REITs

Financial Advisor Investigation: Ameriprise Financial Services’ Advisor Detlef Schoeppler

November 29, 2015 | by Staff Attorney

The investment attorneys of Gana Weinstein LLP are interested in speaking with clients of Detlef Schoeppler (Schoeppler). According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) Schoeppler has been the subject of at least 10 customer complaints, one criminal matter, and three judgments or liens. The customer complaints against Schoeppler allege securities law violations that claim unsuitable investments in various investment products including REITs, variable annuities, and mutual funds. The most recent complaint was filed in August 2012, and alleged $77,569 in damages due to claims that the broker recommended a variable annuity purchase in June 2011 that was misrepresented to the customer. In addition, the customer alleged that the fees were not fully disclosed and that there were trades made without the client’s authorization.

In addition, in July 2014, two tax liens were imposed on Schoeppler. One lien is for $184,519 and the other is for $182,691. A broker with large liens are an important consideration for investors to consider when dealing with a financial advisor. An advisor may be conflicted to offer high commission investments to customers in order to satisfy liens and debts that may not be in the client’s best interests.

Schoeppler entered the securities industry in 1996. Since June 1996, Schoeppler has been associated with Ameriprise Financial Services, Inc. out of the firm’s Tampa, Florida branch office location.

Numerous Customer Complaints Against Former Berthel Fisher Broker Jerry McCutchen

August 13, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Jerry McCutchen (McCutchen) has been the subject of at least 15 customer complaints and one judgment or lien. The customer complaints against McCutchen allege a number of securities law violations including that the broker made unsuitable investments, negligence, and misrepresentations among other claims.

The claims against McCutchen involve various investments including equipment leasing, non-traded real estate investment trusts (Non-Traded REITs), and variable annuities. We have written many times about the investing dangers of these products. One quality all of these investments have in common is the fact that they come with high commissions for the broker and low probability of success for the client. Our firm has written numerous times about investor losses in these programs such as equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. The costs and fees associated with all of these investments cause the security to be so costly that significant returns are virtual impossibility. Yet, investors are in no way compensated for the additional risks of these products.

In a typical equipment leasing program upfront fees are around 20-25% of investor’s capital. As for Non-Traded REITs, it was reported in the Wall Street Journal, that a study on “Nontraded REITs are costing investors, especially elderly, retired, unsophisticated investors, billions. They’re suffering illiquidity and ignorance, and earning much less than what they ought to be earning.” In conclusion, “No brokerage should be allowed to sell these things.”

Senior Abuse in the Securities Industry A Major Ongoing Concern

June 23, 2015 | by Staff Attorney

As long time readers of our blogs know senior abuse is an ongoing concern in the securities industry. See Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors; The NASAA Announces New Initiative to Focus on Senior Investor Abuse; The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.

Recently, a number of regulatory agencies have begun new initiatives against investment fraud targeted at seniors with the intent to provide resources to seniors and financial advisors. Regulators fear senior abuse in the investment sector will be a growing trend over the next couple of decades if not addressed soon.

According to a National Senior Investor Initiative report cited by the Financial Industry Regulatory Authority (FINRA), the Social Security Administration estimates that each day for the next 15 years, an average of 10,000 Americans will turn 65. According to the U.S. Census Bureau in 2011, more than 13 percent Americans, more than 41 million people, were 65 or older. By 2040, that number is expected to grow 79 million doubling the number that were alive in 2000.

LPL Financial Fined $11.7 Million Over Securities Practices

June 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined LPL Financial LLC (LPL) and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (Non-Traditional ETFs), certain variable annuity contracts, non-traded real estate investment trusts (Non-Traded REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. As part of the fine FINRA ordered LPL to pay approximately $1.7 million in restitution to customers who purchased non-traditional ETFs.

In a press release Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, stated that “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business. With today’s action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

This action is only one of many regulatory actions that our firm has tracked concerning LPL and its brokers including the following:

World Equity Group Supervisory Failures Explored Part II

March 18, 2015 | by Staff Attorney

As we previously reported, The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm World Equity Group, Inc. (World Equity) concerning at least seven different allegations of supervisory failures that occurred between 2009 through 2012. These failures included failures to implement an adequate supervisory system reasonably designed to detect and prevent potential rule violations concerning both internal processes and procedures and in the handling of customer accounts in the areas of suitability of transactions in non-traditional ETFs, private placements, and non-traded REITs.

