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Articles Posted in Unregistered Securities

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Financial FraudIf you have sustained losses in an investment in GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment, you be able to recover losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”) if the investment was sold pursuant to a misleading sales presentation or the recommendation to purchase the securities lacked a reasonable basis.  GWG Holdings, Inc. (“GWG”) began selling what it termed Renewable Secured Debentures (“Debentures”) in 2012.  In certain instances, financial advisors and brokers recommending these Debentures reportedly solicited their clients to invest without first fully disclosing the Debentures’ many risks.  In fact, in some instances, financial advisors reportedly made false and misleading oral and written statements concerning these investments offered by GWG, describing them as safe, low-risk, liquid and/or guaranteed.  Further, some financial advisors may have recommended these Debentures without taking into account a customer’s specific investment objectives, risk tolerance, as well as other relevant factors which all touch upon the suitability of a specific investment.

In actuality, these Debentures were anything but safe, liquid investments.  In structuring the Debentures, Minnesota firm GWG purchased life insurance policies in the secondary market at a discount to their face value and then packaged these policies into the Debentures, to be sold to investors.  In structuring the overarching investments, GWG planned to continue paying on the insurance policy premiums, while paying investors interest, ultimately hoping to collect more upon maturity of the policies than GWG had initially paid to purchase, finance and service the policies.  GWG required a minimum investment of $25,000 – with the optionality to make additional investments at $1000 increments.  The Debentures had varying maturity terms and interest rates, ranging from six (6) months at an annual interest rate of 4.75% to seven (7) years at an interest rate of 9.5%.

Significantly, as stated in the GWG Prospectus, the life insurance policies underlying the investments do not serve as collateral for the Debentures, but rather acted as collateral for GWG on a line of credit to purchase the insurance policies, in the first instance.  In addition to the risk of default without secure collateral in place, the GWG Debentures are extremely illiquid in nature.  This means that investors do not have ready access to their initial capital commitment prior to maturity (unless such a request is due to death, bankruptcy, or disability).  Further, there is no active trading market for GWG’s Debentures, making resale extremely difficult.

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Money BagsOn May 4, 2015, the Commonwealth of Massachusetts Securities Division (“Division”) entered a Cease and Desist Order (“Order”) against certain Woodbridge Mortgage Investment Funds.  With respect to the Order, these mortgage funds — which are offered by Woodbridge Wealth (“Woodbridge”) of Sherman Oaks, CA — include: Woodbridge Mortgage Investment Fund 1, LLC, Woodbridge Mortgage Investment Fund 2, LLC, and Woodbridge Mortgage Investment Fund 3, LLC (collectively, the “Woodbridge Funds”).  These Woodbridge Funds, and other similar fund iterations, have been offered nationwide by Woodbridge through a network comprised primarily of independent broker-dealers and financial advisors.

Through its findings of fact, the Division noted that the Woodbridge Funds, all Delaware limited liability companies, sought to “[r]aise money from individuals in Massachusetts, by offering and selling ‘First Position Commercial Mortgages…’”  Significantly, the Division determined that Woodbridge’s First Position Commercial Mortgages (“FPCMs”) were not registered as securities in either Massachusetts or on the federal level, nor were these FPCMs exempt from registration.  In nearly all instances, in order to recommend an investment in a security, the issuer and/or broker or promoter soliciting the investment must either register the security, or seek exemption from registration (e.g., exemption through Regulation D via private placement).

The Order indicated that in response to a Division subpoena, “[W]oodbridge identified 144 Massachusetts residents who invested in [FPCMs] between January 1, 2012 to present.  The 144 Massachusetts Investors reside in cities and towns across the Commonwealth, including Springfield, Worcester, Gloucester, Truro, Plymouth, Dorchester, and Boston.”  Finally, the Division determined that Charles N. Nilosek, a resident of Plymouth, MA, was promoting and selling FPCMs through his two business entities, Position Benefits, LLC and SHP Financial LLC.  Of concern, the Division noted that Mr. Nilosek was not registered in any capacity with the Division, the SEC, or FINRA.  Further, Position Benefits, LLC was not registered in any capacity with the Division, the SEC, or FINRA.

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Oil field at sunset.

On October 4, 2016, the Texas State Securities Board (the “Board”) entered a Disciplinary Order (“Order”) against Respondents Calton & Associates, Inc. (CRD# 20999) (“Calton”) and stockbroker M. F. Long II (CRD# 1778299) (“Mickey Long”).  The Respondents consented to the entry of the Order and its associated findings of fact and conclusions of law.

The Order indicates that, from June 6, 2002 – June 30, 2016, Mickey Long was registered with the State of Texas as an agent of VSR Financial Services, Inc. (“VSR”).  For the majority of that time frame, Mickey Long was registered as an investment adviser representative of VSR.  On June 30, 2016, Mickey Long applied for registration with the State of Texas as an agent of Calton.

