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woodbridge mortgage fundsAs recently discussed in our blog, on Monday, December 4, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in Delaware Bankruptcy Court (Case No. 17-12560-KJC).  Woodbridge has asserted that a restructuring of its debt was necessary due to increased operating and development costs, in addition to expenses associated with ongoing litigation and regulatory compliance.  As we have discussed in several previous blog posts, Woodbridge continues to face considerable regulatory scrutiny in connection with allegations of offering and selling unregistered securities, in addition to allegations of possible misconduct by Woodbridge and its President, Robert Shapiro.

As reported on December 6, Woodbridge’s First Day Motions in Delaware Bankruptcy Court (“Motions”) were successful.  The Bankruptcy Court issued certain interim authorizations to help ensure Woodbridge’s ability to continue operations in the ordinary course during its restructuring process.  For instance, the Bankruptcy Court approved Woodbridge’s request to access debtor-in-possession (“DIP”) financing through a California private direct lender specializing in real estate debt investments, Hankey Capital, LLC (“Hankey”).

This DIP financing, combined with cash on hand generated by Woodbridge’s operations, is intended to support continued business operations during the restructuring process.  In signing off of on Woodbridge’s request to borrow $6 million for a day through its DIP financing, Judge Kevin Casey indicated “The request here is a relatively modest one.”  In addition to receiving approval on its initial DIP financing request, Woodbridge also received approval for, among other things, cash to pay employee salaries and benefits.

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woodbridge mortgage fundsIf you are have invested in Woodbridge Wealth or in any of the Woodbridge Mortgage Funds, you may have questions concerning your rights in light of Woodbridge’s recent bankruptcy filing.

Investors who purchased Woodbridge FPCMs through a stockbroker or financial advisor may have viable FINRA arbitration claims if the brokerage firm did not perform adequate due diligence before recommending the Woodbridge investment.  Law Office of Christopher J. Gray, P.C. offers a confidential, no-obligation consultation to Woodbridge investors.

Woodbridge Wealth, a California-based firm, sells structured financial products to investors, often through intermediary brokers.   Woodbridge has reportedly raised over $1 billion by selling investors instruments known as First Position Commercial Mortgages (“FPCMs”). The Woodbridge Funds advertise that their management team’s substantial experience lets them maintain a successful lending model and find lending opportunities that are favorable for investors. Investors do not have any role other than providing money. An FPCM consists of a promissory note from a Woodbridge Fund, a loan agreement, and a non-exclusive assignment of the Woodbridge Fund’s security interest in the mortgage for the underlying hard-money loan. The Woodbridge Funds pool money from multiple investors for each hard-money loan. The Woodbridge Funds’ promissory notes effectively guarantee the underlying hard-money loans, and the Woodbridge Funds’ advertising materials state that the Woodbridge Funds are obligated to make payments to FPCM investors even if the hard-money borrower defaults.

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Piggy Bank in a CageThe Securities and Exchange Commission (“SEC”) has filed a civil complaint (“Complaint”) in federal court against Mr. Zachary S. Berkey of Centerreach, NY and Mr. Daniel T. Fischer of Greenwich, CT, alleging that these financial advisors made unsuitable trades at the expense of customers.  The Complaint addresses alleged conduct that occurred when Messrs. Berkey and Fischer were both employed by Four Points Capital Partners LLC (“Four Points”) (CRD# 43149).

According to the Complaint, Messrs. Berkey and Fischer allegedly conducted “in-and-out trading” that was almost certain to incur losses for investors, while at the same time yielding commissions to the financial advisors.  Further, the Complaint indicates that ten (10) Four Points customers lost a total of $573,867, while Messrs. Berkey and Fischer earned commissions of $106,000 and $175,000 on these losing trades, respectively.

The SEC Complaint alleges that because the customers incurred significant costs with every transaction and the securities traded were held for short periods of time, the price of the securities had to rise significantly in order to realize even a minimal profit.

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woodbridge mortgage fundsOn December 4, 2017, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware.  As we have previously highlighted in a series of blog posts, Woodbridge has come under considerable regulatory scrutiny over the past year, both by the Securities and Exchange Commission (“SEC”), and various state securities regulators including officials in Arizona, Colorado, Idaho, Massachusetts, Michigan, Pennsylvania, and Texas.