FINRA alleged that World Equity failed to implement an adequate system to ensure the suitability of Non-Traditional ETFs. As a background, Non-Traditional ETFs are registered unit investment trusts or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark, index, commodity, or other instrument. Shares of ETFs are typically listed on national exchanges and trade at established market prices. Non-Traditional ETFs are different from traditional ETFs in that they return a multiple of the performance of the underlying index or benchmark or the inverse performance.

Non-Traditional ETFs may use swaps, futures contracts, and other derivative instruments in order to create leverage to achieve these objectives. In addition, most Non-Traditional ETFs are designed to achieve their stated objectives in one trading session. Between trading sessions the fund manager generally rebalances the fund’s holdings in order to meet the fund’s objectives. For most Non-Traditional ETFs the rebalancing happens on a daily basis. Further, because the correlation between a Non-Traditional ETF and its linked index or benchmark is inexact there is typically tracking error between a fund and its benchmark becomes compounded over longer periods of time. In addition, the tracking error effect becomes more pronounced during periods of volatility in the underlying index or benchmark. FINRA advised brokerage firms in June 2009 due to the effect of compounding the performance of Non-Traditional ETFs over longer periods of time can differ significantly from the performance of their underlying index or benchmark during the same period of time and because of these risks and the inherent complexity of the products, FINRA advised broker-dealers and their representatives that the products are typically not suitable for retail investors who plan to hold them for more than one trading session.

WFG Investments Sanctioned Over Failure to Review Transactions for Suitability Part II

February 9, 2015 | by Staff Attorney

This article continues our prior post concerning The Financial Industry Regulatory Authority (FINRA) recent sanctions of brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014.

In one supervisory failure example involving suitability, FINRA found that between 2009, and 2013, a broker by the initials “MC” (1) traded with discretion in several of his customers’ accounts without their written authorization; and (2) also excessively traded in at least one of his customer’s accounts in light the customer’s investment objectives and risk tolerance. FINRA also alleged that many of the securities traded were also qualitatively unsuitable in light of the customers’ age, objectives, risk tolerance, and financial situation. In addition, several of the customer’s accounts were charged both commissions and management fees and this problem was not identified or corrected even after it was detected.

FINRA also alleged that MC used unapproved charts and provided consolidated statements to a customer without the firm’s knowledge or approval. Moreover, allegedly there were exception reports that highlighted the problem trading activity in several of these accounts that were simply not reviewed or not properly processed. In fact, FINRA found that one of the customers who complained about unsuitable activity in her accounts was not contacted by the firm until after she had complained despite the fact that her accounts had appeared on numerous exception reports. Similarly, FINRA found that broker SGD was also permitted by the WFG to engage in unsuitable trading in one of his customer’s accounts which included the recommendation and sale of numerous high risk equity and ETF purchases for a retired client with a conservative risk tolerance.

FINRA Sanctions WFG Investments $700,000 for Supervisory Failures Part I

February 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014. FINRA alleged that WFG failed to commit the necessary time, attention, and resources to critical regulatory obligations in supervising registered representatives including: (1) failure to conduct appropriate due diligence on a private placement offering that was sold by a broker away from the firm; (2) failure to supervise the private securities transactions of one of its brokers that were executed through the representative’s investment advisory firm; (3) failure to maintain a supervisory system to ensure customer transactions were suitable; (4) failure to enforce its written supervisory procedures regarding the sale of alternative investments; (5) failure to supervise statements made by one broker on his weekly radio broadcast; and (6) failure to timely report customer complaints and update the Forms U4 and U5 of its brokers.

WFG has been a FINRA member since 1988, conducts a general securities business, and is headquartered in Dallas, Texas. WFG currently has about 280 brokers operating out of 102 branch offices.

FINRA alleged that in 2007, a WFG broker by the initials “SGD” provided notice to the firm that he intended to sell a private placement offering FINRA called “ATMA” to his customers. ATMA was designed to offer an income stream to investors based revenues form automated teller machines (ATMs). In evaluating a selling agreement with SGD, FINRA alleged that WFG assigned its compliance officer known by the initials “TS” to conduct due diligence on ATMA. TS owned a 5% interest in ATMA and SGD was the 90% owner and the operator of ATMA, had no prior experience in structuring and offering private placement investments. FINRA found that the entity that was to provide the ATM machines to ATMA was engaged in fraudulent business practices and most of the ATMs were fictional. FINRA found that WFG declined to enter into a selling agreement with SGD, but permitted him SGD to sell interests in ATMA as private securities transactions.

