Private Placements

The Dangers of Oil and Gas Private Placements

April 29, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) has found private securities offerings of oil and gas ventures pose a substantial danger and risk for investor fraud. An SEC Investor Alert listed some common red flag sales pitches often made to investors including: (1) Sales pitches referring to the high price of oil and gas; (2) “Can’t miss” wells or “guaranteed” returns; (3) Promises of high returns with little risk; (4) Sales pressure to purchase quickly; and (5) Sales pitches touting new technology to get higher production out of low-producing wells.

The Financial Industry Regulatory Authority (FINRA) has also clamped down on inappropriate sales of oil and gas ventures. Recently, FINRA fined broker Jeffrey Alexander (Alexander) concerning allegations that he recommended the purchase of interests in Amazon 13-30, an oil and gas program offered by Amazon Exploration that raised funds for the drilling of a well in Nebraska. FINRA found that the recommendations made by Alexander to three investors without a reasonable basis for believing the investment to be suitable for any investors.

In August 2012, FINRA alleged that the brokerage firm Shoreline Pacific entered into an agreement with Amazon Exploration where the firm would offer and sell up to 30 partnership units in Amazon 13-30. Shoreline Pacific was to receive a “success fee” of 20% of the funds it raised, as well as five Amazon 13-30 units if the firm was able raise $1 million for the venture. FINRA alleged that Alexander worked in Shoreline’s Colorado Springs office and was the primary point of contact between the firm and Amazon Exploration and primarily responsible for finding investors for the Amazon 13-30 private placement.

Colorado Financial Service Fined By FINRA Over Private Placement Supervisory Failures

April 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined Colorado Financial Service Corporation (Colorado Financial) concerning allegations that the firm violated NASD Rule 3010, and FINRA Rule 2010, among other violations, by failing to establish, maintain, and enforce supervisory procedures reasonably designed to ensure compliance with the securities rules pertaining to the supervision of electronic communications and due diligence review of new private placement offerings.

Colorado Financial is based in Centennial and became a FINRA member in 2000. Currently, there are approximately 82 persons registered with Colorado Financial in thirty six branches. The firm’s primary lines of business include investment banking, private placements, mutual funds, and variable life insurance or annuities.

FINRA alleged that Colorado Financial did not establish, maintain, and enforce adequate procedures to supervise and review electronic communications for the period of February 2009 to September 2012. According to FINRA, Colorado Financial only manually reviewed between .1% and 1.5% out of approximately 325,900 archived e-mails during the period of January 2012 to September 2012. FINRA found that Colorado Financial’s written supervisory procedures relating to electronic communications did not indicate who at the firm was responsible for the supervisory review, how the review would be conducted and documented, or establish protocols for escalating regulatory issues in e-mails.

Investors in LEAF Limited Partnerships May Have A Investment Claim

April 22, 2014 | by Staff Attorney

Some investment advisors have touted alternative investments as safe, stable, high return products. The truth is, these products are often laden with risks that are not disclosed and discussed with clients. In addition, alternative investments are simply unsuitable for many investors needs. The sale of these products often generates commissions of between 7-10% of the investment amount. Thus, there are unscrupulous advisors who have used misleading sales pitches designed to lure investors into putting their hard earned money into these extremely risky and unsuitable investment.

Some alternative investments are sold as private placements in limited partnership vehicles. These limited partnerships are formed to acquire, operate, and sell assets for the benefit of the partners. Investors in limited partnerships are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, limited partnerships are not listed on an exchange and are therefore illiquid and reliable pricing information is typically very difficult to obtain.

There is a line of limited partnerships held under LEAF Asset Management, LLC—a limited liability company that acts as general partner for a handful of limited partnership equipment leasing fund investment programs. LEAF Asset Management, LLC is a wholly-owned subsidiary of Resource America, Inc., a company that specializes in developing investment funds for outside investors and providing asset management services either by contract or by acting as the manager or general partner of its own sponsored investment funds.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part II

April 1, 2014 | by Staff Attorney

This post continues our investigation into the recent bar of broker William (Bill) Tatro by the Financial Industry Regulatory Authority (FINRA) and his relationship with Mary Helen Caprice Mallett (Mallett), Tatro’s wife, colleague, and business partner.

Mallett has also had a large number of customer complaints initiated against her. Mallett’s BrokerCheck reveals that she was associated with First Allied at roughly the same time as Tatro. Thereafter, from September 2010 until May 2011, Mallett was associated with Morgan Stanley Smith Barney (Morgan Stanley). From 2011 until June 2013, Mallett was associated with Independent Financial Group, LLC. Mallett is also associated or is involved in Biltmore Wealth Advisors, LLC, Capital Financial Management, Ltd, South Race Street, LLC, Red Rock, LLC, Mango Lizard LLC, and EZ Plan LLC.

