Securities Lawyers Blog

Odebrecht Offshore Drilling Finance Investor Recovery Options

January 30, 2016 | by Staff Attorney

The investment attorneys at Gana Weinstein LLP continue to report on investor losses in oil and gas related investments. Our firm is investigating potential securities claims against brokerage firms over sales practices related to the recommendations of oil & gas and commodities products such as exchange traded notes (ETNs), structured notes, private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and individual stocks.

According to Bloomberg, bonds of Odebrecht Oleo & Gas SA (Odebrecht), the oil services arm of Latin America’s largest construction conglomerate plunged to record lows after Petroleo Brasileiro SA, the corruption plagued stated owned oil company, canceled a contract to rent one of its drilling rigs. Odebrecht Offshore Drill Finance’s $1.5 billion of bonds come due in 2022 and are backed by cash flows coming from four drilling rigs. On the news back in September 2015, shares of the bonds fell 12% to about 26 cents on the dollar. Also $550 million in perpetual dollar bonds from Odebrecht Oil & Finance also declined.

More recently, Fitch Ratings has downgraded the senior secured notes issued by Odebrecht Offshore Drilling Finance Ltd. (OODFL) to ‘CCC’, and affirmed the senior secured notes issued by Odebrecht Drilling Norbe VIII/IX Ltd. at ‘B’.

Pharmaceutical Company Zafgen (ZFGN) Investors Suffer Massive Losses After Key Drug Placed on Hold

January 30, 2016 | by Staff Attorney

The investment fraud attorneys of Gana Weinstein LLP are investigating potential legal remedies due to recommendations to investors to buy speculative pharmaceutical company stocks. One such company is Zafgen, Inc. (Zafgen) (Stock Symbol: ZFGN). The stock was trading in the mid $40s just last September but now has plunged to under $6 a share, a staggering loss of shareholder value.

According to Bloomberg, Zafgen announced that its trial of an experimental drug to fight obesity was placed on hold by regulators after a second patient died taking the drug. The trial involves patients with a rare genetic disease called Prader-Willi syndrome that causes overeating. The trial was being studied to for the purposes of having the U.S. Food and Drug Administration approve the drug for those patients. Zafgen had finished one part of the trial that compared the drug to a placebo and then continued to a study where all patients took the drug. However, the FDA has now ordered a complete clinical hold on studies. The news sent the company’s shares down 61% when announced.

Before recommending investments in pharmaceutical related investments, brokers and advisors must ensure that the investment is appropriate for the investor and conduct due diligence on the company in order to understand the risks and prospects of the company. Pharmaceutical companies are notoriously risky investments. While investments in big name pharmaceuticals with diversified portfolios of established drugs and products offer greater stability some brokers recommend small bio-technology companies that have only one or two unproven drugs in clinical trials or development. The entire value of the company’s stock for these companies are often tied to the perceived success or failure of the drug. Even slightly downbeat news can send such stocks into a tailspin. However, brokers who recommend risky pharmaceutical companies are obligated to understand the risks of these investments and convey them to clients.

Broker Spotlight: Customer Complaints Against PHX Financial Broker Johnathan McHale

January 28, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority’s (FINRA) against broker Johnathan McHale (McHale). According to BrokerCheck records there are at least 6 customer complaints, one employment separation for cause, and 6 judgments or liens that have been filed against McHale. The most recent customer complaint against McHale filed in April 2014 alleges that McHale breached his fiduciary duty, negligence, and misrepresentations in the handling of the customer’s account leading to $108,000 in damages. The claim was settled for $14,995. In August 2012, another client alleged that McHale engaged in unsuitable investments leading to $43,000 in damages. The claim was denied.

In May 2014, National Securities Corporation terminated McHale alleging that he violated the firm’s policy by using his personal email address for business correspondence. In addition, McHale has 6 judgements. One tax lien filed in March 2011 for $34,598. Substantial judgements and liens on a broker’s record can reveal a financial incentive for the broker to recommend high commission products or services. A broker’s inability to handle their personal finances has also been found to be relevant in helping investors determine if they should allow the broker to handle their finances

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client. In order to make a suitable recommendation the broker must meet certain requirements. First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

Commodities Company Freeport-McMoran (FCX) Investors Suffer Massive Losses

January 28, 2016 | by Staff Attorney

The law offices of Gana Weinstein LLP continue to report on investor related losses and potential legal remedies due to recommendations to investor in oil and gas and commodities related investments. Commodity prices have plummeted due to the economic slowdown in China and the strengthening dollar. Persistently low equity prices for companies in these sectors are ruining balance sheets prompting bankruptcies and debt reduction strategies that may be too little too late.

