Securities Lawyers Blog

FINRA Sanctions Bedminster Financial Group Concerning Allegations of Supervisory Failures

January 20, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Bedminster Financial Group, Ltd. (BFG) and Robert M. Van Pelt (Van Pelt). FINRA alleged that at least four representatives of BFG used non-BFG email accounts for securities related communications to the public, customers and prospective customers and that Van Pelt failed to retain and review these emails. FINRA also found that BFG, through its President and Chief Compliance Officer Van Pelt, failed to enforce its written supervisory procedures by failing to 1) preserve business related emails; 2) review of business related mail; 3) inspect of non-branch offices; and 4) review and approve website content.

BFG’s main office is located in Holicong, Pennsylvania. BFG employs thirty-four registered persons, had six registered branch offices, and twenty-eight non-branch offices located across the country. BFG’s primary business is the receipt of finder’s fees for private placements and Private Investment in Public Equity (PIPE) offerings. Since 1996, Van Pelt has been registered with BFG and is the firm’s President, CCO, and majority owner.

The securities laws require firms to maintain and preserve for at least three years originals of all communications received and copies of all communications sent relating to the firm’s business. BFG’s supervisory procedures required representatives to use the firm’s email account for business related communications and prohibited employees from communicating with customers or prospects through their personal email accounts unless the outside account was first approved by the firm and records of the email activity were provided to the firm. Despite BFG’s prohibition against using personal email addresses, FINRA found that at least four representatives used their unapproved personal email accounts for business-related communications without copying or forwarding these emails to the firm.

Gana LLP, New York Real Estate Litigation Attorneys, File Action on behalf of a Luxury Condominium against Sponsors for Construction Defects

January 17, 2014 | by Staff Attorney

On December 5, 2013, the board of managers of 90 William Street condominium filed a construction defect case against SDS Procida and its managers and sister agencies (Defendants). SDS Procidia was the sponsor of the building. The complaint alleges that the building was marketed to potential and current owners as a luxury condominium project and was to provide innovative modern urban residences offering creative lifestyle and a social atmosphere.

The 113 unit condominium alleges that the building was built with inferior materials and contains pervasive construction defects, including serious health and safety issues in fire protection, roofing, windows, electrical, plumbing, insulation, elevator and domestic water systems of the building.

According to the complaint the Defendants concealed critical information about the 15 story building and improperly substituted materials and equipment from the owners of the units, the general public and prospective purchasers. In addition, the complaint states that the Defendants failed to construct the building in compliance with its offering plan.

Investor Tips to Avoid Losing Money in Private Placements and Alternative Investments

January 16, 2014 | by Staff Attorney

Private Placements are considered alternative investments and are issued under Regulation D under the Securities Act of 1933. Regulation D contains rules for issuing securities that provide exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements and allows companies to issue securities without normal disclosures.

Investors who are recommended private placements must meet the “accredited investor” standard under Rule 501. Rule 501 defines “accredited investor” as any person who has a net worth in excess of $1,000,000, excluding residence, or annual income in excess of $200,000, $300,000 if filing jointly with a spouse, in the two most recent years.

According to a 2008 estimate, companies issued approximately $609 billion of securities through Regulation D offerings. While the private placement market allows many small companies to raise capital, regulators have raised a number of issues with due diligence procedures and brokerage firm sales efforts when selling private placements to investors. The North American Securities Administrators Association says private placements are one of the most common cause of regulatory action by state regulators. States brought more than 200 enforcement actions involving private placements in 2011, more than doubled the number of action in2007.

Ronald Anglin Investigated by the SEC Over Charges of Securities Fraud

January 15, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) instituted administrative proceedings against broker Ronald Gene Anglin (Anglin), formerly of Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch), on allegations that Anglin engaged in securities fraud by forging letters of authorization from a Merrill Lynch customer to be sent by mail to addresses designated by Anglin.

From 2004 through October 2008, Anglin was a registered representative of Citigroup Global Markets, Inc. Thereafter, Anglin was a registered representative of dually registered broker-dealer and investment adviser Merrill Lynch until May 2011. Anglin also was an investment adviser representative for Merrill Lynch. Anglin is 38 years old and is a resident of Canyon Country, California.

