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Investors in Griffin-American Healthcare REIT III (“GAH REIT III”), may have FINRA arbitration claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the broker or financial advisor.

Money Maze
GAH REIT III recently announced that it will cut its annual distribution rate in half to $0.30 a share, from $0.60 a share, citing the possible impact of the COVID 19 epidemic on its operations  GAH REIT III also suspended its share repurchase plan.

GAH REIT III is a publicly registered non-traded real estate investment trust (“REIT”) incorporated in January 2013 as a Maryland REIT and is registered with the SEC.  As such. GAH REIT III was permitted to sell securities to the investing public at large, including retail investors who bought shares on the recommendation of a broker or money manager.

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James T. Booth, a former LPL Financial broker, has been arrested and charged by U.S. authorities with securities and wire fraud in connection with his alleged operation of a Ponzi scheme.  The scheme allegedly defrauded more than three dozen retail investors, including senior citizens saving for retirement, of nearly $4 million in assets.

broker misappropriating client money
According to the indictment, accessible here u.s._v._james_booth_indictment,  Booth, 74,  solicited money from over 40 clients of his wealth management business known as Booth Financial and falsely promised to invest their money in securities offered outside of their ordinary advisory and brokerage accounts.  The indictment alleges that, rather than investing the funds as represented,  Booth instead misappropriated nearly $5 million to pay his own personal and business expenses.  According to the indictment, from 2013 through 2019, Booth purportedly directed some of his clients to write checks or wire money to an entity named “Insurance Trends, Inc.”   Booth then allegedly used the funds to pay personal and business expenses.

Under the federal indictment, Booth, of Norwalk, Connecticut, is charged with one count of wire fraud, which carries a maximum sentence of 20 years in prison, one count of securities fraud, which carries a maximum sentence of 20 years in prison, and one count of investment adviser fraud, which carries a maximum sentence of five years in prison, according to the Department of Justice press announcement.

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Customers of Voya Financial Advisors, Inc. (“Voya Financial”) may have arbitration claims if they worked with Broker James T. Flynn between 2013 and 2017 or with IFS Securities, Inc. (“IFS Securities”) if they worked with Flynn between 2017 and 2018, and if Mr. Flynn recommended unsuitable securities transactions or made a misleading sales presentation to them.  Voya Financial has reportedly paid over $900,000 to date to settle claims brought by Mr. Flynn’s customers.

Piggy Bank in a Cage
Flynn (CRD#: 3082615), formerly of Voya Financial and most recently with IFS Securities, has been barred by FINRA and has faced dozens of complaints related to his placement of their funds in variable annuities and non-traded real estate investments (REITs).

Non-traded REITs pose many risks that are often not readily apparent to retail investors, and may not be adequately explained by the financial advisors and stockbrokers who recommend these complex investments.  One significant risk associated with non-traded REITs concerns their high up-front commissions, typically between 7-10%.  In addition to high commissions, non-traded REITs generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.

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Customers of former LPL Financial LLC (“LPL”) broker Kerry Hoffman (“Hoffman”) of Chicago, Illinois may have arbitration claims if they purchased unregistered GT Media Inc. on behalf of their clients between July 2015 and July 2018.

Money Bags
Hoffman was a registered representative and an investment advisory representative associated with LPL.  GT Media hired Hoffman as an adviser in March 2015.  Hoffman then recommended that GT Media hire his friend Thomas Conwell (“Conwell”), who had been previously enjoined and criminally convicted for stealing money from investors, to sell its stock.

As alleged in a complaint filed by the Securities and Exchange Commission (“SEC”), from July 2015 through July 2018, Conwell offered and sold approximately $2.5 million of GT Media stock to approximately 41 investors.  The SEC further alleged that exchange for selling GT Media stock to investors, Conwell received $221,900 in commissions from the company.  The SEC complaint is accessible below.

