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Money in WastebasketOn July 27, 2018, two affiliated small business lenders — 1 Global Capital (a/k/a 1st Global Capital, and 1 West Capital (collectively, “1GC”) — filed for Chapter 11 protection in Bankruptcy Court in the Southern District of Florida.  Based in Hallandale Beach, FL, the two affiliated lenders are under the same common ownership and are in the business of purportedly providing small business loans known as “direct merchant cash advances,” to various clientele.  In connection with the bankruptcy filing, 1GC’s two primary executives, Messrs. Carl Ruderman and Steven A. Schwartz, relinquished their control over the company and tendered their resignations.

As reported, 1GC had around 1,000 individual unsecured creditors prior to filing for bankruptcy.  These creditors had loaned 1GC money with the understanding that these funds would then be invested in direct merchant cash advances.  Creditors received monthly statements which demonstrated how their investments had supposedly been allocated, in addition to being provided with an online portal to track their investments.

In total, 1GC has reported more than $283 million in unsecured lender claims.  Of the 20 largest creditors, all of them are individuals or retirement accounts.  Prior to the bankruptcy filing, the SEC had opened an investigation into whether 1GC was engaging in “[p]ossible securities laws violations, including the alleged offer and sale of unregistered securities by unregistered brokers, and by the alleged commission of fraud in connection with the offer, purchase and sale of securities.”  At this stage, both the SEC and the U.S. Attorney’s Office for the Southern District of Florida, which recently commenced a parallel criminal investigation, are investigating allegations of possible wrongdoing or malfeasance at 1GC.

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Wastebasket Filled with Crumpled Dollar BillsAccording to publicly available records via FINRA BrokerCheck, former Securities America, Inc. (CRD# 10205, hereinafter “Securities America”) financial advisor Hector A. May (CRD# 323779, hereinafter “Hector May”) is currently under investigation by the U.S. Department of Justice (DOJ) and the Attorney for the Southern District of New York concerning allegations of investment fraud.  Specifically, certain former customers of Hector May have recently come forward, alleging that Mr. May solicited investments in purported “tax-free” corporate bonds.

A long-time resident of Rockland County, New York, Hector May maintained an office in New City, New York, from which he conducted business through his registered investment advisory (RIA) firm: Executive Compensation Planners, Inc. (CRD# 116375) (“ECPI”).  Upon information and belief, Hector May’s ECPI clientele included investors in the following states: New York, Connecticut, New Jersey, Pennsylvania, Maryland, Virginia, North Carolina, and Florida.  Publicly available information indicates that ECPI was formed as a New York corporation in December 1982.  SEC records reflect that Mr. May’s registration with the securities regulator was terminated on May 1, 2018.

Hector May was affiliated with the independent broker-dealer Securities America from 1994 until March 2018.  On or about March 9, 2018, Securities America reportedly discharged Mr. May due to allegations concerning “misappropriation of client assets.”  Subsequently, on June 6, 2018, the United States Attorney for the Southern District of New York implemented an asset freeze pursuant to a Restraining Order against Mr. May and his wife, Sonia May, with their consent.  Through the government’s restraining order, numerous assets have been frozen, including ECPI assets, as well as various bank and brokerage accounts, pension and social security benefits, as well as real assets including the May’s Orangeburg residence.

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stock market chartAs previously reported, on June 29, 2018, the board of directors of American Finance Trust, Inc. (“AFIN” or the “Company”), formerly known as American Realty Capital Trust V, Inc., announced the approval of a plan to list AFIN common stock on the Nasdaq Global Select Market (“Nasdaq”), under the symbol ‘AFIN’.  The company listed its shares effective July 19, 2018.  Although most investors paid $25.00 a share for AFIN shares in the Company’s offerings, AFIN shares have consistently traded well below that price level since the Nasdaq listing.  AFIN shares have traded as low as $13.15 a share, and closed on July 30, 2018 at $14.93 a share.

As of July 26, 2018, an investor known as MacKenzie Realty Capital, Inc. has now announced a tender offer for shares of AFIN, offering $15.00 per Class A Share (AFIN), $11.27 per Class B-1 Share, and $10.00 per Class B-2 Share.  The performance of the Company since it started trading on July 19 and the relatively low tender offer price may have caught some investors by surprise, since AFIN published an estimated net asset value of $23.56 in June 2018.

Because AFIN was registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.  AFIN commenced its initial public offering in April 2013, which closed approximately six months later, raising $1.6 billion in investor equity.  Investors who participated in the IPO paid $25 per share.  AFIN later merged with another REIT known as American Realty Capital Retail Centers of America in a controversial 2017 transaction.

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Piggybank In A CageThe Securities and Exchange Commission (“SEC”) has filed a fraud lawsuit in federal court in Colorado against a group of companies known as “Financial Visions” and their principal, Daniel B. Rudden (“Rudden”), who allegedly bilked at least 150 investors in a $55 million alleged Ponzi scheme.

