FINRA

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.

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.

Senators Probe Broker Background Check Expungement Practices

December 31, 2013 | by Staff Attorney

A InvestmentNews article recently highlighted the efforts of two U.S. senators that have asked the Financial Industry Regulatory Authority (FINRA) to provide new details on the process that allows brokers to clean their disciplinary records of customer complaints. Sen. Jack Reed (D-R.I.) and Sen. Chuck Grassley (R-Iowa) also said Wall Street’s industry-funded securities regulator should respond to criticism that the current expungement practice creates BrokerCheck reports that could mislead investors.

“We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled,” the senators wrote. “Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.”

Under the current system FINRA Rule 2080 allows brokers to petition the organization to clean their public disciplinary reports if an investor files a complaint and “the claim, allegation, or information is false.” However, in my opinion the process is abused and cases which should not be expunged are routinely cleaned from broker records. Attorneys representing claimants are placed in the position of agreeing to expungement in order to settle their client’s case. Thus, a process that was meant to provide a mechanism to remove untrue claims against a broker is often times being used as a low-cost bargaining chip in settlement negotiations concerning meritorious claims. Further, there is no incentive for an attorney to argue against including a consent to expungement as part of the settlement agreement language because it costs the client nothing and the settlement conversation itself may be made contingent upon expungement as being a part of the ultimate resolution.

Jeffrey Isaacs of Investors Capital Corporation Suspended Over Unsuitable Sale of Securities

December 30, 2013 | by Staff Attorney

Broker Jeffrey M. Isaacs (Issacs) of Investors Capital Corporation (ICC) was recently suspended and sanctioned by The Financial Industry Regulatory Authority (FINRA) over allegations that Isaacs made negligent material misrepresentations of fact in connection with the unsuitable sale of two private placements to ICC customers. In addition, after the customers complained to Isaacs, he settled their claims without notifying ICC.

From January 12, 2005, through December 12, 2011, Issacs was associated with Investors Capital Corporation. On December 12, 2011, ICC filed a Form U5 stating that Isaacs “submitted a voluntary request to terminate association with the firm while under investigation for failing to follow firm policies.” Thereafter, Isaacs was registered with TFS Securities, Inc. (TFS) from November 21, 2011 through December 15, 2011. On December 15, 2011, TFS filed a Form U5 stating that Isaacs’ termination was voluntary. Issacs’ BrokerCheck discloses that he is also employed by JB Financial Resources.

FINRA alleged that Isaacs negligently misrepresented two customers that an investment in the Insight Real Estate LLC 2007 Secured Debenture Offering (Insight) was a safe, low-risk investment, misstated its payment terms, and omitted material facts relating to the speculative nature of the investment. The customers invested $100,000 in Insight in reliance on Issacs’ representations. Thereafter, FINRA alleged that Isaacs negligently misrepresented to the customers that an investment in CIP Leverage Fund Advisors, LLC (CIP) was for moderately conservative investors and would pay interest to the investors on a monthly basis. In fact, the CIP was a speculative investment that paid interest only on an accrued basis with the final payment of principal. The customers also invested $100,000 in CIP in reliance on Issacs representations.

Maurice Chelliah of World Group Securities Barred Over Allegations of Improper Investment Recommendations

December 23, 2013 | by Staff Attorney

Maurice Joseph Chelliah (Chelliah) was recently barred from the financial industry by The Financial Industry Regulatory Authority (FINRA) over allegations that Chelliah converted $90,000 from two World Group Securities, Inc. (WGS) clients and made unsuitable recommendations to five WGS customers. FINRA alleged that Chelliah recommended that these customers refinance their primary residences and use the proceeds to purchase securities and insurance policies that they did not need and that were beyond the customers’ ability to afford. FINRA found that as a result of Chelliah’s recommendations some of the customers lost their securities, their life insurance policies, and their residences when they were unable to keep their mortgages current.

FINRA alleged that Chelliah violated NASD Rule 2110 and FINRA Rule 2010 by converting customer funds. These rules provide that a member, “in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.” FINRA found that two of Chelliah’s customers were 80 and 75 years-old respectively and were unsophisticated investors. Chelliah recommended that the customers liquidate their mutual fund shares. Following the liquidation, $90,000 in proceeds was transferred to Chelliah’s three outside businesses. The customers had provided these funds to Chelliah in order for him to pay monthly bills and expenses on their behalf but instead Chelliah used these funds for his own personal benefit.

FINRA also alleged that Chelliah made unsuitable transactions in at least five customer accounts. NASD Rule 2310 provides that “in recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs…”

David Kauffman of First Allied Barred Over Allegations of Sale of Private Placements

December 20, 2013 | by Staff Attorney

Broker David Charles Kauffman (Kauffman) was recently barred by The Financial Industry Regulatory Authority (FINRA) over his failure to respond to FINRA’s investigation over allegations that he engaged in personal private securities transactions, used unapproved email addresses, and introduced clients to individuals associated with non-approved investment opportunities.

Kauffman began his career in the securities industry in 1993 and has been registered with 13 FINRA member firms. From March 2006 through September 2010, Kauffman was registered with FINRA as a General Securities Principal and a General Securities Representative at First Allied Securities, Inc. (First Allied). First Allied terminated Kauffman for violating firm policies pertaining to his personal private securities transactions, used unapproved email addresses, and introduced clients to individuals associated with non-approved investment opportunities. Thereafter, Kauffman was registered with MCL Financial Group, Inc. through December 2011. Kauffman’s BrokerCheck discloses that Kauffman was also employed by David Kauffman Insurance Services, One-Less Putt, MCS Golf, 928 LLC, and EDT Property Services.

