yourself into, don't invest. If you're convinced a REIT is a good investment choice, follow the lead of more sophisticated institutional investors and invest in publicly traded REITs.

_________________________________________________

The Bottom Line

An investment in Non-Listed REIT's is inappropriate for most conservative or moderate risk investors. Even knowledgeable investors who are willing to assume some of the risks involved, a publicly traded REIT is a better option; however, a large concentrated investment in real estate, including REITs, still raises suitability concerns.

The Alcala Law Firm would like to thank the assistance of attorney Joshua Pittel who contributed to this blog post.

Click here for more information about REITs.

Is FINRA's BrokerCheck Broken?

Tue, 08 Jan 2013 20:06:53 -0800

In my securities law practice, one of the first things I do after speaking with a new client is run a quick background check of the stockbroker using the BrokerCheck tool maintained by the Financial Industry Regulatory Authority (FINRA). FINRA is the self-regulatory organization that operates BrokerCheck, a publicly available database that is intended to help investors make informed choices when selecting a financial advisor. Individuals interested in obtaining a BrokerCheck report can do so online by visiting FINRA's BrokerCheck website and downloading a report that contains a summary of a prospective broker's professional qualifications, employment history and--most useful of all--a listing of customer disputes or disciplinary actions lodged against the broker. BrokerCheck is a powerful tool and I encourage all financial consumers to conduct a search before dong business with a broker or brokerage firm.

Expungement: BrokerCheck's Dirty Little Secret

What many investors don't know about BrokerCheck is that brokers can get customer disputes "expunged" or removed from their records in certain situations. Brokers that are involved in a securities arbitration claim can request that the arbitrators order the matter expunged. Expungement is given to protect brokers who are falsely accused of misconduct. Any decision to grant expungement must contain written findings specifically stating the reasons why expungement was ordered. The three reasons for which expungement can be granted are:

The claim was factually impossible or clearly erroneous.

The individual was not involved in the incident.

The allegations are false.

I don't have a problem with having false or clearly erroneous claims expunged from a broker's files. However, it is a disservice to the investing public when arbitrators order expungement even if the broker was obviously involved in the incident and the allegations appear to have merit. When in doubt, arbitrators should always err on the side of public disclosure. Here are two examples of how the public can be misled.

In October 2012, an arbitration panel in Pittsburgh, Pennsylvania found that a broker and his employer were jointly and severally liable to the customer in the amount of $97,250. However, the arbitrators simultaneously granted the broker's request for expungement stating that his conduct "was not so egregious as to warrant a permanent stigma" on his record. This begs the question: How can a broker be jointly liable, yet be allowed to hide this fact from the investing public? Incidentally, this arbitration claim still shows up in BrokerCheck, as does a separate complaint alleged by another unhappy customer of this same broker.

In December 2012, an arbitration panel in Los Angeles, California granted expungement in a case that settled before hearing. The brokers requested a hearing solely on the issue of expungement. The investor did not participate in the expungement hearing or file any objections. After reviewing the evidence submitted by the two brokers involved, the arbitration panel granted expungement stating that there was no evidence that the brokers made any material misrepresentations or omissions to the customers. As a condition of settlement, brokerage firms sometimes require investors to refrain from objecting to any expungement requests.

I recently negotiated a settlement on behalf of one of our clients. The amount paid in settlement was significant because, in my opinion, the case had merit. Nevertheless, the investment advisor involved has asked the arbitrators to order expungement on the basis that the claim was "clearly erroneous." We are vigorously opposing the expungement request. I will update this blog post once the arbitrators' decision is received.

-----------------------------------------
Updated April 25, 2013: The expungement request was denied.

Worst Investments of 2012

Fri, 28 Dec 2012 13:09:53 -0800

Below is a list of the worst investments in 2012 according to Bloomberg Businessweek.

Worst Exchange Traded Fund (ETF)

ProShares VIX Short-Term Futures ETF (-79%).

As we've repeatedly stated in this blog, leveraged and inverse ETFs are unsuitable investment vehicles for most individual investors. [Read more.]

Worst Equity Mutual Fund

Federated Prudent Bear Fund (-17%)

Worst Initial Public Offering

Facebook (-30%)

Worst U.S. Large-Cap Stock

Hewlett Packard (-43%)

LPL Financial, LLC Under Fire for Sale of Non-Traded REITS

Mon, 24 Dec 2012 10:34:06 -0800

The Enforcement Section for the Commonwealth of Massachusetts has filed an administrative lawsuit against LPL Financial, LLC for violation of securities laws in connection with the sale of non-traded REITs. [R-E-I-T is an acronym for "Real Estate Investment Trust."] The term "non-traded" refers to the fact that the REITs are not listed on a national stock exchange and investors have limited redemption rights. The Commonwealth is demanding that the firm make full restitution to Massachusetts investors who were improperly sold non-traded REITs. Following an investigation of 597 non-traded REIT transactions made by LPL, the Enforcement Section determined that 569 of those were made in violation of the prospectus requirements. For example, many of the non-traded REITs sold by LPL contained a requirement in their prospectuses limiting an individual investor's purchase to 10% of their liquid net worth. The Commonwealth's investigation focused on seven non-traded REITs sold by LPL:

Inland American, Cole Property Trust II, Inc.

Cole Credit Property Trust III, Inc.