On October 4, 2012, Anglin pleaded guilty to one count of mail fraud before the United States District Court for the Central District of California in U.S. v. Ronald Gene Anglin, 2:12-CR-00232-SJO. On March 25, 2013, Anglin was sentenced to three years of probation including 27 months in home detention, and ordered to make restitution in the amount of $73,000.

Mary Faher of WR Rice Suspended By FINRA Over Private Placement Sales

January 14, 2014 | by Staff Attorney

Broker Mary A. Faher (Faher) was suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Faher made unsuitable recommendations to her clients to invest in private placements.

Between February 2011, and November 2012, Faher was registered with WR Rice Financial Services, Inc. (WR Rice). Previously, Faher was registered with Fifth Third Securities, Inc. from March 2004 through February 2011. According to Faher’s BrokerCheck, on September 26, 2013, the state of Michigan permanently barred Faher from registration in Michigan and fined her $4,000 in connection with the sales of limited partnership securities.

FINRA alleged that between August 2011, and February 2012, Faher recommended that her customers invest in various limited partnership interests resulting in an overconcentration in the customer’s accounts in speculative securities. The limited partnerships were interests in The Diversified Group Land Contract Limited Partnerships 1-17 (Diversified LPs) that were offered by The Diversified Group Partnership Management, LLC (Diversified Group). The Diversified Group was a contracting company that purchased and rehabilitated real estate. The Diversified LP shares stated purpose was to use investor funds to purchase servicing land contracts on residential real estate. The land contracts promised investors an annual interest rate of 9.9%, with a total return of 10.44%. The Diversified Group planned to collect payments on the land contracts from the homes’ inhabitants and pay investors. The offering memoranda for the Diversified LPs stated that the investments were speculative in nature, illiquid, non-transferable, subject to default risk, and adverse market conditions.

FINRA Panel Awards Customer in A Claim Over the Erickson Retirement Communities Private Placement

January 13, 2014 | by Staff Attorney

Wisconsin based B.C. Ziegler & Co. (Ziegler) was recently hit with a $311,000 judgment in a decision made by a FINRA arbitration panel. The claimant alleged negligent misrepresentation, suitability, negligence, failure to supervise, and violation of Wisconsin Uniform Securities Act. The claim related to the recommendation to purchase private placement securities in the Subordinated Taxable Adjustable Mezzanine Put Securities (STAMPS) offered by Erickson Retirement Communities, LLC (Erickson).

The claimant alleged that less than two years after its investment, Erickson filed for bankruptcy and the STAMPS investment became worthless. The claimant alleged that Ziegler failed to disclose material facts regarding the STAMPS investment and that the STAMPS recommendation was at odds with the claimant’s investment objectives. The claimant alleged that STAMPS was an illiquid subordinated debt products, not secured by any collateral, and was recommended to the claimant at a time when private and commercial loan environments were experiencing extreme stresses. Further, the claimant alleged that they were recommended the investment even though Erickson’s financial situation was steadily worsening.

Other complaints filed against Ziegler in connection with the Erickson private placement have made similar allegations against the firm. According to a Chicago Tribune article, claimants have alleged that their broker promised returns of 11 percent to 12 percent but minimized or failed to disclose the risks, including how their cash would be tied up for years. Due to stock market volatility, broker promises of fixed returns from a stable investment often entice clients to follow their broker’s recommendation to invest in private placements. In addition, private placements are supposed to be sold to only accredited investors who meet certain net worth or income requirements. Some of the investors have claimed that they were instructed to provide incorrect financial information in order to meet the accredited investor standard, a claim that has become more and more common as brokerage firms seek to sell private placements to a wider field of investors.

Paul Thomas of Lincoln Financial Suspended By FINRA Over Penny Stock Trades

January 10, 2014 | by Staff Attorney

Broker Paul A. Thomas (Thomas) formerly with Lincoln Financial Advisors Corp. (Lincoln Financial) was suspended by The Financial Industry Regulatory Authority (FINRA) over allegations that Thomas engaged in unauthorized and/or improper discretionary penny stock trading, engaged in unsuitable penny stock trading, and mismarked the trade tickets for penny stock transactions as unsolicited, when they were solicited trades.