In September 2010, First Allied made two filings with FINRA disclosing it had terminated Kauffman for conduct including engagement in private securities transactions in connection with several private placement offerings without providing written notice to the firm. FINRA alleged that one of the offerings Kauffman was involved in was entity named Gulf Coast Oil & Rig, LLC (Gulf Coast). Thereafter, FINRA staff sought information, documents, and testimony from Kauffman to determine, among other things, his role and compensation in connection with the private securities transactions, as well as the status of Gulf Coast’s business. Initially, Kauffman cooperated with the examination by providing some information and documents. However, FINRA alleged that Kauffman failed to respond properly to further requests.

FINRA Bars Gevorg Daldumyan of Transamerica Over Allegations Concerning Condominium Cooperative Investments

December 16, 2013 | by Staff Attorney

Gevorg Daldumyan was recently barred from the financial industry by The Financial Industry Regulatory Authority (FINRA) over allegations that he failed to appear for testimony concerning condominium cooperative investments.

Daldumyan was registered with World Group Securities, Inc. (WGS) from 2002 through January 2012. Thereafter, Daldumyan was associated with Transamerica Financial Advisors, Inc. (Transamerica) or its predecessor. On June 19, 2012, Transamerica filed a Form U5 with FINRA stating that Daldumyan had voluntarily resigned on May 21, 2012, during an internal review by the firm arising from “information that the registered representative made investments in a condominium cooperative in Arnienia which appear not to have been disclosed to the firm.” Daldumyan is no longer associated with any FINRA member.

Due to the U5 Form filing, FINRA sent requests to Daldumyan for more information concerning the outside investments. By letter dated May 20, 2013, FlNRA staff requested that Daldumyan appear for on-the-record testimony. In response to the letter, Daldumyan stated that he would not appear for testimony at any time. Consequently, Daldumyan violated FINRA Rule 8210 by refusing to appear and provide testimony and was barred from association with any FINRA member firm.

How to Find An FINRA Securities Attorney to Assist in Your Investment/Broker Case

December 10, 2013 | by Staff Attorney

You’ve gone over your account statements and start to suspect that your broker hasn’t invested your assets appropriately. What should you do? The first step is to compile all of your documents and correspondence with your broker. You should collect your monthly account statements, opening account documents, and any written communication with your brokerage firm for starters. This will make it easier to assess your case.

Next, you should consult with an attorney. While not required, when you have securities claim, brokerage firms rarely settle claims with individuals without the assistance of an attorney. Most securities claims must be brought in arbitration before the Financial Industry Regulatory Authority (FINRA), the broker-dealer regulator. A securities attorney can represent you during the arbitration or mediation proceedings and provide direction and advice on how to present your claim. Even if you do not choose to hire an attorney, brokerage firms usually hire counsel to represent them. If you cannot afford an attorney, many law firms offer contingency fee arrangements.

The SEC provides the following advice on finding an attorney who specializes in resolving securities complaints. If you need help in finding a lawyer who specializes in resolving securities complaints, you may want to try the following:

Adam Gana of Gana LLP is Quoted in a Reuters Article About FINRA Arbitrator Pay

December 6, 2013 | by Staff Attorney

Reuters: Arbitrators could receive pay hike under wall street watchdog plan, By Suzanne Barlyn (December 6, 2013)

http://www.reuters.com/article/2013/12/06/finra-arbitrators-idUSL2N0JL16120131206

Source Capital Group Employees Sanctioned Over Blue Ridge and Argyle Oil and Gas Private Placements

December 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Source Capital Group (Source Capital) registered representatives Kevin Cline (Cline), Robert Burr (Burr), Vincent Christopher (Christopher), and Thomas Gilleland (Gilleland). FINRA’s findings concerned allegations that the brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

According to FINRA, from at least October 11, 2006, and December 17, 2012, the named brokers violated the federal securities laws and FINRA rules in connection with selling Blue Ridge and Argyle offerings. Cline is the branch office manager for Source Capital’s Bowling Green, Kentucky branch office on Adams Street and Burr managed the Wright Street office where Christopher and Gilleland were brokers. Source Capital’s Adam Street branch office was the sole seller of private placement offerings of oil and gas securities issued by Blue Ridge’s limited partnerships all of which were managed by Blue Ridge Group, Inc. Source Capital’s Wright Street branch office was the sole seller of private offerings of Argyle limited partnerships managed by Argyle Energy, Inc. Blue Ridge and Argyle were both housed at the Adams Street branch office and were owned by Robert “Bob” Burr, the father of Burr as the controlling stockholder and former officer of both Blue Ridge and Argyle.

FINRA alleged that Cline failed to adequately disclose material information in selling Blue Ridge to investors. Specifically, FINRA found that Blue Ridge gave money to Cline that Cline used to pay Source Capital representatives a $2,000 monthly salary in advance of their draws which were not always repaid. FINRA concluded that the failure to adequately disclose that Cline used Blue Ridge funds to pay compensation to Source representatives was a material omission in violation of FINRA Rule 2010 and NASD Rule 2110, and Section 17(a)(2) of the Securities Act of 1 933, 15 U.S.C. § 77q(a)(2).