In a letter to investors dated December 5, Woodbridge announced the bankruptcy filing and stated that “[t]he Company took this action in an effort to recapitalize its debt and establish a stronger financial platform.”

In the investor letter, Woodbridge elaborated as follows concerning the purported reasons for the bankruptcy: “While Woodbridge continues to be a leading developer of high-end real estate, as the  business has grown, increased operating and development costs have been exacerbated by the unforeseen costs associated with ongoing litigation and regulatory compliance.  This combination of rising costs and regulatory pressure led to a loss of liquidity, resulting in an inability to make our regularly scheduled one-year Notes payment due December 1, 2017.  So you understand, this unpaid obligation incurred by Woodbridge prior to December 4, 2017 is now frozen and will be considered as general unsecured claims in the restructuring proceedings.”

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On December 4, 2017, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware.  As we have previously highlighted in a series of blog posts, Woodbridge has come under considerable regulatory scrutiny over the past year, both by the Securities and Exchange Commission (“SEC”), and various state securities regulators including officials in Arizona, Colorado, Idaho, Massachusetts, Michigan, Pennsylvania, and Texas.  Further, according to bankruptcy filings, Woodbridge has received information requests from state securities regulators in approximately 25 states.  The investigations conducted by securities regulators at both the federal and state level have centered on allegations of offering and selling unregistered securities that are not exempt from registration.

In addition, at the federal level, the SEC has raised allegations of possible misconduct by Woodbridge and its President, Robert Shapiro (“Shapiro”).  On Friday, December 1, Mr. Shapiro resigned as Woodbridge’s CEO.  As of Monday, December 4, according to bankruptcy proceeding filings, Woodbridge owes approximately $750 million to an estimated 8,998 noteholders who invested in various Woodbridge funds.  Holders of these notes are entitled to a fixed rate of interest generally ranging from 4.5 – 13%, payable on a monthly basis, and repayment of principal upon maturity (typically within 12-20 months of issuance) of the note.

Woodbridge operates through a complex structure of interrelated companies (numbering about 250) which are owned either directly or indirectly by RS Protection Trust, an irrevocable Nevada trust, of which Mr. Shapiro is the trustee and his family members are the sole beneficiaries.  Included among the various Woodbridge entities or mortgage funds are the following:

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woodbridge mortgage fundsOn March 18, 2016, the Securities Commissioner of the State of Texas (“Securities Commissioner”) entered a Cease and Desist Order (“Order”) against Woodbridge Mortgage Investment Fund 3, LLC (“Woodbridge 3” or “Respondent”).  Respondent Woodbridge 3 is a Delaware-organized limited liability company formed in or around 2014.  Woodbridge 3 is one of a number of mortgage funds offered by the Woodbridge Group of Companies, LLC (“Woodbridge”), the successor firm to Woodbridge Structured Funding, LLC.  Woodbridge is headquartered in Sherman Oaks, CA, and its principal and controlling person is Robert H. Shapiro (“Shapiro”).

In connection with the Securities Commissioner’s Order, State of Texas securities regulators made the following findings of fact concerning their investigation into Woodbridge 3:

  • The Bureau determined that Respondents Woodbridge 3 and Shapiro offered and sold “First Position Commercial Mortgages” (“FPCMs” or “The Note Program”) to investors in Texas that fell within the definition of a security;
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Money MazeOn September 25, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a fine of $3.25 million against Morgan Stanley Smith Barney LLC (“Morgan Stanley”) in connection with the brokerage firm’s alleged failure to supervise its brokers’ short-term trades of unit investment trusts.  Unit investment trusts (“UITs”) are a specific type of Investment Company, as defined by the Investment Company Act of 1940 (the ’40 Act), and subject to regulation by the SEC.  Unlike mutual funds, closed-end funds, or ETFs, UITs are unique in that they are created for a specific, limited time period (e.g., 24 months).  Furthermore, UITs consist of a static investment portfolio as part of a pre-selected pooled investment vehicle.

Typically, UITs impose a number of charges.  Some of these charges include a deferred sales charge, a creation and development fee, as well as annual operating expenses charged as an annual fee to account for portfolio administration and bookkeeping.  In aggregates, these various fees might total approximately 4% for a typical 24-month UIT.  Thus, any investor in a UIT will experience a “drag” on the performance of their UIT portfolio in the form of various fees.