In April 2011, Morgan Stanley filed a Form U5 taking the position that Mallett “engaged in outside business activities without prior written approval of [Morgan Stanley] and facilitated clients’ relationships with an outside investment manager”, believed to be Tatro, “who was not approved by or affiliated with [Morgan Stanley].” According to a lawsuit Morgan Stanley filed against Mallett she told Morgan Stanley that she and Tatro had used the same investment strategy over the previous nine years, presumably while associated with First Allied, and that she had bought Tatro’s book of business. However, Morgan Stanley charged that Mallett had falsely told them Tatro was no longer servicing his former clients.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part I

March 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker William (Bill) Tatro, formerly registered with First Allied Securities, Inc. (First Allied), concerning allegations that he failed to respond to two requests for information by FINRA staff in connection with an investigation into whether he violated federal securities laws or FINRA conduct rules. According to FINRA, Tatro admitted that he received both information requests but did not provide any of the requested information and documents because he claimed that he believed the bankruptcy court had stayed all requests pending the bankruptcy’s resolution. FINRA rejected Tatro’s bankruptcy defense and that Tatro violated FINRA Rules by failing to provide the information and documents FINRA staff requested and determined that Tatro should be permanently barred from associating with any FINRA member firm in any capacity.

FINRA initiated the investigation against Tatro after it received customer complaints and a series of Uniform Termination Notices (Forms U5) filed by Tatro’s former broker-dealer, First Allied. According to FINRA, the amended termination notices disclosed numerous customer complaints alleging fraud and other sales practice violations of more than 80 individuals who might be victims of Tatro’s alleged misconduct. Tatro total career related losses have been estimated to be anywhere from $10 million to $100 million and may potentially involve as many as 1,000 clients. On July 30, 2012, Tatro filed a petition for bankruptcy with the United States Bankruptcy Court for the Western District of New York.

Tatro began his securities career in 1975 and worked at six different broker-dealers before becoming associated with First Allied in November 2003. After Tatro left First Allied he operated Biltmore Wealth Advisors, LLC, an investment advisory firm in Phoenix, Arizona. Tatro also operated Eagle Steward Wealth Management, an investment advisory firm. Tatro’s wife, colleague, and business partner, Mary Helen Caprice Mallett (Mallett) has also advised Tatro clients and has been accused of recommending the same or similar speculative investments that characterizes Tatro’s practice.

John Towers of VSR Financial Sanctioned Over Unsuitable Sale of Alternative Investments and Private Placement Securities

March 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned financial advisor John H. Towers (Towers) of VSR Financial Services, Inc. (VSR) concerning allegations of unsuitable sales of over $6,000,000 in alternative investments including oil and gas interests, real estate investment trusts (REITs), and other speculative private placement investments to an investor. FINRA’s determinations in this matter is significant because some in financial industry take the position that wealthy customers are automatically sophisticated and therefore fair game to recommend positions in speculative private placement securities. The theory goes that if you have a lot of money then it is ok for you to lose some of it speculating in alternative investments.

Towers entered the securities industry in 1970. From 2002 until December 2013, Towers was associated with VSR. According to Towers’ BrokerCheck at least 14 customers have filed complaints against Towers. The vast majority of those complaints involve claims concerning the improper sale of various private placement securities.

FINRA alleged that in September 2005, Towers recommended that a married couple invest $25,000 in APC 2005-B, a high risk private placement. Over the next five years, FINRA found that Towers continually recommended that the couple make an additional eighty-eight investments in private placements and REITs totaling approximately $6,259,400 and representing approximately 72% of their investments purchased at VSR. FINRA alleged that the private placements and REITS were all described in the offering documents as high risk investments. FINRA also found that the couple had stated a moderate risk tolerance on their new account forms and specified that no more than 10% of their accounts were to be invested in high risk products.

Merriman Capital Sanctioned Over Private Placement and Supervisory Failures

March 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Merriman Capital, Inc. (Merriman) concerning allegations that for more than three years Merriman’s written supervisory procedures were not reasonably designed to achieve compliance the FINRA rules. FINRA alleged that Merriman’s written supervisory procedures failed to describe the specific procedures to be followed and the persons responsible for carrying them out. In addition, according to FINRA, between May 2009, and September 2013, Merriman Capital raised more than $16 million for its parent company through several private offerings of securities even though Merriman did not have written procedures related to the sale of private placements.

