Securities Lawyers Blog

Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I

August 10, 2015 | by Staff Attorney

As longtime readers of our blog know we have reported numerous instances of sales and other practice violations regarding how brokers and brokerage firms sell non-traded real estate investment trusts (Non-Traded REITs). See list of articles below. As Non-Traded REITs have become the latest darling product of the financial industry experts and regulators have begun to question the basis for selling these products. And if Non-Traded REITs are to be sold, should there be a limit on the amount a broker can recommend.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are publicly traded REITs that are bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Investors are also often ignorant to several other facts that would warn against investing in Non-Traded REITs. First, only 85% to 90% of investor funds actually go towards investment purposes. In other words, investors have lost up to 15% of their investment to fees and costs on day one in a Non-Traded REIT. Second, often times part or almost all of the distributions that investors receive from Non-Traded REITs include a return of capital and not actual revenue generated from the properties owned by the REIT. The return of capital distributions reduces the ability of the REIT to generate income and/or increases the investment’s debt or leverage.

FINRA Sanctions Morgan Stanley and Scottrade for Failing to Supervise Customer Transfers to Third-Party Accounts

August 9, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) issued a press release concerning two settlements fining Morgan Stanley Smith Barney, LLC (Morgan Stanley) $650,000 and Scottrade, Inc. $300,000 for failing to implement reasonable supervisory systems to monitor the transmittal of customer funds to third-party accounts. The settlements included allegations that both firms had weak supervisory systems after FINRA examination teams reviewed the firms in 2011, but neither took necessary steps to correct the supervisory gaps.

Brad Bennett, Executive Vice President and Chief of Enforcement, was quoted in the press release as stating that, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.”

In the Morgan Stanley settlement, FINRA alleged that from October 2008, to June 2013, three Morgan Stanley brokers in two different branch offices converted a total of $494,400 from thirteen customers by creating fraudulent wire transfer orders and checks to third-party accounts. In one example, the brokers moved funds from multiple customer accounts to their own personal bank accounts. FINRA found that in these instances Morgan Stanley’s supervisory systems and procedures to review and monitor transmittals of customer funds through wire transfers were not reasonable and could not detect multiple customer account transfers to the same third-party accounts and outside entities. In sum, FINRA found that the supervisory failures allowed the conversions to go undetected.

FINRA Bars Advisor James Ham Over Outside Business Activities

August 7, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker James Ham (Ham) has been the subject of at least two customer complaints, one financial matter, three regulatory events, two employment separations, and one judgement/lien. Recently, FINRA barred the broker for failing to cooperate in the agencies investigation into allegations that a customer of Ham’s deposited of approximately $170,000 into Ham’s undisclosed outside business. Such activities are referred to as “selling away” in the industry. The customer complaints against Ham allege a number of securities law violations including that the broker made unsuitable investments concerning variable annuities among other claims.

Ham entered the securities industry in 1988. From March 2006, until October 2014, Ham was registered with First Independent Financial Services (First Independent). Upon termination from First Independent the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Ham was due to allegations by the firm that Ham executed discretionary transactions in a variable annuity owned by customers without obtain authorization from the customers or the firm to make such trades.

The latest FINRA investigation is not the only action the regulatory took against Ham. In October 2014, Ham entered into another consent order with FINRA concerning the reasons for his termination from First Independent, namely that he made discretionary trades in the variable annuity accounts of his customers without authorization. That consent order resulted in a 60 day suspension and a $5,000 fine. However, it appears FINRA was not paid the fine and the agency brought a second action against Ham. At some point FINRA then began to investigate the outside business activity that ultimately resulted in Ham being ousted from the industry.

Cushing Mutual Funds Investor Update

August 4, 2015 | by Staff Attorney

The attorneys at Gana Weinstein LLP have been following the collapse of a series of mutual funds managed by Cushing Asset Management. The funds involved include:

Cushing Closed-End Funds

Cushing Renaissance Fund

Numerous Customer Complaints Against Herbert J. Sims Broker Robert Delguercio

August 3, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Robert Delguercio (Delguercio) has been the subject of at least eight customer complaints, two financial matters, and one employment separation. The customer complaints against Delguercio allege a number of securities law violations including that the broker made unsuitable investments, unauthorized activity, negligence, fraud, and misrepresentations among other claims.

One customer complaint filed in September 2013, alleged that from February 2007, through February 2012, that Delguercio made unauthorized transfers of funds from her account and the claimant’s now deceased husband and alleging $10,400,000 in damages. Another complaint filed in May 2012, alleged that Delguercio made unauthorized transactions and liquidations in the customers accounts leading to claims of over $1.2 million. After reading an earlier version of this article Mr. Delguercio reached out to our firm to comment stating that the woman in above arbitration provided a power of attorney to her husband and denies the charges made in the complaint. Mr. Delguercio stated that he expects that his position will be vindicated in a future arbitration hearing on this matter.

