Securities Lawyers Blog
The law offices of Gana LLP recently filed a complaint before The Financial Industry Regulatory Authority (FINRA) on behalf of a investor against brokerage firm LPL Financial, LLC (LPL) involving the firm’s financial advisor, Kevin McCallum (McCallum) and his use of discretion to invest substantial sums in Medley Capital Corporation (MCC). The Claimant alleged that LPL failed to supervise Mr. McCallum’s discretionary trading in MCC, breached their fiduciary duty to Claimant, and failed to conduct due diligence on the investment. In addition, due to the massive amount of MCC that LPL allowed Mr. McCallum to purchase on behalf of all of his clients, the Claimant alleged that LPL had an undisclosed conflict of interest in the MCC transaction.
MCC is a low-priced thinly traded security and is a non-diversified closed end management investment company incorporated in Delaware that is a business development company (BDC). MCC commenced operations on January 20, 2011 with an investment objective to generate current income and capital appreciation by lending directly to privately held middle market companies. BDCs often enter into high risk lending arrangements.
In this case, MCC was even more risky than the average BDC due to several factors including: 1) the BDC was a thinly traded micro-cap issuer and a low-priced or penny stock; 2) MCC had suffered from years of ongoing losses and declines in its business portfolio; and 3) MCC’s management was accused and found to have engaged in an unethical bidding process. Due to the foregoing high risk factors, an investment in MCC was unsuitable for the vast majority of investors and certainly unsuitable in large concentrations for any investor.
The Claimant alleged in the complaint that nowhere in any account form or agreement is there any statement that he had the desire or ability to risk the loss of most of his entire retirement savings in a single speculative gamble in a stock like MCC.
Claimants also alleged LPL suffered from numerous conflicts of interests that it should have disclosed to Claimant as his fiduciary. Not only did LPL gamble with Claimant’s retirement savings, but it also allowed Mr. McCallum to execute a similar strategy across many of his clients’ accounts. LPL’s negligence resulted in the firm becoming the discretionary manager of over $16 million worth of MCC stock, which required the firm to file public disclosures with the SEC acknowledging the firm’s 11% ownership of the MCC.
In the complaint Claimant alleged that LPL failed to disclose the conflict of interests that existed in owning 11% of MCC including the inability to recommend selling MCC without filing a stock offering registration statement with the SEC. Further, because LPL owned so much of MCC’s stock, the firm could not possibly liquidate its holdings in less than several months due to stock’s lack of liquidity. Investors have a right to know of any material conflict which would influence a decision not to exercise discretion to sell a position or to recommend against selling a position.
Claimant alleged that the MCC investment LPL traded with discretion caused Claimant over $1 million in losses and deprived him of the ability to generate the reasonable returns he was entitled to had he been invested in a well-managed and diversified portfolio.
The investment lawyers at Gana Weinstein LLP represent investors who have suffered investment losses due to allegations of wrongdoing. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover. Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation.