Securities Lawyers Blog

The Dangers of Oil and Gas Private Placements

April 29, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) has found private securities offerings of oil and gas ventures pose a substantial danger and risk for investor fraud. An SEC Investor Alert listed some common red flag sales pitches often made to investors including: (1) Sales pitches referring to the high price of oil and gas; (2) “Can’t miss” wells or “guaranteed” returns; (3) Promises of high returns with little risk; (4) Sales pressure to purchase quickly; and (5) Sales pitches touting new technology to get higher production out of low-producing wells.

The Financial Industry Regulatory Authority (FINRA) has also clamped down on inappropriate sales of oil and gas ventures. Recently, FINRA fined broker Jeffrey Alexander (Alexander) concerning allegations that he recommended the purchase of interests in Amazon 13-30, an oil and gas program offered by Amazon Exploration that raised funds for the drilling of a well in Nebraska. FINRA found that the recommendations made by Alexander to three investors without a reasonable basis for believing the investment to be suitable for any investors.

In August 2012, FINRA alleged that the brokerage firm Shoreline Pacific entered into an agreement with Amazon Exploration where the firm would offer and sell up to 30 partnership units in Amazon 13-30. Shoreline Pacific was to receive a “success fee” of 20% of the funds it raised, as well as five Amazon 13-30 units if the firm was able raise $1 million for the venture. FINRA alleged that Alexander worked in Shoreline’s Colorado Springs office and was the primary point of contact between the firm and Amazon Exploration and primarily responsible for finding investors for the Amazon 13-30 private placement.

Colorado Financial Service Fined By FINRA Over Private Placement Supervisory Failures

April 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined Colorado Financial Service Corporation (Colorado Financial) concerning allegations that the firm violated NASD Rule 3010, and FINRA Rule 2010, among other violations, by failing to establish, maintain, and enforce supervisory procedures reasonably designed to ensure compliance with the securities rules pertaining to the supervision of electronic communications and due diligence review of new private placement offerings.

Colorado Financial is based in Centennial and became a FINRA member in 2000. Currently, there are approximately 82 persons registered with Colorado Financial in thirty six branches. The firm’s primary lines of business include investment banking, private placements, mutual funds, and variable life insurance or annuities.

FINRA alleged that Colorado Financial did not establish, maintain, and enforce adequate procedures to supervise and review electronic communications for the period of February 2009 to September 2012. According to FINRA, Colorado Financial only manually reviewed between .1% and 1.5% out of approximately 325,900 archived e-mails during the period of January 2012 to September 2012. FINRA found that Colorado Financial’s written supervisory procedures relating to electronic communications did not indicate who at the firm was responsible for the supervisory review, how the review would be conducted and documented, or establish protocols for escalating regulatory issues in e-mails.

LPL Financial Fined by FINRA for Failing to Supervise Sales of Alternative Investments

April 25, 2014 | by Staff Attorney

On March 24, 2014, LPL Financial LLC, the fourth largest broker dealer, measured by number of salespersons, was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise the way that its brokers marketed and sold nontraditional investments. The fine is one of many that have recently been imposed on LPL and other “independent broker-dealers,” firms that provide products, marketing, and regulatory services to independent brokers who are not their full-time employees.

LPL Financial was alleged to have deficient supervision as it related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDC’s), hedge funds, managed futures, and other illiquid pass through investments. FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of theses alternative investments that violated concentration limits.

Investors often rely on professional advisors like LPL Financial, which help them to diversify their portfolio while minimizing risk. LPL, like many states, has limits in place, on the portion of a client’s portfolio that can be concentrated in these riskier, alternative investments. According to FINRA, however, LPL failed to ensure adherence to these limits. FINRA explained that between 2008 and 2012, LPL utilized a manual process that relied on outdated data to conduct suitability reviews. FINRA further stated that once LPL transitioned to a new automated review system, its database was built with faulty programming.

FINRA Fines Triad Advisors and Securities America for Failure to Supervise Issuance of Consolidated Reports

April 24, 2014 | by Staff Attorney

On March 12, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it sanctioned and fined Triad Advisors and Securities America, $650,000 and $625,000, respectively, for failing to supervise the use of consolidated reporting systems, after brokers from the firms inaccurately represented the value of some customer holdings, often inflating their overall worth.

Triad Advisors and Securities America, both registered broker dealers, had internal systems designed to generate consolidated reports—documents intended to combine most, if not all, of a customer’s financial holdings, regardless of where those assets or accounts are held. These reports do not replace account statements, but rather supplement the more traditional document. These two broker dealers, however, maintained consolidated report systems that allowed their respective brokers and representatives to manually create, rather than automatically generate, consolidated reports. In doing so, representatives from Triad and Securities America were able to customize the reports by manually inputting the data, entering asset values for accounts held away from the firm before providing the reports to customers.

According to FINRA, over the last few years, both firms regularly permitted their advisors to use these highly customizable reporting software systems, but in doing so, failed to maintain the proper supervisions. The lack of supervision, says FINRA, led to clients inadvertently, or in some cases intentionally, receiving inaccurate and misleading account information.

New York State Fines AXA Equitable $20 Million Over Variable Annuity Products

April 23, 2014 | by Staff Attorney

Governor Andrew M. Cuomo announced on March 17, 2014, that AXA Equitable (AXA) agreed to a consent order to pay a $20 million fine to the New York Department of Financial Services (DFS) for violations relating to certain variable annuity products. The DFS investigation uncovered that AXA made changes to certain variable annuity products that limited potential returns for existing customers without providing adequate notice to New York. New York stated that AXA’s omissions limited the DFS’ ability to protect consumer by requiring existing customers to affirmatively “opt in” to the altered product rather than remaining in that investment by default. According to New York, AXA’s actions affected tens of thousands of New Yorkers with variable annuity products at AXA.

A variable annuity is complex bundled financial and insurance product. A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you and the investor chooses the investments made in the annuity. The value of your variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.

The Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. In the publication, the SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.” Often times the benefits of variable annuities are outweighed by the other provisions including surrender charges, mortality and expense charges, management fees, and rider costs. Variable annuities are also high sales commission products for financial advisors and sometimes advisors push these products on persons who do not need them or cannot benefit from them. For example, since an IRA account is already tax deferred it makes little sense to use an IRA account to hold a variable annuity investment.

Investors in LEAF Limited Partnerships May Have A Investment Claim

April 22, 2014 | by Staff Attorney

Some investment advisors have touted alternative investments as safe, stable, high return products. The truth is, these products are often laden with risks that are not disclosed and discussed with clients. In addition, alternative investments are simply unsuitable for many investors needs. The sale of these products often generates commissions of between 7-10% of the investment amount. Thus, there are unscrupulous advisors who have used misleading sales pitches designed to lure investors into putting their hard earned money into these extremely risky and unsuitable investment.

Some alternative investments are sold as private placements in limited partnership vehicles. These limited partnerships are formed to acquire, operate, and sell assets for the benefit of the partners. Investors in limited partnerships are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, limited partnerships are not listed on an exchange and are therefore illiquid and reliable pricing information is typically very difficult to obtain.

There is a line of limited partnerships held under LEAF Asset Management, LLC—a limited liability company that acts as general partner for a handful of limited partnership equipment leasing fund investment programs. LEAF Asset Management, LLC is a wholly-owned subsidiary of Resource America, Inc., a company that specializes in developing investment funds for outside investors and providing asset management services either by contract or by acting as the manager or general partner of its own sponsored investment funds.

FINRA Announces UBS Puerto Rico Bond Fund Cases to Move Forward

April 21, 2014 | by Staff Attorney

On Monday, April 14, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it would lift the hold that it had put on some cases related to the collapse of Puerto Rico Bond Funds.

FINRA has been able to expand its pool of arbitrators that will be available to hear the cases. There are approximately 700 eligible arbitrators on its roster who have agreed to serve in Puerto Rico, where the majority of the 209 cases received to this point, are to be heard.

Last summer, investor fears began to rise when Detroit filed for bankruptcy. Investors, seeing a city go bankrupt, became concerned with Puerto Rico’s $70 billion in municipal debt. As fear set in, investors in the UBS Puerto Rico family of closed-end municipal bond funds began to lose billions. Nineteen of these funds lost $1.66 billion during the first nine months of 2013.

Pennsylvania Regulator Investigates Securities America and Landenburg Thalmann Non-Traded REIT Sales

April 17, 2014 | by Staff Attorney

The Pennsylvania Department of Banking and Securities requested that Securities America Inc. (Securities America) provide information concerning customer purchases of non-traded real estate investment trust (REIT) securities by Pennsylvania residents since 2007. This information was provided by an annual report of Ladenburg Thalmann & Co. Inc. (Ladenburg Thalmann), the company that owns Securities America as well as two other independent broker-dealers. According to Ladenburg Thalmann the company is unable to determine whether and the extent that the Pennsylvania Department of Banking and Securities may seek to discipline Securities America

A REIT is a corporation or trust that owns income-producing real estate properties. REITs pool the capital of numerous investors to purchase a portfolio of properties that may include office building, shopping centers, hotels, and apartment buildings that the average investor would not otherwise be able to purchase individually. Publicly traded REITs can be sold on an exchange and have the same liquidity as most stocks and bonds. However, non-traded REITs are sold only through broker-dealers and are illiquid. REITs are typically long term investments and investors should be prepared to hold onto non-traded REITs for up to 7 to 10 years and even longer under some circumstances.

The non-traded REIT industry sales doubled last year to $20 billion, from 2012. Increased volatility in the stock market during the financial crisis led investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, the stability of non-traded REITs only exists because brokerage firms and issuers have control over the value how the value of the security is listed on an investor’s account statements and not because the security will actually sell at that value. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

Hits of the 80’s and 90’s Sounding Like Fraud: Gana LLP Files Suit Against Producer of Classic Tunes

April 16, 2014 | by Staff Attorney

Music lovers looking to reminisce while enjoying classic hits from the 80’s and 90’s may not be getting what they paid for. Producers have created and marketed a compilation of some of those classic tunes, which include songs such as “Only In My Dreams” by Debbie Gibson, “Jenny/867-5309” by Tommy Tutone, “Hold On” by Wilson Phillips, and “Ice Ice Baby” by Vanilla Ice. Unfortunately, the packaging and marketing of these discs never alerted consumers to the fact that they were not purchasing the original recordings.

On March 20, 2014, Gana Weinstein LLP filed a class action suit, on behalf of Celeste Farrell and other individuals who purchased the music albums: “Hits of the 80’s: Platinum Collection” 2-CD set and/or “Hits of the 90’s: Platinum Collection” 2-CD set. The Complaint alleges that Tutm Entertainment (also known as Drew’s Entertainment) misled consumers by failing to indicate that these albums were comprised of inferior quality re-recorded songs. The Complaint further avers that Tutm Entertainment allowed consumers to believe that they were purchasing a compilation of original recordings, and thus distorted their ability to make an informed purchase decision.

The story has gained significant traction, as it was picked up by various news outlets only two days after the Complaint was filed with the United States District Court, District of New Jersey. As reported by Hollywoodreporter.com, re-recording is considered to be an open secret within the music industry, with musicians often having legitimate, albeit self-serving, reasons for re-recording their original hits. The site explains that artists are often required to work around contractual obligations and copyright termination to generate additional revenue from some of their classic hits. Musicians rights to re-record, however, do not absolve Tutm Entertainment and other music producers and sellers of music of their obligation to be completely forthcoming with consumers. The New Jersey Consumer Fraud Act explicitly prohibits any deception, misrepresentation, or knowing concealment intended to be relied on in connection with the sale or advertisement of merchandise.

Meyers Associates: Black Marks and Red Flags

April 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) maintains a public database, called BrokerCheck, which acts as a free tool for investors looking to research the backgrounds of FINRA registered personnel. BrokerCheck covers brokerage firms, brokers, investment adviser firms and representatives. Searches allow investors to draw upon filings by firms, regulators, and other investment professionals, to reveal licensing status and history, employment history, and any reported regulatory infraction, customer dispute, criminal actions, financial issues, and other related matters.

These black mark events, revealed by BrokerCheck, are known as “disclosure events” and are often viewed as red flags by investors and the industry. Advisers and brokers who have marred records with multiple events carry inherent regulatory risk. As a consequence, most of the elite broker dealers and advisory firms will shy away from hiring representatives with such backgrounds.

Enter Meyers Associates, L.P.