Delguercio entered the securities industry in 1995. From 2004, until January 2010, Delguercio was registered with PNC Investments (PNC). Upon termination from PNC the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Delguercio was due to allegations by the firm that Delguercio received a verbal complaint from a customer alleging that Delguercio misrepresented a GNMA Bond. PNC then reviewed the complaint and Delguercio resigned at that time. Delguercio disputes PNC’s account of events. Thereafter, from December 2009, through February 2012, Delguercio was associated with UBS Financial Services Inc. Finally, Delguercio has been a registered representative with Herbert J. Sims & Co. Inc. since February 2012.

Gana LLP Investigation: Broker Duane Smith

July 31, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Duane Smith (Smith) has been the subject of at least two customer complaint and one employment separation. The customer complaints against Smith allege a number of securities law violations including that the broker made unsuitable investments, negligence, fraud, and breach of fiduciary duty among other claims.

Smith entered the securities industry in 1995 and is both a licensed broker and a principal. From 1995, until September 2008, Smith was registered with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch). Upon termination from Merrill Lynch the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Smith was due to allegations by the firm that Smith violated the firm’s policies by facilitating a client investment in an account that was held outside of Merrill Lynch, recorded information on blank authorization forms previously signed by a client, and failed to obtain supervisory approval for correspondence that he sent to multiple clients. Thereafter, in March 2014, Smith became associated with Neidger, Tuck, and Bruner, Inc. in Englewood, Colorado.

It is important for investors to know that all advisers have an obligation and responsibility to deal fairly with investors including making suitable investment recommendations. In order to make suitable recommendations the broker must have a reasonable basis for recommending the product or security based upon the broker’s investigation of the investments properties including its benefits, risks, tax consequences, and other relevant factors. In addition, the broker must also understand the customer’s specific investment objectives to determine whether or not the specific product or security being recommended is appropriate for the customer based upon their needs.

Gana LLP Investigation: Claims Against Broker George Lincoln

July 30, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker George Lincoln (Lincoln) has been the subject of at least three customer complaints, one regulatory action, and one employment separation. The customer complaints against Lincoln allege a number of securities law violations including that the broker made unsuitable investments among other claims.

Lincoln entered the securities industry in 1991. From November 2005, until January 2014, Lincoln was registered with CCO Investment Services Corp. (CCO Investment). In December 2013, CCO Investment filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Lincoln was due to a regulatory action by the state of Vermont alleging violations of the securities laws.

The state of Vermont’s action against Lincoln alleged that the broker altered material information of the books and records of his brokerage firm in order to suggest that his clients were more aggressive and risky investors than their actual circumstances and stated risk tolerances. According to the allegations, Lincoln made these alterations in order to concentrate his client’s investments in certain funds that were unsuitable.

Broker Spotlight: Churning Claims Against Advisor Jason Klabal

July 30, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Jason Klabal (Klabal) has been the subject of at least eight customer complaints six of which have been filed since 2014. The customer complaints against Klabal allege a number of securities law violations including that the broker made unsuitable investments, engaged in churning (excessive trading), misrepresentations, negligence, fraud, and breach of fiduciary duty among other claims.

Klabal entered the securities industry in 1997. From 1999 through October 2008, Klabal was associated with J.P. Turner & Company, L.L.C. (JP Turner). Thereafter from October 2008, until January 2010, Klabal was registered with Mercer Capital LTD. From there, Klabal was associated with Buckman, Buckman & Reid, Inc from January 2010, until August 2011. Finally, Klabal became associated with Legend Securities, Inc. in August 2011.

Pace’s employment separation involved allegations by Global Arena Capital claiming that Pace allowed client information to be taken from the office by another person. The information was later returned to the firm.

JP Turner Broker Homer Vining Suspended for Failing to Comply with an Arbitration Award

July 29, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Homer Vining (Vining) has been the subject of at least one customer complaint and three regulatory actions. The customer complaint against Vining alleges a number of securities law violations including that the broker made misrepresentations concerning penny stocks and a claim of investment sold away from the firm among other claims.

Vining entered the securities industry in 1991. From 2005 through August 2009, Vining was associated with Ameriprise Advisor Services, Inc. Thereafter, from August 2009, until March 2015, Vining was associated with J.P. Turner & Company, L.L.C. (JP Turner).

Vining has three regulatory actions against him. The first is a suspension by FINRA for failing to comply with an arbitration award. The second is also a suspension by FINRA for failing to comply with an arbitration award. The third regulatory action is by the state of Georgia which suspended Vining until the broker comes into good standing with FINRA.

Broker Spotlight: Alexander Capital Broker Anthony Pace

July 29, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Anthony Pace (Pace) has been the subject of at least six customer complaints and one employment seperation. The customer complaint against Pace allege a number of securities law violations including that the broker made unsuitable investments, engaged in churning (excessive trading), misrepresentations, negligence, fraud, breach of fiduciary duty, and failure to execute among other claims.

Pace entered the securities industry in 1994. From 2005 through May 2009, Pace was associated with J.P. Turner & Company, L.L.C. (JP Turner). Thereafter from May 2009, until September 2010, Pace was registered with vFinance Investments, Inc. From there, Pace was associated with Global Arena Capital Corp from September 2010, through April 2015. Finally, Pace became associated with Alexander Capital, L.P. in March 2015.

Pace’s employment separation involved allegations by Global Arena Capital claiming that Pace allowed client information to be taken from the office by another person. The information was later returned to the firm.