The SEC’s complaint charges that Rudden, operating under the name Financial Visions and through a group of companies, issued promissory notes to fund a line of business involving providing financing for funeral services and related expenses to consumers.  The SEC alleges that Rudden/Financial Vision defrauded as many as 150 investors after promising them annual returns of 12% or more.  Since 2010 or 2011, Rudden allegedly used new investor funds to pay interest and redemptions to existing investors and concealed the Financial Visions companies’ true financial performance and condition.

The SEC Complaint is accessible here.

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stock market chartInvestors in speculative microcap and nanocap securities may have arbitration claims to be pursued before FINRA, in the event that the recommendation to invest lacked a reasonable basis, or if the nature of the investment, including its risk components, was misrepresented to the investor.  Both FINRA and the SEC have issued ample guidance with regard to the numerous risks associated with investing in speculative microcap (or “penny”) stocks, including the potential for fraudulent schemes and market manipulation due to the lack of public information concerning the companies’ underlying business and management, as well as verifiable financials.

In certain instances, broker-dealers who transact business in the penny stock arena may expose themselves to regulatory scrutiny and related liability.  For example, Aegis Capital Corp. (“Aegis”) (CRD# 15007) has come under considerable regulatory scrutiny by both the SEC and FINRA with respect to its activities concerning low-priced securities transactions.  Formed in 1984 and headquartered in New York, New York, Aegis is a mid-sized, full service retail and institutional broker-dealer.  As of March 2017, Aegis employed approximately 415 brokers in its sixteen branches, with the bulk of its workforce centered in New York City and Melville, NY.

According to FINRA BrokerCheck, Aegis’ regulatory history includes a total of thirty (30) disclosure events, a number of which involve penny stocks.  For instance, in August 2015, Aegis entered into a settlement with FINRA, pursuant to which the broker-dealer agreed to pay $950,000 in sanctions over allegations of improper sales of unregistered shares of penny stocks, as well as certain AML violations.  In connection with that regulatory event, two of Aegis’ compliance officers were suspended for 30 and 60 days, and ordered to pay fines of $5,000 and $10,000, respectively.  On March 28, 2018, the SEC imposed a cease-and-desist order (“Order”) against Aegis for its alleged supervisory failures concerning penny stocks.  Further, the SEC penalized Aegis $750,000 after the brokerage firm admitted that it failed to file required suspicious activity reports (“SAR’s”) on numerous penny stock transactions from “at least late 2012 through early 2014.”

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Money BagsInfinex Investments (“Infinex”, CRD No. 35371) of Meriden, Connecticut has entered into a Consent Order with Massachusetts securities regulators, agreeing to pay a fine of $125,000 and make restition to investors to resolve allegations that it failed to adequately supervise agents who were selling high-commission securities products.  Infinex registered representatives allegedly targeted customers at bank branches, primarily senior citizens, for unsuitable investment recommendations,  including real estate investment trusts REITs and variable annuities, primarily to senior customers at local banks who didn’t understand the products.

Infinex is majority-owned by a group of nearly 40 banks that offer securities on bank premises and has selling agreements with approximately 30 banks in Massachusetts.  Infinex also operates in other states and, according to the Financial Industry Regulatory Authority (“FINRA”), is licensed to operate in 53 U.S. states and territories.  Therefore, it is possible that sales of investments such as those that allegedly occurred in Massachusetts may have occurred in bank branches in other states.

The Massachusetts Securities Division reportedly began investigating sales practices by Infinex after senior citizens complained that they had been sold investments they did not ask for or did not understand.  The Consent Order is accessible below.

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woodbridge mortgage fundsInvestors in unregistered Woodbridge First Position Commercial Mortgages (“FPCMs”) notes and/or units upon the recommendation of former financial advisor Jerry Davis Raines (CRD# 4578689, hereinafter “Raines”) may be able to recover losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”).  According to FINRA BrokerCheck, a number of investors have already filed claims against Mr. Raines in connection with allegations surrounding Mr. Raines’  alleged recommendation of unsuitable Woodbridge investments to customers.  Mr. Raines was most recently affiliated with HD Vest Investment Services (CRD# 13686, hereinafter “HD Vest”) from 2014 – May 2017.  Previous to that, Mr. Raines was affiliated with Signal Securities, Inc. (CRD#15916) and Woodmen Financial Services, Inc. (CRD# 117365).