Merriman has been a FINRA member since November 1986 and its business is focused on offerings of growth companies and institutional investors. Merriman is headquartered in San Francisco, California and employs fifty-five registered persons.

FINRA alleged that Merriman Capital’s written supervisory procedures, at fifteen pages long, listed legal rules and regulations that had to be complied with but failed to describe the specific procedures to be followed by the firm or how compliance with the procedures would be documented. Further, FINRA found that until June 2011, Merriman written supervisory procedures failed to address private placements even though the selling private placements was a substantial portion of the firm’s business. FINRA found that Merriman failed to address private placements in the firm’s supervisory manual even though Merriman Capital raised more than $16 million for its parent company through several private offerings.

Gana LLP Investigates Icon Leasing Fund Eleven and Twelve

February 18, 2014 | by Staff Attorney

The attorneys at Gana Weinstein LLP are currently investigating Icon Leasing Fund Eleven and Twelve on behalf of investors who suffered losses as a result of the unsuitable recommendation of these funds. The attorneys at Gana Weinstein LLP have filed arbitrations against broker dealers that have sold these illiquid investments to their clients. Both NFP Securities, Inc. and WFG Investments Inc. have been know to sell the Icon Funds to their clients.

Allegedly, many advisors who sold the Icon investments failed to adequately explain that the funds operated as an equipment leasing program. Given the nature of the Icon Funds, in which capital is consolidated for the purchase and leasing of equipment, made the fund illiquid.

According to recent filings in securities arbitrations, during the offering period, the funds paid healthy distributions. However, not long after the funds were closed to new investors, the value of the Icon Funds began to decline and dividend payments became sporadic. By the end of 2012, Icon Leasing Fund 12 lost 53% of its value. For the same time period, Icon Leasing Fund 11 suffered an 84% decline in value. Furthermore, it has been alleged that the Icon Funds did not properly disclose that the distributions included return of original principal and that the fees were extraordinarily high.

Investor Tips to Avoid Losing Money in Private Placements and Alternative Investments

January 16, 2014 | by Staff Attorney

Private Placements are considered alternative investments and are issued under Regulation D under the Securities Act of 1933. Regulation D contains rules for issuing securities that provide exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements and allows companies to issue securities without normal disclosures.

Investors who are recommended private placements must meet the “accredited investor” standard under Rule 501. Rule 501 defines “accredited investor” as any person who has a net worth in excess of $1,000,000, excluding residence, or annual income in excess of $200,000, $300,000 if filing jointly with a spouse, in the two most recent years.

According to a 2008 estimate, companies issued approximately $609 billion of securities through Regulation D offerings. While the private placement market allows many small companies to raise capital, regulators have raised a number of issues with due diligence procedures and brokerage firm sales efforts when selling private placements to investors. The North American Securities Administrators Association says private placements are one of the most common cause of regulatory action by state regulators. States brought more than 200 enforcement actions involving private placements in 2011, more than doubled the number of action in2007.

Mary Faher of WR Rice Suspended By FINRA Over Private Placement Sales

January 14, 2014 | by Staff Attorney

Broker Mary A. Faher (Faher) was suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Faher made unsuitable recommendations to her clients to invest in private placements.

Between February 2011, and November 2012, Faher was registered with WR Rice Financial Services, Inc. (WR Rice). Previously, Faher was registered with Fifth Third Securities, Inc. from March 2004 through February 2011. According to Faher’s BrokerCheck, on September 26, 2013, the state of Michigan permanently barred Faher from registration in Michigan and fined her $4,000 in connection with the sales of limited partnership securities.

FINRA alleged that between August 2011, and February 2012, Faher recommended that her customers invest in various limited partnership interests resulting in an overconcentration in the customer’s accounts in speculative securities. The limited partnerships were interests in The Diversified Group Land Contract Limited Partnerships 1-17 (Diversified LPs) that were offered by The Diversified Group Partnership Management, LLC (Diversified Group). The Diversified Group was a contracting company that purchased and rehabilitated real estate. The Diversified LP shares stated purpose was to use investor funds to purchase servicing land contracts on residential real estate. The land contracts promised investors an annual interest rate of 9.9%, with a total return of 10.44%. The Diversified Group planned to collect payments on the land contracts from the homes’ inhabitants and pay investors. The offering memoranda for the Diversified LPs stated that the investments were speculative in nature, illiquid, non-transferable, subject to default risk, and adverse market conditions.