Cole Credit Property 1031 Exchange

Wells Real Estate Investment Trust II, Inc

W.P. Carey Corporate Property Associates 17

Dividend Capital Total Realty

LPL Financial, LLC is the largest independent broker-dealer in the United States with 12,800 financial advisors. Although the administrative action taken by Massachusetts is primarily concerned with the sale of non-traded REITs to its own residents, LPL's financial advisors sold non-traded REITs to thousands of investors across the country. The Commonwealth of Massachusetts should be commended for their aggressive efforts to protect the rights of financial consumers. In the past, lawsuits such as the one filed by the Commonwealth of Massachusetts have encouraged investors nationwide to seek their own form of justice through individual securities arbitration claims.

See related blog post:

Investors Beware: Non-Listed Real Estate Investment Trusts (REITs)

ALF Pursues Securities Arbitration Claim Against Wells Fargo Advisors Over Sale of Dividend Capital Total Realty Trust

Webush Securities Fined Again for Supervisory Lapses

Tue, 04 Dec 2012 11:29:39 -0800

Los Angeles, California-based Wedbush Securities was fined an additional $375,000 by the Financial Industry Regulatory Authority (FINRA) for failing to properly supervise and detect misconduct in connection with the sale of variable annuities. In an earlier blog post, we recently reported that Wedbush Securities had already been fined $300,000 for supervisory conduct that FINRA referred to as egregious and persistent. The firm's founder Edward Wedbush was also fined $30,000 and suspended for 30 days.

Related News:

On November 10, 2010, a Los Angeles Times article titled Edward Wedbush's roof leaks, but his wallet doesn't quoted one employee who referred to him as "the cheapest man alive."

FINRA's Securities Arbitration Program to be More Available to Investment Advisors

Sat, 03 Nov 2012 14:49:08 -0800

The Financial Industry Regulatory Authority ("FINRA") is taking steps to broaden the scope of their securities arbitration program to include more investment advisors. FINRA administers the single largest dispute resolution program for investors and securities firms. In 2011, there were 4,729 securities arbitration cases filed with FINRA. However, not all financial advisors are alike. FINRA's arbitration program is mandatory, but only for stockbrokers and their customers. Investment advisors are not FINRA members--at least not yet. If a customer has a dispute with their investment advisor, they will need to pursue a lawsuit in court, unless the investment advisor included an arbitration clause in their advisory agreement. Many advisory agreements obligate customers to resolve disputes through the American Arbitration Association ("AAA"), which can be a costlier alternative to FINRA's arbitration forum.

Voluntary Arbitration Program: FINRA has always offered up their arbitration program to investment advisors on a voluntary basis. FINRA has not established any new rules or procedures for arbitrating investment advisors disputes. FINRA did, however, recently issue "guidance" discussing the availability of their program. I am happy to see FINRA offer more competition in the arbitration field, especially because participation in the arbitration program is totally voluntary. In my opinion, FINRA's entire arbitration program should be non-mandatory. Granting any one organization a monopoly over investor disputes is fundamentally unfair. Competition will help insure that the rights of financial services consumers are not diminished. Investors should be allowed to freely choose between arbitration and litigation.

Court vs. Arbitration: For the time being, only investment advisor customers have the opportunity to choose between going to court or arbitration. Each alternative has its benefits and drawbacks. When weighing which course of action to take, it is best to consult with a knowledgeable securities attorney who can thoroughly explore and discuss all available options.

More information:

Frequently Asked Questions About Securities Arbitration

ALF Investigating Claims Involving San Diego Investment Advisor Ray Lucia

Thu, 27 Sep 2012 10:19:44 -0800

The Alcala Law Firm is investigating claims about the sales practices of Ray Lucia, a San Diego, California, financial advisor and radio personality best known for his Buckets of Money (BOM) investing strategy. Raymond Lucia is the principal of RJL Wealth Management LLC (formerly Lucia Financial LLC). Recently, the Securities and Exchange Commission (SEC) filed a securities fraud lawsuit against Raymond Lucia and one of his former companies--Raymond J. Lucia Companies, Inc. According to the SEC's lawsuit, Lucia made false and misleading representations regarding the history and performance of his BOM strategy.

Raymond Lucia is the author of three books on investing for retirement: "Buckets of Money: How to Retire in Comfort and Safety," "Ready? Set? Retire!," and "The Buckets of Money Retirement Solution: The Ultimate Guide to Income for Life."

United Planners Fined $200,000 Over Variable Annuity Sales

Mon, 24 Sep 2012 09:09:58 -0800

United Planners Financial Services of America (Scottsdale, Arizona) agreed to the payment of a $200,000 fine to the Financial Industry Regulatory Authority (FINRA) to settle allegations involving the failure to properly supervise and detect the unsuitable sale of variable annuities (VAs). According to FINRA, United Planners allowed supervisors to self-approve their own VA sales and the firm failed to implement proper supervisory procedures and training of VA transactions. United Planner's Chief Compliance Officer Douglas Hall (Phoenix, Arizona) was fined $15,000 in a related disciplinary action.

Despite increased efforts from regulators, our securities law firm continues to see abuses in the sale of VAs. Two areas of particular concern are the sale of VAs to elderly investors and the unnecessary exchange or replacement of existing VAs.

See related blog posts:

Variable Annuity Exchanges and Replacements

The Trouble with Variable Annuities