As recently reported, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, and certain of its affiliated entities, filed for Chapter 11 bankruptcy protection on December 4, 2017 (U.S. Bankruptcy Court for the District of Delaware – Case No. 17-12560-KJC).  The SEC has alleged that Woodbridge, through its owner and former CEO, Mr. Robert Shapiro, purportedly utilized “more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

Beginning as early as 2012, Woodbridge and its affiliates offered securities nationwide to numerous retail investors through a network of in-house promoters, as well as various licensed and unlicensed financial advisors.  Woodbridge investments came in two primary forms: (1) “Units” that consisted of subscriptions agreements for the purchase of an equity interest in one of Woodbridge’s seven Delaware limited liability companies, and (2) “Notes” or what have commonly been referred to as “First Position Commercial Mortgages” or “FPCMs” consisting of lending agreements underlying purported hard money loans on real estate deals.

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investing in real estate through a limited partnershipAs recently announced, the board of directors of Hines Real Estate Investment Trust, Inc. (“Hines REIT” or the “Company”) — one of three publicly registered non-traded REITs sponsored by Hines — has unanimously voted for approval of a plan of liquidation and dissolution of the Company (“Liquidation Plan”).  Under the Liquidation Plan, which calls for  shareholder approval, the Company will sell seven of its West Coast office building assets in a cash transaction valued at $1.162 billion to an affiliate of Blackstone Real Estate Partners VIII.  In addition, Hines REIT also seeks to liquidate the remainder of its portfolio, including Chase Tower in Dallas, TX, 321 North Clark in Chicago, and a grocery-anchored retail portfolio located in the Southeastern U.S.

Pursuant to the Liquidation Plan, Hines REIT shareholders will receive $0.08 per share, to be paid on or about July 31, 2018.  Specifically, the Liquidation Plan entails a final distribution of $0.07 per share, as well as an additional $0.01 per share stemming from a recent class action settlement.  The class action settlement involves a lawsuit filed by Baltimore City in the Circuit Court of Maryland, alleging breach of fiduciary duty, waste of corporate assets, and misappropriation of assets surrounding certain payments made in connection with the Liquidation Plan.

Hines REIT shareholders previously approved the Liquidation Plan in November 2016; subsequent to shareholder approval, the Company declared an initial liquidating distribution of $6.20 per share in December 2016, as well as a $0.30 per share liquidating distribution in April 2017.  Following the final distribution of $0.08 per share, Hines REIT investors will have received total special and liquidating distributions of approximately $7.59 per share, in addition to regular annual distributions.  Shares were originally sold for $10 each.

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Building DemolishedAs recently reported, third party real estate investment firms Everest REIT Investors I LLC and Everest REIT Investors III LLC, two private affiliated entities, commenced an unsolicited tender offer to purchase approximately 8.8 million shares of CNL Healthcare Properties, Inc. (“CNL Healthcare”) common stock for $7.50 each.  Unless amended, this unsolicited tender offer will expire on August 31, 2018.  As of December 31, 2017, CNL Healthcare reported a net asset value (NAV) of $10.32 per share.  Thus, the recent tender offer pricing represents an approximate 27% discount on CNL’s recent NAV pricing and suggests that investors may have incurred principal losses on their investments.

Headquartered in Orlando, FL, CNL Healthcare is a Maryland REIT incorporated in June 2010 for the purpose of acquiring a portfolio of geographically diverse healthcare real estate real estate-related assets, including certain senior housing communities, medical office buildings, and acute care hospitals.

Investors in CNL Healthcare may have claims to bring in FINRA arbitration, if the investment was recommended by a broker or financial advisor who lacked a reasonable basis for the recommendation, or if the financial advisor misrepresented the nature of the investment, including its risk components.

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Money in WastebasketOn July 18, 2018, the SEC filed a lawsuit in the District of Connecticut naming Temenos Advisory, Inc. (“Temenos”) and George L. Taylor (“Taylor”) as Defendants and essentially alleging that Defendants made improper recommendations of certain private placement investments to their investment advisory clients.  A copy of the SEC Complaint is accessible here: SEC v Temenos & Taylor 

Temenos, founded by Taylor, is a Connecticut corporation headquartered in Litchfield, CT, with additional offices located in St. Simons Island, GA and Scottsdale, AZ.  Temenos has been registered with the SEC as a registered investment advisor (RIA) since 1999, and is owned by Mr. Taylor and a trust that was purportedly established for purposes of benefiting Taylor’s former business partner.

As alleged by the SEC, prior to 2014, Temenos’ business was largely focused on the sale of traditional financial products to its clientele, including “[m]utual funds, exchange traded funds, variable annuities, and publicly traded stocks.”  Like many RIAs, Temenos charged an advisory fee to its customers based upon a percentage of assets under management.  However, as alleged in the Complaint, beginning in 2014 Temenos began recommending private placement investments to its clients: “Between 2014 and 2017, Defendants placed more than $19 million in investments by their clients and others in [the securities of] four private issuers … And they did so without ever sufficiently examining the marketing claims, financial statements, or business activities of those companies.”