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Piggybank In A Cage As recently reported, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, continues to face considerable regulatory scrutiny in connection with allegations of offering and selling unregistered securities.  To date, Woodbridge has been the subject of investigations by state securities regulators in Arizona, Texas, Massachusetts, Pennsylvania, and Michigan.  Several of these investigations have resulted in regulators issuing cease-and-desist orders, requiring Woodbridge to stop offering and/or selling unregistered securities, and further, to stop otherwise violating applicable securities laws.

As of mid-November 2017, Woodbridge has settled regulatory actions in Pennsylvania, Texas and Massachusetts.  The company, which has offered a number of various Woodbridge Mortgage Investment Funds (“Woodbridge Funds”), has marketed so-called “First Position Commercial Mortgages” (or “FPCMs”) to investors nationwide through issuing promissory notes in exchange for investments backing certain hard money loans secured by commercial real estate.

At the federal level, for the past year the Securities and Exchange Commission (“SEC”) has also been investigating Woodbridge.  Specifically, according to a publicly available court filing, the SEC “[i]s investigating the offer and sale of unregistered securities, the sale of securities by unregistered brokers and the commission of fraud in connection with the offer, purchase and sale of securities.”

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woodbridge-300x82The U.S. Securities and Exchange Commission (“SEC”) obtained an order on September 21, 2017 requiring the Woodbridge Group of Companies LLC (“Woodbridge”), of Sherman Oaks, California, to produce the documents of several company executives and employees, including the President and CEO.  This order reportedly relates to an SEC investigation of Woodbridge.

The SEC is reportedly investigating whether Woodbridge and others have violated or are violating the antifraud, broker-dealer, and securities registration provisions of the federal securities laws in connection with Woodbridge’s receipt of more than $1 billion of investor funds.  According to the SEC’s application and supporting papers filed in federal court in Miami on July 17, 2017, investors from around the country may have been affected.

On January 31, 2017, in furtherance of the SEC’s probe into Woodbridge, SEC staff in the Miami Regional Office reportedly served Woodbridge with a subpoena seeking the production of electronic communications that the company maintained relating to Woodbridge’s business operations, as well as other documents.  Court papers filed by the SEC allege that the company has failed to produce any relevant communications in response to the subpoena, including those of three high-level Woodbridge officials, despite being legally required to make the production.  The Court overruled Woodbridge’s objections and ordered the documents produced.

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Money Flies The President of a California group of companies known as Woodbridge that has previously been accused of selling unregistered securities by state securities regulators, Robert Shapiro, has reportedly invoked his Fifth Amendment right against self-incrimination in a letter to the Securities and Exchange Commission (SEC).  A March 27, 2017 letter to the SEC from Shapiro’s attorney Ryan O’Quinn, Esq., reportedly stated that “Upon consideration of the SEC’s investigative subpoenas and a review with counsel of the individual rights afforded by the United States Constitution, Mr. Shapiro will rely on his constitutional privilege to refuse to be a witness against himself.”

Woodbridge Wealth, a California-based firm, is a successor company to Woodbridge Structured Funding, LLC, and sells structured financial products to investors, often through intermediary brokers.   These sales have resulted in certain actions by state regulators. For example, in April of 2017, the Pennsylvania Bureau of Securities Compliance and Examinations entered into an agreement with Woodbridge Wealth, to settle allegations of securities industry misconduct arising out of sales of complex structured settlement products that Pennsylvania regulators alleged were unregistered securities.  In another example, in May of 2016, the Financial Industry Regulatory Authority (FINRA) suspended Frank John Capuano (CRD#: 844182), a registered broker from western Massachusetts, after he was alleged to have improperly sold Woodbridge Wealth notes to investors while employed as a registered representative of Royal Alliance Associates in Holyoke, Massachusetts.  Finally, in May of 2015, Massachusetts state regulators charged a non-registered individual named Charles Nilosek and his firm, Position Benefits, LLC, with fraud. These charges were brought bssed on the regulators’ allegations that the firm was marketing and selling unregistered securities to vulnerable elderly investors. These complex securities were allegedly sold to retirees as having a guaranteed return, but in fact were complex unregistered securities with no guaranteed return and the potential to create substantial principal losses.

Woodbridge, based in California, has reportedly raised over $1 billion from investors.  Despite the regulatory actions, Woodbridge reportedly continues to sell securities. Some of the issuers of Woodbridge securities are the following:

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On August 8, 2017, the State of Michigan Corporations, Securities & Commercial Licensing Bureau (“Bureau”) entered a Cease and Desist Order (“Order”) against Woodbridge Mortgage Investment Fund 4, LLC (“Woodbridge 4” or “Respondent”).  Respondent Woodbridge 4 is a Delaware-organized limited liability company formed in or around 2015. Woodbridge 4 is one of several mortgage funds offered by the California-based Woodbridge Group of Companies, LLC (“Woodbridge”), the successor firm to Woodbridge Structured Funding, LLC.