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Funds offered by GPB Capital Holdings LLC (“GPB”) have shown signs of distress for some time now.  First, it was reported that the U.S. Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (known as “FINRA”), the FBI, the State of Massachusetts, and the New York Business Integrity Commission are investigating GPB Capital Holdings LLC (“GPB”) for financial misconduct. Then one of GPB’s business partners, Prime Automotive Group in Massachusetts, accused GPB of serious financial misconduct and running a “Ponzi-like scheme”.

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Now, these problems have apparently come home to roost in the form of investor losses, as it was recently reported that GPB issued revised, lower valuations for two of its funds, GPB Holdings Fund II and GPB Automotive Fund.  The funds purportedly lost 25.4% and 39% of their value respectively.  Investors are left to guess whether this is the end of the losse, or whether GPB’s other funds including GPB Holdings LP, GPB Holdings III, GPB Waste Management, LP, and GPB NYC Development LP – will also lose value.

GPB is a New York-based alternative asset management firm whose business model is predicated on “acquiring income-producing private companies” across a number of industries including automotive, waste management, and middle market lending.   An issuer of private placements, GPB has raised $1.8 billion from accredited investors in funds that in turn invest in auto dealerships and the waste management industry.  Stockbrokers and advisors from dozens of brokerage and financial advisory firms sold the high risk, high-commission private placements, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.   According to SEC filings approximately 60 brokerage firms sold clients investments in various GPB Capital Funds.  However, the primary sellers of these toxic funds appear to have been Royal Alliance, FSC Securities, SagePoint Financial, and Woodbury Financial Services.

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The United States Securities and Exchange Commission (“SEC”) has filed charges Cardinal Energy Group, Inc. (“Cardinal”), a Texas-based oil and gas company, as well as and its former CEO Timothy W. Crawford (“Crawford”).  The SEC charges defendants with fraudulently concealing the loss of Cardinal’s major source of revenue.

Oil Drilling Rigs
In mid-2017, Cardinal reportedly lost control of its interest in two oil-and-gas leases that accounted for nearly all (approximately 90%) of the company’s revenue, according to the SEC’s complaint.  However, according to the SEC complaint, instead of revealing these issues, Cardinal and Crawford filed quarterly reports with the SEC that misrepresented to investors that the leases were still expected to be part of the company’s future business plans.

During this period, while allegedly concealing the setback to the business, Cardinal also allegedly raised additional money from investors, misreported stock ownership, and failed to make the required disclosures that its Crawford had sold millions of shares of Cardinal stock.

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Investors in Inland Residential Properties Trust Inc. (“Inland Residential”), a publicly registered non-traded real estate investment trust or REIT, have an opportunity to sell their shares- but at a price far below the REIT’s estimated per-share value of $16.06 a share, or its initial $25.00 a share offering price.   MacKenzie Capital Management recently announced an unsolicited tender offer to purchase up to 200,000 shares of Inland Residential, at a price of $11.39 a share. The tender offer expires on March 22, 2019.

Apartment Building
Inland Residential is in the process of being liquidated, which means the company is selling off its assets and distributing the sales proceeds to shareholders pro rata.  Inland Residential’s board estimates that the REIT’s shares have a net asset value or “NAV” of $16.06 as of February 1, 2019.  This $16.06 estimated NAV is net of a distribution of $4.53 a share that Inland Residential previously paid to shareholders after the sale of one of the REIT’s properties.

Inland Residential Properties Trust’s $1 billion offering was declared effective in February 2015.  The offering raised approximately $47 million, selling stock in Inland Residential for $25.00 a share.  The REIT invests in multifamily housing in large metropolitan areas.

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Third-party investment firm  CMG Partners LLC is reportedly offering to pay $3.21 per share of  KBS Real Estate Investment Trust II (“KBS II”), a publicly registered non-traded real estate investment trust or REIT.  KBS II is urging its stockholders not to sell their shares in the tender offer.  In December 2018,  KBS II announced an estimated $4.95 per share net asset value (“NAV”) for the REIT’s common stock.  An NAV is an estimate of a stock’s value per share, based on the estimated value of a company’s property and assets less the estimated value of its liabilities, divided by the number of shares outstanding.

