Securities Lawyers Blog

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.

UBS Closes Two MLP ETNs – ETRACS 2x Monthly Leveraged S&P MLP Index (MLPV) and ETRACS 2x Monthly Leveraged Long Alerian MLP Infrastructure ETN (MLPL) After Massive Investor Losses

January 24, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating investors that were recommended to invest in two UBS exchange traded notes (ETNs) that concentrated in master limited partnerships (MLPs) that are now being shuttered. The first ETN, ETRACS 2x Monthly Leveraged S&P MLP Index ETN (MLPV) only recently was issued in July 2015 and is an $11 million fund. Since starting at a high of around $21 per share the fund has collapsed to only around $6.6 per share. The other fund being closed is the $113 million ETRACS 2x Monthly Leveraged Long Alerian MLP Infrastructure ETN (MLPL) which reached a high of around $73 in July 2014 only to fall to about $12.6. According to a press release by UBS the funds “will be mandatorily redeemed in accordance with the terms of the Securities as a result of the occurrence of an Acceleration Event, triggered as a result of the intraday indicative value of the Securities being equal to or less than $5.00 on January 20, 2016.”

The liquidation of a $113 million fund like MLPL under these circumstances is shocking. The notes were supposed to expire by the earliest in 2040. However, the rapid fall of the price of oil triggered an acceleration provision. Investors recommended to hold such funds by their advisors were probably not aware that the funds could be required to automatically liquidate their holdings under duress and at firesale prices that will erase shareholder value. The liquidation provisions in the ETNs is a risk that financial advisors may not be aware of when they recommend buying and holding this speculative asset class that offers leveraged exposure to a volatile commodity like oil. Further, at this point it would take a mathematician to figure out what an investor is likely to receive in repayment.

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, leveraged ETFs, mutual funds, and individual stocks. Our firm has written numerous articles concerning the dangers of MLP investments. MLPs are publicly traded partnerships. About 86% of the total MLP securities market, a $490 billion sector, can be attributed to energy and natural resource companies. However, most of these companies are heavily reliant on high oil prices to sustain their business models.

Wells Fargo Financial Advisor Charles Lynch Accused of Unsuitable Energy Related Investments

January 24, 2016 | by Staff Attorney

The securities lawyers of Gana Weinstein LLP are investigating a number of customer complaints involving Wells Fargo Advisors, LLC (Wells Fargo) brokers, including financial advisor Charles Lynch (Lynch), concerning allegations that the investors have been recommended or their advisory accounts have been mismanaged to hold high concentrations of energy related investments. According to Lynch’s publicly available records, there are 11 customer complaints with 9 of those complaints being filed in 2015 all related to energy investments. The customer complaints against Lynch allege securities law violations that including unsuitable investments among other claims.

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. Our firm has written numerous articles concerning the dangers of MLP investments. MLPs are publicly traded partnerships. About 86% of the total MLP securities market, a $490 billion sector, can be attributed to energy and natural resource companies. However, most of these companies are heavily reliant on high oil prices to sustain their business models.

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. Many of these companies relied upon high energy prices in order to sustain their operations. As reported by the Wall Street Journal the drop in oil and energy prices and the industry downturn has made it difficult for many companies to refinance their debts.

Broker Investigation: Churning Claims Against National Securities Corporation Broker Shaun Stein

January 23, 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 Shaun Stein (Stein). According to BrokerCheck records there are at least 3 customer complaints against Stein. The customer complaints against Stein allege a number of securities law violations including that the broker made unsuitable investments, misrepresentations, breach of fiduciary duty, and churning (excessive trading) among other claims. The most recent customer complaint filed in July 2015 alleged churning and mishandling of the account claiming $60,000 in damages. The claim is still pending. In June 2014, another client filed a complaint alleging unsuitable investments, fraud, unfair trade practices and other claims claiming damages of $75,000. The claim has been closed.

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 Stein 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.

Broker Investigation: Churning Claims Against Broker Kerry Raheb (a/k/a Patrick Raheb)

January 22, 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 Kerry Raheb (a/k/a Patrick Raheb) (Raheb). According to BrokerCheck records there are at least 5 customer complaints, two judgments or liens, and one criminal matter involving Raheb. The customer complaints against Raheb allege a number of securities law violations including that the broker made unsuitable investments, misrepresentations, negligence, and churning (excessive trading) among other claims. The most recent customer complaint filed in December 2015 alleged unsuitable investments resulting in losses of $199,001. The claim is still pending. In April 2014, another client filed a complaint alleging unauthorized trading claiming damages of $300,000. The broker has denied the allegations in the complaint and the claim is still pending.

In addition, Raheb has two judgements. One tax lien filed in January 2014 for $64,518 and one civil judgement for $12,024 recorded in February 2013. 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.

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.

Broker Investigation: Churning Claims Against Aegis Broker Michael Venturino

January 22, 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 Michael Venturino (Venturino). According to BrokerCheck records there are at least 2 customer complaints against Venturino. The customer complaints against Venturino allege a number of securities law violations including that the broker made unsuitable investments, misrepresentations, negligence, and churning (excessive trading) among other claims. The most recent customer complaint filed in June 2014 alleged excessive mark-ups or commissions claiming $125,000 in damages. The claim is still pending. In March 2014, another client filed a complaint alleging unsuitable investments, unauthorized trading, and churning among other claims claiming damages of $140,368. The claim is still pending.

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 Venturino 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.