One such company is Freeport-McMoran (FCX). Analysts studying Freeport worry about lower projected copper prices, risks in Indonesia, and the company’s reluctance to sell assets to raise capital. According to analysts it may already be too late for Freeport. So far the company has taken some steps such as announcing suspending its dividend and reducing capital expenditures. However, the Arizona-based natural resources company has a $20 billion debt load and no meaningfully way to reduce it. Shares of Freeport which traded as high as $38 in 2014 now trade at $4.35 a share.

Before recommending investments in oil and gas and commodities related investments, brokers and advisors must ensure that the investment is appropriate for the investor and conduct due diligence on the company in order to understand the risks and prospects of the company. Oil and gas and commodities related investments have been recommended by brokers under the assumption that commodities prices would continue to go up. However, brokers who sell oil and gas and commodities products are obligated to understand the risks of these investments and convey them to clients.

Broker Investigation: 13 Customer Complaints Against Aegis Capital Broker Keith Connolly

January 27, 2016 | by Staff Attorney

The securities fraud lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority’s (FINRA) against broker Keith Connolly (Connolly). According to BrokerCheck records there are at least 13 customer complaints against Connolly. The customer complaints against Connolly allege a number of securities law violations including that the broker made unsuitable investments, misrepresentations, failure to supervise, unauthorized trading, and churning (excessive trading) among other claims. The most recent customer complaint filed in October 2014 alleged churning, negligence, unsuitability, overconcentration resulting in damages of $187,855 in damages. The claim is still pending. In August 2014, another client filed a complaint alleging administering the customer’s brokerage accounts claiming damages of 776,326. The claim was resolved settling for $450,000.

As a background, when brokers engage in excessive trading, sometimes referred to as churning, the broker will typical trade in and out of securities, sometimes even the same stock, many times over a short period of time. Often times the account will completely “turnover” every month with different securities. This type of investment trading activity in the client’s account serves no reasonable purpose for the investor and is engaged in only to profit the broker through the generation of commissions created by the trades. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

The number of customer complaints against Connolly is high relative to his peers. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. Brokers must publicly disclose certain types of reportable events on their CRD including but not limited to customer complaints. In addition to disclosing client disputes brokers must divulge IRS tax liens, judgments, and criminal matters. However, FINRA’s records are not always complete according to a Wall Street Journal story that checked with 26 state regulators and found that at least 38,400 brokers had regulatory or financial red flags such as a personal bankruptcy that showed up in state records but not on BrokerCheck. More disturbing is the fact that 19,000 out of those 38,400 brokers had spotless BrokerCheck records.

Prospect Capital Highlights the Risks of Business Development Companies (BDCs)

January 27, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in non-traded real estate investment trusts (Non-Traded REITs) and non-traded Business Development Companies (BDCs). Based upon the investor’s investment objectives and other information such investments may have been unsuitable for the investor. Recently, one publicly traded BDC has been under scrutiny, Prospect Capital Corporation (Prospect Capital) (Stock Symbol: PSEC). As the New York Times reported, in the last year and a half Prospect Capital’s stock price and net-asset value per share have been steadily sinking. Prospect Capital’s stock now has traded at discounts to net-asset-value of more than 30 percent this year.

As a background, BDCs have been a growing asset class that markets itself to investors as a non-stock market, non-real estate, high yield alternative investment. As we have reported in the past, BDCs make loans to and invest in small to mid-size, developing, or financially troubled companies either broadly or in a particular sector, such as oil and gas. BDCs have stepped into a role that many commercial banks left during the financial crisis due to capital raising requirements. In sum, BDCs lend to companies that may not otherwise get financing from traditional sources. However, BDCs appear to be just as speculative, suffer from high commissions and fees, and are inappropriate for most investors just like Non-Traded REITs. Indeed, to a Wealth Management Article front-end load fees on Non-Traded BDCs are typically around 11.5 to 12 percent. In addition, BDCs also usually have an incentive compensation following the “two and twenty” rule where the fund charges two percent of assets in management fees and 20% of capital gains based upon performance.

In the case of Prsopect Capital, some analysts have accused Prospect of charging conspicuously high fees even in the face of as investor returns. For example, Prsopect Capital paid its chief executive, John F. Barry III more than $100 million annually in recent years when the CEO of the largest internally managed BDC earned just $16.9 million in 2014. In addition, investors have accused Prsopect Capital because they claimed the firm inflates the fees it pays its management firm, Prospect Capital Management. Further, investors believe that Prsopect Capital trades at a 28 percent discount to net-asset value because of investor belief that the value Prospect Capital’s reported asset value may be inflated.