In connection with the Bureau’s Order, State of Michigan securities regulators made the following findings of fact concerning their investigation into Woodbridge 4:

  • The Bureau determined that Woodbridge 4 offered and sold “First Position Commercial Mortgages” (“FPCMs” or “Notes”) to investors in Michigan that fell within the definition of a security;
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House in HandsRecently, the Securities and Exchange Commission (SEC) requested documents form a group of companies known as Woodbridge that has previously been accused of selling unregistered securities by state securities regulators. The SEC reportedly has now asked a Miami federal judge to enforce subpoenas against nearly 250 companies affiliated with Woodbridge as part of the SEC’s investigation into whether “the company is perpetrating a fraud on its investors.”

The SEC also recently disclosed its ongoing investigation into Woodbridge’s receipt of more than $1 billion in investor funds in connection with securities offerings including a security known as the First Position Commercial Mortgage (“FPCM”), which the company describes as “[a] private third-party loan to Woodbridge [which] provides higher returns with shorter terms secured by commercial real estate.”  In connection with FCPMs, investors reportedly loan money to Woodbridge, which says it uses those funds to acquire properties and in return pays investors a 5% annual return.  Woodbridge also raises money using investment offerings through entities such as Woodbridge Mortgage Investment Fund III, LLC.

The SEC’s investigation, which began in September 2016, reportedly is focused on “possible significant violations of the securities laws,” including “the offer and sale of unregistered securities, the sale of securities by unregistered brokers, and the commission of fraud in connection with the offer, purchase, and sale of securities.”  The recent round of subpoena requests reportedly began after Woodbridge failed to cooperate with less formal requests for documents by the SEC.

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Piggy Bank in a CageOn November 1, 2017, the Financial Industry Regulatory Authority (“FINRA”) disclosed that registered representative Masood “Mike” Husain Azad (“Mike Azad”) has been barred from the securities industry following a FINRA enforcement proceeding.  Specifically, without admitting or denying FINRA’s findings, “[A]zad consented to the sanction and to the entry of findings that he failed to provide FINRA requested documents and information in connection with its investigation into allegations of misconduct by Azad while associated with his member firm… the allegations included that Azad participated in an unapproved private securities transaction by soliciting investments and/or directly investing in an electronic data security company and engaged in outside business activities involving the company….”

Publicly available information through FINRA indicates that Mike Azad (CRD# 4798445) worked in the securities industry from August 2004 – June 2017.  During this time frame, Mike Azad was affiliated with the following brokerage firms: Voya Financial Advisors, Inc. (CRD# 2882) (2004-2015) and, most recently, First Allied Securities, Inc. (“First Allied”) (CRD# 32444) (2015-2017).  According to FINRA BrokerCheck, Mr. Azad was discharged from his employment with First Allied on May 19, 2017, concerning allegations of violating firm policy “[r]elating to borrowing money from clients, engaging in an unapproved private securities transaction and outside business activity.”

Brokerage firms like First Allied have a duty to ensure that their registered representatives are adequately supervised.  In this regard, brokerage firms must take reasonable steps to ensure that their financial advisors follow all applicable securities rules and regulations, in addition to internal policies and procedures.  In those instances when brokerage firms fail to adequately supervise their registered representatives, they may be held liable for losses sustained by investors.

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Building ExplodesThe Securities and Exchange Commission (SEC) recently sought documents form a group of companies known as Woodbridge that has previously been accused of selling unregistered securities by state securities regulators.  Woodbridge, based in California, has reportedly raised over $1 billion from investors- allegedly by offering the sale of unregistered securities through unregistered brokers.  Woodbridge and its agents have also been sanctioned by multiple state regulators for allegedly offering unregistered securities, including a 2015 cease-and-desist order by Massachusetts, a cease-and-desist order against Woodbridge Fund 3 and principal Robert Shapiro imposed by Texas in 2015, and a 2016 complaint filed by Arizona regulators.

Most recently, Colorado regulators reportedly have opened an investigation into Colorado-based alleged Woodbridge brokers including James Campbell of Campbell Financial Group in Woodland Park, and Timothy McGuire of Highlands Ranch.  Woodbridge has reportedly raised $57 million from 450 Colorado investors and continues to solicit investors through online and radio advertising.

Some FINRA-registered stockbrokers and financial advisors have also allegedly sold unregistered Woodbridge securities to clients, including Frank Capuano, who was registered with Royal Alliance Associates in Holyoke, MA.  Capuano was alleged to have sold over $1,000,000 of the private notes to Royal Alliance customers and received over $30,000 in commissions.

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