Gana LLP Broker Investigation – Former Berthel Fisher Broker Robert Smith

December 5, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP are investigating a series of claims before The Financial Industry Regulatory Authority (FINRA) in relation to the conduct of financial advisor Robert Smith (Smith). Smith has been accused by at least 10 customers over his career concerning allegations that Smith overconcentrated the customer’s accounts in private placement securities including equipment leasing programs, oil & gas investments, and non-traded real estate investment trusts (Non-traded REITs).

Smith has been registered with several broker dealers over the years. Starting in 2000 Smith was registered with American General Securities (n/k/a SagePoint Financial, Inc.) until May 2006. Thereafter, Smith was associated with ProEquities, Inc. until June 2010. Finally, from June 2010, until June 2014, Smith was registered with Berthel, Fisher & Company Financial Services, Inc. (Berthel Fisher). Currently, Smith is not registered with any FINRA firm. Upon information and belief, from 2006 on Smith operated his securities business under a DBA called Proactive Retirement Investing.

The large number of complaints against Smith concerning the same or similar charges of misconduct is unusual in the brokerage industry. Most brokers go their entire careers without a single complaint. A small number have one or two complaints. But only a tiny percentage have more than two customer complaints. Here, at least 10 customers have made allegations against Smith all concerning difficult to value private placement securities.

Do Increased Investor Risks Lurk Behind the SEC’s Revisiting of the Accredited Investor Definition Part II

November 21, 2014 | by Staff Attorney

This article continues to opine on an InvestmentNews article, describing the Securities and Exchange Commission’s (SEC) revisiting the accredited investor standard that determines who is eligible to invest in private placements. It is the opinion of this securities attorney who has represented hundreds of cases involving investors in private placement offerings that some of the IAC’s proposals are severely flawed and will only enrich the industry at investor’s expense. While proposals to increase standards through sophistication tests and limiting the amount of private placement investments to a certain percentage of net worth are constructive, it is clear that some will attempt to use the review to water down the current requirements. Below are some of the reasons why proposals to abandon the income and net worth approach and instead use a definition that takes into account an individual’s education, professional credentials, and investment experience will be a disaster for investors.

First, many private placements such as equipment leasing and non-traded real estate investment trusts (Non-Traded REITs) already skirt these rules and offer non-traded investments to those with income of $70,000 and net worth of $250,000. If you want to see what the world would be like without the $1,000,000 constraint on private placements, it’s already here and it’s not pretty.

Non-Traded REITs are a $20 billion a year industry that basically ballooned overnight. These non-traded investments act like private placements and charge anywhere from 7-15% of investor capital in the form of commissions and selling fees. In addition, there is little evidence to support that these investments will largely be profitable for investors. In fact, because non-traded REITs offer products with very limited income and net worth thresholds brokers have loaded up clients accounts to such an extent that the NASAA has proposed universal concentration limits to curb these abusive practices. But as bad as many of these products are, many other private placements that would be allowed to be sold to investors under some of the IAC proposals are far worse.

An Examination of LPL Financial’s Recent Regulatory Woes

October 7, 2014 | by Staff Attorney

LPL Financial, LLC (LPL) is one of the largest independent brokerage firms in the United States employing approximately 13,840 registered reps and advisers. However, the firm’s growth has come with a host of regulatory actions focusing on the firm’s alleged supervisory failures.

Recently, InvestmentNews reported that the firm was hit with a $2 million fine, and ordered to pay $820,000 in restitution, for failing to maintain adequate books and records documenting variable annuity exchanges. The mounting firm fines have led to flat second quarter earnings at LPL. The firm has stated that the company is instituting enhanced procedures with a view to ensuring that surrender charges incurred in connection with variable annuity exchange transactions are accurately reflected in the firm’s books and records as well as in any disclosures given to clients. The firm is also purportedly taking steps to make sure that its advisers are adequately documenting the basis for their variable annuity recommendations.

LPL has been on the radar of FINRA and several state regulators that have focused on the firm’s supervisory and other record systems as well as examining sales of investment products, including non-traded real estate investment trusts (REITs). In February 2013, LPL settled with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines concerning the firm’s non-traded REIT practices. In addition, in the last year, FINRA has fined LPL Financial $7.5 million for significant e-mail system failures. Moreover, we have reported on numerous LPL registered representatives who have been fined over the past year for a variety of misconduct ranging from misappropriation of funds, sales of alternative investments, selling away activities, and private placements.