Because UITs carry a substantial fee structure and are subject to termination after a given time period, there exists the potential for some financial advisors to recommend to their clients that they roll-over, or switch, from one UIT to another.  In its worst form, this sales practice amounts to a stock broker seeking enhanced income through switching clients out of one product to another on a short-term basis in order to earn commissions and fees, at the expense of the client.

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Money in WastebasketBank of America Merrill Lynch’s (“Merrill Lynch”) brokerage unit offered Strategic Return Notes (“SRNs”) to customers, resulting in losses of as much as 95% of the principal invested.  First issued in November 2010 and maturing November 27, 2015, the SRNs were designed to be linked to Merrill Lynch’s own proprietary volatility index (the “VOL”) which was designed to calculate the volatility of the S&P 500 Index.  The SRNs, which were issued at $10 per share, ultimately matured at just $0.50 per share.  Thus, investors in Merrill Lynch’s proprietary SRN’s were subjected to an enormous 95% loss on their principal investment.

In recent years, many investors have been solicited by their financial advisor to purchase so-called structured notes, which are often presented to customers as a higher-yielding, but still relatively safe alternative to fixed-income investments such as bonds.  Structured notes are issued and backed by financial institutions.  As hybrid products containing both a bond component and an embedded derivative, structured notes are designed to provide an investor with a return based on an equity index (or some other benchmark), as opposed to an interest rate typically associated with a traditional bond investment.

In theory, a structured note is supposed to provide an investor with an opportunity to earn enhanced income (in excess of the very low interest rates offered in the current environment on most bond investments), while also providing some downside cushion.  In practice, however, many structured notes engineered by various investment banks and sold by their brokers have proved to be horrendous investments.

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Apartment  BuildingAs recently reported, on September 20, 2017, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed an Administrative Complaint (“Complaint”) against SII Investments, Inc. (“SII”) (CRD# 2225) in connection with the brokerage firm’s marketing and sales of non-traded REITs to certain Massachusetts investors.  SII is an independent broker-dealer within National Planning Holdings, which was recently acquired by Boston-based LPL Financial.

The Complaint essentially alleges that for the past several years, SII has engaged in “[d]ishonest and unethical conduct and failed to supervise its agents by allowing systemic inflation of its clients’ liquid net worth while maintaining contradictory and unclear rules related to the purchase of non-traded real estate investment trusts… .”  Of significance, Massachusetts securities regulations mandate that “[n]o more than 10% of a client’s liquid net worth can be concentrated in one specific non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs in general.”

According to the Complaint, SII’s own internal policies and procedures also would also appear to have been violated by some of SII’s alleged conduct.  For example, on SII’s own suitability and disclosure forms used for the sales of non-traded REITs, the full value of variable annuity products was listed as part of a client’s liquid net worth.  However, as referenced in the Complaint, SII’s own “[C]ompliance Guide states ‘There must not be any representation or implication that variable annuities are short-term, liquid investments.  Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions.’”

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Cage MoneyFormer United Planners Broker Jerry Lou Guttman allegedly sold over $7,000,000 worth of unregistered securities to customers of his former employer.  Guttman allegedly sold membership interests in at least six different limited liability companies to 31 customers and seven non-customers without first disclosing the sales to United Planners, according to a recent Letter of Acceptance, Waiver, and Consent (AWC) issued by the Financial Industry Regulatory Authority (FINRA).  According to the AWC, Mr. Guttman neither admitted to nor denied the conduct charged by FINRA.

Guttman was a financial advisor and a registered representative of United Planners Financial Services of America from 2001 to October 2017.   Guttman has also allegedly been the subject of three previous customer complaints.  During his career, Guttman has been affiliated with Guttman Financial Group, Nationwide Planning & Benefits, Champion Entertainment Group, Walled Lake Properties, and Serenity Management.

FINRA Rule 3280 prohibits associated persons from participating in any manner in a private securities transaction without first providing written notice to the registered representative’s employing firm.  The notice to the employer must occur before the private securities transaction begins.  There are other requirements imposed by the rule, including that the employing firm must approve the transaction.

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