Private Placements

FINRA Panel Awards Customer in A Claim Over the Erickson Retirement Communities Private Placement

January 13, 2014 | by Staff Attorney

Wisconsin based B.C. Ziegler & Co. (Ziegler) was recently hit with a $311,000 judgment in a decision made by a FINRA arbitration panel. The claimant alleged negligent misrepresentation, suitability, negligence, failure to supervise, and violation of Wisconsin Uniform Securities Act. The claim related to the recommendation to purchase private placement securities in the Subordinated Taxable Adjustable Mezzanine Put Securities (STAMPS) offered by Erickson Retirement Communities, LLC (Erickson).

The claimant alleged that less than two years after its investment, Erickson filed for bankruptcy and the STAMPS investment became worthless. The claimant alleged that Ziegler failed to disclose material facts regarding the STAMPS investment and that the STAMPS recommendation was at odds with the claimant’s investment objectives. The claimant alleged that STAMPS was an illiquid subordinated debt products, not secured by any collateral, and was recommended to the claimant at a time when private and commercial loan environments were experiencing extreme stresses. Further, the claimant alleged that they were recommended the investment even though Erickson’s financial situation was steadily worsening.

Other complaints filed against Ziegler in connection with the Erickson private placement have made similar allegations against the firm. According to a Chicago Tribune article, claimants have alleged that their broker promised returns of 11 percent to 12 percent but minimized or failed to disclose the risks, including how their cash would be tied up for years. Due to stock market volatility, broker promises of fixed returns from a stable investment often entice clients to follow their broker’s recommendation to invest in private placements. In addition, private placements are supposed to be sold to only accredited investors who meet certain net worth or income requirements. Some of the investors have claimed that they were instructed to provide incorrect financial information in order to meet the accredited investor standard, a claim that has become more and more common as brokerage firms seek to sell private placements to a wider field of investors.

Jeffrey Isaacs of Investors Capital Corporation Suspended Over Unsuitable Sale of Securities

December 30, 2013 | by Staff Attorney

Broker Jeffrey M. Isaacs (Issacs) of Investors Capital Corporation (ICC) was recently suspended and sanctioned by The Financial Industry Regulatory Authority (FINRA) over allegations that Isaacs made negligent material misrepresentations of fact in connection with the unsuitable sale of two private placements to ICC customers. In addition, after the customers complained to Isaacs, he settled their claims without notifying ICC.

From January 12, 2005, through December 12, 2011, Issacs was associated with Investors Capital Corporation. On December 12, 2011, ICC filed a Form U5 stating that Isaacs “submitted a voluntary request to terminate association with the firm while under investigation for failing to follow firm policies.” Thereafter, Isaacs was registered with TFS Securities, Inc. (TFS) from November 21, 2011 through December 15, 2011. On December 15, 2011, TFS filed a Form U5 stating that Isaacs’ termination was voluntary. Issacs’ BrokerCheck discloses that he is also employed by JB Financial Resources.

FINRA alleged that Isaacs negligently misrepresented two customers that an investment in the Insight Real Estate LLC 2007 Secured Debenture Offering (Insight) was a safe, low-risk investment, misstated its payment terms, and omitted material facts relating to the speculative nature of the investment. The customers invested $100,000 in Insight in reliance on Issacs’ representations. Thereafter, FINRA alleged that Isaacs negligently misrepresented to the customers that an investment in CIP Leverage Fund Advisors, LLC (CIP) was for moderately conservative investors and would pay interest to the investors on a monthly basis. In fact, the CIP was a speculative investment that paid interest only on an accrued basis with the final payment of principal. The customers also invested $100,000 in CIP in reliance on Issacs representations.

David Kauffman of First Allied Barred Over Allegations of Sale of Private Placements

December 20, 2013 | by Staff Attorney

Broker David Charles Kauffman (Kauffman) was recently barred by The Financial Industry Regulatory Authority (FINRA) over his failure to respond to FINRA’s investigation over allegations that he engaged in personal private securities transactions, used unapproved email addresses, and introduced clients to individuals associated with non-approved investment opportunities.