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KBS II has reported paid shareholders $4.50 per share in special distributions from proceeds from its property sales.  KBS II shares were sold in the REIT’s public offering for $10.00 a share.  KBS II closed its public offering in December 2010 after selling $1.8 billion of shares to the public.  Secondary market transactions in KBS II shares have reportedly priced the shares at between $4.00 and $4.06 a share.

Non-traded REITs pose a great deal of risks that are often not readily apparent to retail investors, and may not be adequately explained by the financial advisors and stockbrokers who recommend these complex investments.  One significant risk associated with non-traded REITs concerns their high up-front commissions, typically between 7-10%.  In addition to high commissions, non-traded REITs like KBS II generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.

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Oil Drilling RigsInvestors in certain oil and gas limited partnerships offered and underwritten by David Lerner Associates, Inc. (“David Lerner”) — including Energy 11, L.P. (“Energy 11”) and Energy Resources 12, L.P. (“ER12”) — may be able to recover investment losses through FINRA arbitration, in the event that the investor’s broker lacked a reasonable basis for the recommendation, or if the nature of the investment including its many risk components was misrepresented by the financial advisor.  Energy 11 is a Delaware limited partnership formed in 2013 “to acquire producing and non-producing oil and natural gas properties onshore in the United States and to develop those properties.”  Specifically, as of March 31, 2017, Energy 11 had made key acquisitions in certain Sanish Field Assets (for approx. $340.5 million) located in North Dakota in proximity to the Bakken Shale.

ER12 was formed in 2016 as a Delaware limited partnership, with essentially the same objective as Energy 11, namely to “acquire producing and non-producing oil and gas properties with development potential by third-party operators on-shore in the United States.”  On February 1, 2018, ER12 closed on the purchase of certain Bakken Assets, including a minority working interest in approximately 204 existing producing wells and approximately 547 future development locations, primarily in McKenzie, Dunn, McLean and Mountrail counties in North Dakota.

Structured as limited partnerships, both Energy 11 and ER12 carry significant risks that may not be adequately explained to retail investors in marketing pitches by financial advisors who may recommend these complex financial products.  To begin, both Energy 11 and ER12 were only recently formed (2013 and 2016, respectively) and have very little operating history.  Moreover, each limited partnership is helmed by a CEO and CFO, Glade Knight and David McKenney, whose primary experience is in the real estate industry, not the oil and gas arena.  Oil and gas investments by their very nature are extremely volatile as they are subject to the boom and bust cycles which characterize the oil market.

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An options trading program marketed as a “Yield Enhancement” strategy to brokerage customers of UBS, reportedly including risk averse investors with substantial bond portfolios, has suffered a hard landing in November and December as the so-called “Iron Condor” index options spread-based scheme has reportedly delivered losses in excess of 20% of the capital committed.

Iron Condor Basics
UBS’s Yield Enhancement Strategy (“YES”) reportedly has over $5 billion under management and over 1,200 investors.  Investors in YES must agree to commit capital to the program, a so-called “mandate,” which may take the form of securities or cash.  The committed capital provides collateral for options spread trading in each investor’s account.  Although marketed to bond investors, the bonds held by each investor have nothing to do with the YES strategy other than serving as collateral for the options trades.  Some investors pledge other securities or cash as collateral for the YES program.

The YES strategy entails generating option premium income through the strategic sale and purchase of SPX (S&P 500) index option spreads.  This strategy, which is also sometimes referred to as an “Iron Condor” spread, involves writing two vertical options spreads – a bear call spread and a bull put spread.  Thus, this strategy entails four different options contracts, each with the same expiration date and differing exercise prices.  The “Iron Condor” strategy involves writing both a short put and a short call against the SPX, with these naked, or uncovered, options are designed to generate income for the investor via the receipt of premium.  Further, the “Iron Condor” strategy involves writing both a long put and long call against the SPX, with these trades, or options legs, designed to mitigate the risk associated with the uncovered options positions.

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