Voyager Financial Group, LLC Investor Recovery Options

January 26, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in Voyager Financial Group, LLC, (VFG), a Delaware limited liability company. VFG maintained a website which claimed that Voyager “is a national distributor, broker, and consulting firm for a diverse array of products, services, and contracts in the financial services arena.” Voyager claimed to “specializes in the factored income stream market, working to satisfy the needs both of individuals and entities receiving structured payments and those wishing to take advantage of the stability and return on investment that these products can bring.”

However, several state regulators have found that brokers and financial advisors have been selling VFG investments under false and misleading statements. Advisors accused by state regulators of misleading investors include Sidney Evans with Equity Advisors LLC and Erryn Barkett with LPL Financial. Some states, such as California, have ordered VFG to cease doing business in their state.

State regulators and investors claim that VFG offers securities in the form of investment contracts called “Veterans Benefits’ Contracts.” VFG structured and promoted investment transactions between investors and sellers who typically are veterans who receive structured payments such as a military pension or disability benefits from the United States government. VFG then identified potential sellers and persuaded them to sell to investors a portion of their future government payments for a lump sum.

Spirit of America Energy Fund (SOAEX) Investor Recovery Options

January 26, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in Spirit of America Energy Fund (Stock Symbol: SOAEX) underwritten and promoted by David Lerner Associates. The Fund went public in July 2014 and since that time has fallen from about $10 to only about $4.33 per share, an over 50% loss in less than a year and half.

The Spirit of America Energy Fund states that its investment strategy “seeks to achieve its investment objective by investing at least 80% of its assets in energy and energy related companies Exploration, production and transmission of energy or energy fuels. The Fund will invest in Master Limited Partnerships (MLPs) that derive the majority of their revenue from energy infrastructure assets and energy related assets or activities…”

In the case of Spirit of America Energy Fund as of May 2015, over 90% of the fund was invested in oil and gas related MLPs. In addition, investors recommended to invest in the fund may have to pay a high 5.75% load fee and 1.55% annual expenses. In addition, from information available on the Spirit of America Energy Fund website, for the year ended 2014, over 93% of distributions received by investors are a return of their capital and only 6% of all distributions was a taxable dividend. Thus, part of the reason that the fund has declined so rapidly may possibly be attributable to the fund simply repaying investors from their own funds rather than through funds generated by investments.

Recovery Options for United Development Funding Investors

January 25, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in non-traded real estate investment trusts (Non-Traded REITs) or publicly traded shares of United Development Funding (UDF) funds. Based upon the investor’s investment objectives and other information such investments may have been unsuitable for the investor. Recently, UDF IV, a publicly traded REIT, plummeted about 50% in value after allegations arose claiming that UDF runs its REIT programs like a Ponzi scheme.

As a background, according to UDF’s website the company was founded in 2003 and purports to provide investors with an opportunity to diversify their portfolios with “fundamentally sound investments in affordable residential real estate.”

However, allegations have been made that UDF IV made false or misleading statements and omissions about its business. It has been alleged that UDF IV failed to disclose that: (1) subsequent UDF REIT companies provide significant liquidity and capital to earlier UDF companies which allows those companies to repay earlier investors; (2) if funding from retail investors to the latest UDF company were halted the earlier UDF companies would not be capable of continuing operations; (3) UDF IV provided liquidity to UDF I, UMT and UDF III, as part of an investment scheme; (4) UDF IV was being operated in a manner similar to a Ponzi scheme where new capital is being used to pay prior investors; (5) UDF IV failed to disclose that the company was being investigated by the SEC for its practices; and (6) UDF IV’s business prospect representations were false and misleading.

Preferred Stock Shareholders in RCS Capital Corporation Expected to be Wiped Out

January 25, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in preferred stock issued by RCS Capital Corporation (RCS). According to the Wall Street Journal, RCS Capital plans to file for chapter 11 bankruptcy protection under a prearranged that will allow RCS to focus on its retail brokerage firm conglomerate Cetera Financial Group. As part of the planned deal lenders agreed to invest $150 million in new working capital into Cetera. Also according to the plan, the company expects debt reduction and the elimination of preferred stock worth more than $500 million.

Our firm is investigating potential unsuitable recommendations in RCS preferred stock. Before recommending investments brokers and advisors must ensure that the investment is appropriate for the investor and conduct due diligence on the company in order to understand the risks and prospects of the company. With a company as troubled and opaque as RCS, investors likely relied upon the due diligence of their advisors in making investments in the company.

The issuance of large amounts of preferred stock coincided with the downfall of RCS and was an extremely risky investment. As a background chronicled by InvestmentNews, in the fall of October 2013, Nicholas Schorsch, the owner of RCS and many of its affiliates, had capped off a string of acquisitions in just two years costing $8.8 billion in total and forging a giant non-traded REIT and broker-dealer conglomerate.