Kauffman began his career in the securities industry in 1993 and has been registered with 13 FINRA member firms. From March 2006 through September 2010, Kauffman was registered with FINRA as a General Securities Principal and a General Securities Representative at First Allied Securities, Inc. (First Allied). First Allied terminated Kauffman for violating firm policies pertaining to his personal private securities transactions, used unapproved email addresses, and introduced clients to individuals associated with non-approved investment opportunities. Thereafter, Kauffman was registered with MCL Financial Group, Inc. through December 2011. Kauffman’s BrokerCheck discloses that Kauffman was also employed by David Kauffman Insurance Services, One-Less Putt, MCS Golf, 928 LLC, and EDT Property Services.

In September 2010, First Allied made two filings with FINRA disclosing it had terminated Kauffman for conduct including engagement in private securities transactions in connection with several private placement offerings without providing written notice to the firm. FINRA alleged that one of the offerings Kauffman was involved in was entity named Gulf Coast Oil & Rig, LLC (Gulf Coast). Thereafter, FINRA staff sought information, documents, and testimony from Kauffman to determine, among other things, his role and compensation in connection with the private securities transactions, as well as the status of Gulf Coast’s business. Initially, Kauffman cooperated with the examination by providing some information and documents. However, FINRA alleged that Kauffman failed to respond properly to further requests.

Broker Joseph Giordano of Capital Investment Group Sanctioned Over Empire Debenture Sales

December 19, 2013 | by Staff Attorney

Broker Joseph Anthony Giordano (Giordano) was recently barred from the financial industry by The Financial Industry Regulatory Authority (FINRA) over allegations that he participated in the distribution of unregistered debentures issued by Empire Corporation, a Maryland corporation (Empire Debentures) to customers of Capital Investment Group, Inc. (CIG). FINRA alleged that Giordano violated FINRA Rules by soliciting the sales of the Empire Debentures. In addition, FINRA found Giordano’s Empire Debentures sales to customers were without a reasonable basis for making such recommendation. Finally, FINRA found that Giordano engaged in securities fraud by making intentionally false and misleading statements in connection with the sales of the Empire Debentures to customers.

Giordano was registered with Capital Investment Group from September 1992 until his termination on June 20, 2012. Giordano’s U5 states that he was terminated for “selling away” and making false and misleading statements to the firm. On July 2, 2012, Giordano became registered with Meyers Associates, L.P. (Meyers) until his registration was terminated by Meyers on July 10, 2013. Giordano’s BrokerCheck states that he is the general manager of Giordano Asset Management LLC and treasurer of Giordano Holding Corporation.

FINRA found that Giordano sold approximately $3.1 million of the Empire Debentures to at least 45 customers of CIG. The Empire Debentures had varying maturities but the majority had a five-year maturity and promised interest at an annual compounded rate of ten percent paid at maturity. FINRA alleged that the Empire Debentures were speculative investments considering their high-yield, lack of credit analyses or an effective registration statement, and the complete absence of a secondary market. The sale of the Empire Debentures was in contravention of Section 5 of the Securities Act of 1933 requiring the registration of securities. The securities were also not registered with the State of Maryland. In addition, FINRA alleged that Giordano failed to conduct adequate due diligence regarding the registration status of the Empire Debentures prior to recommending and selling the debentures to customers.

HFP Capital Markets’ Employees Sanctioned Over Metals Millings and Mining Private Placement Offering

December 18, 2013 | by Staff Attorney

Advisor Thomas Mikolasko, (Mikolasko) of HFP Capital Markets LLC (HFP) was recently suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Mikolasko engaged in the sale of $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (MMM) in a private placement offering. The MMM Notes defaulted and investors were not repaid either principal or the 100 percent return promised. FINRA found that Mikolasko negligently caused material misrepresentations and omissions of material facts to be made in connection with the sale of MMM. FINRA also alleged that Mikolasko facilitated the offering even though he knew or should have known that HFP had conducted inadequate due diligence concerning the offering and that the limited due diligence the firm had conducted identified significant “red flags.”

Metals Millings and Mining LLC was an entity created in 2009 with HFP’s assistance. MMM was formed as a vehicle to aggregate and process certain ore materials. The investment’s sponsor had presented to HFP a plan to extract precious metals from the ore concentrate through a process known as “plasmafication.” HFP’s former chief executive, Vincent J. Puma was primary responsibility for HFP’s involvement in the MMM offering. From December 2009 to February 201l, HFP sold approximately $3 million of MMM Notes to 58 HFP customers. The MMM notes provided for the repayment of principal in one year together with the ownership of ore concentrate.

Pursuant to a repurchase agreement, MMM was then obligated repurchase the ore from the investors at an agreed price so that they would receive a 100 percent return on their investment in addition to the return of principal. There was no private placement memorandum for the transaction and investors were provided only with limited disclosures as forth in a subscription agreement. The MMM notes have defaulted and investors have not been repaid either principal or the promised 100 percent return.

Source Capital Group Employees Sanctioned Over Blue Ridge and Argyle Oil and Gas Private Placements

December 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Source Capital Group (Source Capital) registered representatives Kevin Cline (Cline), Robert Burr (Burr), Vincent Christopher (Christopher), and Thomas Gilleland (Gilleland). FINRA’s findings concerned allegations that the brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

According to FINRA, from at least October 11, 2006, and December 17, 2012, the named brokers violated the federal securities laws and FINRA rules in connection with selling Blue Ridge and Argyle offerings. Cline is the branch office manager for Source Capital’s Bowling Green, Kentucky branch office on Adams Street and Burr managed the Wright Street office where Christopher and Gilleland were brokers. Source Capital’s Adam Street branch office was the sole seller of private placement offerings of oil and gas securities issued by Blue Ridge’s limited partnerships all of which were managed by Blue Ridge Group, Inc. Source Capital’s Wright Street branch office was the sole seller of private offerings of Argyle limited partnerships managed by Argyle Energy, Inc. Blue Ridge and Argyle were both housed at the Adams Street branch office and were owned by Robert “Bob” Burr, the father of Burr as the controlling stockholder and former officer of both Blue Ridge and Argyle.

FINRA alleged that Cline failed to adequately disclose material information in selling Blue Ridge to investors. Specifically, FINRA found that Blue Ridge gave money to Cline that Cline used to pay Source Capital representatives a $2,000 monthly salary in advance of their draws which were not always repaid. FINRA concluded that the failure to adequately disclose that Cline used Blue Ridge funds to pay compensation to Source representatives was a material omission in violation of FINRA Rule 2010 and NASD Rule 2110, and Section 17(a)(2) of the Securities Act of 1 933, 15 U.S.C. § 77q(a)(2).

Former Ryan Beck and Oppenheimer Financial Advisor William Bucci Barred From the Financial Industry

December 5, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred financial advisor William D. Bucci (Bucci) for allegedly accepting 19 personal loans totaling $635,000 from nine customers in violation of FINRA rules. Bucci also allegedly willfully failed to amend his Form U4 to disclose material facts relating to two judgments that were entered against him. In addition, customers have filed complaints alleging that Bucci sold illegal promissory notes.

Bucci has been licensed as registered securities representative since 1983. From April 27, 2002, until April 2007, Bucci was a registered representative with Ryan Beck & Co. (Ryan Beck). Thereafter, and until August 2011, Bucci was registered with Oppenheimer & Co. (Oppenheimer). Finally, from August 2011, until May 2012, Bucci was registered with Financial Network Investment Corp. (Financial Network). Bucci’s public disclosures list that he is involved in a number of companies and other business activities including Delaware Valley Financial Group, LLC, DVFG Advisors, LLC, Chestnut Hill College Board of Trustees, Gennaro Vuono & William Bucci, 3010 Ocean Ave, LLC, 510 Seacliff LLC, 210 Sea Spay LLC, and 216 Sea Spay LLC.

FINRA alleged that between May 2004 and December 2010, Bucci accepted 19 personal loans from nine brokerage customers totaling $635,000. FINRA found that all of the personal loans paid annual interest of at least 10 percent and had terms of up to five years. In one instance, Bucci was accused of borrowing $425,000 in ten loan transactions from an elderly retired couple who were customers of Bucci at Ryan Beck and Oppenheimer. FINRA alleged that none of the elderly couple’s loans have been repaid. Further, according to FINRA, the elderly couple loaned Bucci a portion of the $425,000 by withdrawing money from their brokerage accounts and securing a second mortgage on their home. FINRA found that Bucci’s conduct violated NASD Rules 2370 and 2110 and FINRA Rules 3240 and 2010.