Thomas has been in the securities industry since 2000 and was employed by Lincoln Financial as a registered representative through his termination on October 14, 2011. Thomas has approximately 15 customer disputes filed against him. The vast majority of these disputes involve allegations concerning improper penny stock trading.

A “penny stock” is a security issued by a small or micro-cap company having less than $100 million in market capitalization. Penny stocks typically trade at less than $5 per share and are generally quoted on over-the-counter exchanges such as on the OTC Bulletin Board. The risks of penny stocks include the fact that they may trade infrequently. Thus, it is often difficult to liquidate a penny stock holding once acquired and at the time the investor wants to. Second, it is often difficult to find accurate quotes for penny stocks. Consequently, penny stocks often fluctuate wildly day-to-day and investors may lose their whole investment.

Will Puerto Rico Municipal Bonds Default?

January 9, 2014 | by Staff Attorney

This question is on the minds of many investors. Many clients and potential clients have contacted our firm concerned about the effect of a default on their UBS Puerto Rico municipal bond funds that are heavily invested in the island’s debt

The UBS Puerto Rico bond funds, including the Puerto Rico Fixed Income Fund and the Puerto Rico Investors Tax-Free Fund series, invested up to 140% in Puerto Rico debt through the employment of leverage. The extreme use of leverage has exacerbated recent declines. As losses continue to increase clients tell us very similar stories about how their brokers recommended that they invest as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds.

Now our clients worry about a potential Puerto Rico default on its municipal debt. Puerto Rico’s public debt of $53 billion is nearly $15,000 per person. When you add on the severely under-funded pension and healthcare obligations, the amount of debt approaches $160 billion, or $46,000 per person.

Securities Broker Christopher Orlando Suspended Over Sale of Diversified Lending Group Promissory Notes

January 8, 2014 | by Staff Attorney

Broker Christopher Orlando (Orlando) was suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Orlando participated in the sale of approximately $7,000,000 in private securities transactions of promissory notes linked to Diversified Lending Group (DLG) that were not made through his member firm PlanMember Securities Corporation (PlanMember).

FINRA alleged that between March 2007, and July 2008 Orlando marketed Secured Investment Notes in DLG (DLG Notes). According to Orlando’s public disclosures, the DLG notes were supposed to invest funds in distressed real estate and mortgage lending. Investors who filed complaints against Orlando and the brokerage firms that employed him have alleged that in reality the DLG Notes were Ponzi scheme type fraud.

Orlando marketed the DLG Notes to insurance agents and financial advisors who in tum sold the DLG Notes to investors. FINRA alleged that Orlando met with his marketing agents and provided them with information and materials about DLG Notes. In addition, Orlando referred at least eight insurance agents to DLG for training so that they would sell DLG Notes to investors. According to FINRA, Orlando was also directly involved in marketing the DLG Notes to potential investors by speaking at seminars about them.

FINRA Bars LPL Financial Broker for Falsifying Documents

January 7, 2014 | by Staff Attorney

On December 13, 2013, Financial Industry Regulatory Authority Inc. (FINRA) barred Gary Chackman after he allegedly falsified company documents to evade procedures and protocol, which caused an overconcentration of customer’s investments in alternative assets. Chackman evaded the firm’s supervision and inaccurately completed investor documents. LPL Financial Inc., Chackman’s employer at the time of the incident, denies any involvement in Chackman’s illegal activity.

Although Chackman neither admitted nor denied FINRA’s findings, he consented to the described sanction; therefore FINRA barred him as a member of the association. Although there are numerous complaints and investigations pending before FINRA, the association rarely bars brokers. Only one other broker was barred this year due to misrepresentations in the sale of an investment product.

Not only did Chackman allegedly misrepresent the financial transaction to the firm, but also failed to disclose the high-risk nature of alternative investment to his clients. The investor’s liquid net worth was misidentified on purchase forms when acquiring Real Estate Investment Trusts (REITs) and alternative investments. By misrepresenting client information on the purchase forms, the client’s purported liquid net worth remained below the firm’s limitation. Therefore, the REITs became highly concentrated in illiquid alterative investments.