Coker & Palmer Broker Sanctioned Over Allegations of Failure to Conduct Due Diligence on Private Placement Offering

November 26, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Michael A. Barina (Barina) over allegations that Barina failed to conduct reasonable due diligence into the offering a private placement security. In addition, FINRA alleged that the broker commingled certain funds.

Barina first became registered with FINRA in 1999. Barina was registered from November 13, 2009, through November 14, 2011, with Coker & Palmer, Inc. (Coker & Palmer). In November 2011, Barina became registered with Aegis Capital Corp. until May 2013. Thereafter, Barina was registered with Merrimac Corporate Securities, Inc. until October 2013.

Brokerage firms and brokers are responsible for conducting due diligence on all securities recommended by a broker. The due diligence requirement is heightened where the investment recommendation is a private placement offering or other type of non-public offering where there is no public information available and brokerage firm is acting as the underwriter of the securities.

FINRA Bars Broker Richard Manchester of Girard Securities Over Private Placement Sales

November 7, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Richard Manchester (Manchester) over allegations that his participation in several private placements caused his employing firm to fail to establish an escrow account for several contingency offerings, broke escrow before the minimum contingency amounts were met, and made unauthorized use of offering proceeds by lending offering proceeds to other private placements. FINRA found that Manchester’s acts violated of Section 10(b) of Securities Exchange Act of 1934 and Rules 10b-5 and 10b-9 thereunder, NASD Rule 2110, and FINRA Rules 2020 and 2010.

From July 2004 through December 2010, Manchester was associated with Girard Securities, Inc. (Girard Securities). During this time Manchester was involved in the offering of several private placement offerings. One offering was Pacific Yogurt Partners, LLC (Pacific Yogurt) a limited liability corporation formed in 2007 to acquire franchise rights from Golden Spoon Frozen Yogurt. The Pacific Yogurt private placement offered Series B and Series C Units in a contingency offering requiring the raising of a minimum amount of funds for the offering to proceed. FINRA alleged that even though the private placement memorandum stated that funds received would be returned to investors if the minimum sales contingency was not met the funds were released to the issuer. In addition, under the securities laws investor funds received before the satisfaction of the minimum sales contingencies were required to be deposited into a bank escrow account. Instead, FINRA found that the funds provided directly to Pacific Yogurt, the issuer. FINRA alleged that Manchester’s conduct constituted a willful violation of Rule 10b-9, and a violation of NASD Rule 2110 and FINRA Rule 2010.

Another private placement Manchester was involved in offering was WaveWise, LLC (WaveWise). WaveWise was created to acquire interest in IdeaEdge, Inc. (IdeaEdge). The offering sought to purchase up to 2,625,000 shares of IdeaEdge common stock, at $0.80 per share, with warrants to purchase a share of common stock at $1.00 per share for every four shares of common stock purchased at $.80 per share. Thereafter, IdeaEdge changed its name to Social Wise, Inc. (Social Wise), which subsequently changed to Bill My Parents. Like Pacific Yogurt, FINRA alleged that investor funds received before the satisfaction of the minimum sales contingency were required to be deposited into a bank escrow but instead were deposited into a bank account in the name of WaveWise.

What are Tenants-in-Common Securities?

October 30, 2013 | by Staff Attorney

Tenants-in-common real estate investments (“TIC”) are a more than $1-billion a year industry. However, with all innovative investment products, TIC investments receive their share of complaints from unhappy investors who bought them through a private placement. In FINRA arbitration, these complaints materialize as suitability claims and allegations of negligent misrepresentation. Usually, one or more of the following claims are made:

Investing in a TIC was not appropriate for me because of my needs, experience, or risk tolerance.
My broker did not perform adequate due diligence on the,offering materials of the TIC, appraisals of the underlying properties, persons promoting the TIC.