Articles Tagged with broker misconduct

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Piggybank in a CageOn November 9, 2018, GPB Capital Holdings, LLC (“GPB”) notified certain broker-dealers who had been selling investments in its various funds that GPB’s auditor, Crowe LLP, elected to resign.  As reported, GPB’s CEO, David Gentile, stated that the resignation purportedly came about “[d]ue to perceived risks that Crowe determined fell outside of their internal risk tolerance parameters.”  GPB has since engaged EisnerAmper LLP to provide it with audit services moving forward.

As we recently discussed, GPB has come under considerable scrutiny of late.  In August 2018, the sponsor of various private placement investment offerings including GPB Automotive Portfolio and GPB Holdings II, announced that it was not accepting any new investor capital, and furthermore, was suspending any redemptions of investor funds.  This announcement followed GPB’s April 2018 failure to produce audited financial statements for its two largest aforementioned funds.  By September 2018, securities regulators in Massachusetts disclosed that they had commenced an investigation into the sales practices of some 63 independent broker-dealers who have reportedly offered private placement investments in various GPB funds.  To name a few, these broker-dealers include: HighTower Securities, Advisor Group’s four independent broker-dealers – FSC Securities, SagePoint Financial Services, Woodbury Financial Services, and Royal Alliance Associates, in addition to Ladenburg Thalmann’s Triad Advisors.

The various GPB private placement offerings include:

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financial charts and stockbrokerDespite FS Investment Corporation II’s (“FSIC II”, or the “Company”) providing an estimated value of $8.31 a share, recent publicly-available information concerning pricing suggests a lower value, with secondary market transactions reportedly at prices of between $7.20 and $7.31 a share and a third-party tender offer being completed at $5.15 a share.

FSIC II is a publicly registered, non-traded business development company (“BDC”) that may have been marketed to some public investors as a relatively safe investment offering a steady yield of income.   However, as a non-traded BDC, the Company carries with it considerable risks.  Accordingly, in those instances where retail investors were solicited by a financial advisor to invest in FSIC II without first being fully informed of the risks associated with the investment, including the potential for principal losses, high upfront fees and commissions, and the illiquid market in the Company’s shares, investors seeking to recoup their losses may have legal claims against stockbrokers or investment advisory firms who sold them the shares.

Organized under Maryland law in July 2011, FSIC II commenced its operations on June 18, 2012 and is structured as a publicly registered, non-traded BDC under the Investment Company Act of 1940 (’40 Act).  Publicly-available information suggests numerous retail investors participated in FSIC II’s initial offering, priced at approximately $10 per share.  FSIC II is managed by FS Investments (formerly known as Franklin Square), a Philadelphia-based alternative asset management firm sponsoring a number of non-traded BDCs.  As of June 30, 2018, FSIC II reported assets under management of approximately $4.77 billion.

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investing in real estate through a limited partnershipRecent pricing on shares of Cole Credit Property Trust V, Inc. (“CCPT V” or, the “Company”) – at reported prices of $17.25-$17.75 – suggests that investors who chose to sell their shares on a limited secondary market may have sustained considerable losses of up to 30% (excluding any distributions received to date).  Formed in December 2012, CCPT V is structured as a Maryland corporation.  As a publicly registered, non-traded real estate investment trust (“REIT”), CCPT V is focused on the business of acquiring and operating “a diversified portfolio of retail and other income-producing commercial properties.”  As of October 31, 2018, the Company’s real estate portfolio consisted of 141 properties across 33 states, with portfolio tenants spanning some 26 industry sectors.

The shares of CCPT V, a publicly registered, non-traded REIT, were offered to retail investors in connection with CCPT V’s initial offering, which was priced at $25 per share.  The Company launched its initial offer in March 2014, and as of the second quarter of 2018, had raised $434 million in investor equity through the issuance of common stock.

Some retail investors may have been steered into an investment in CCPT V by a financial advisor, without first being fully informed of the risks associated with investing in non-traded REITs.  For example, one initial risk that is often overlooked concerns a non-traded REIT’s characteristic structure as a blind pool.  In the case of CCPT V, its blind pool offering means that not only were shares issued to public investors for a REIT lacking any previous operating history, but moreover, CCPT V did not immediately identify any of the properties that it intended to purchase.

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BuildingHeadquartered in Newport Beach, CA, KBS Real Estate Investment Trust II, Inc. (“KBS II”) was formed as a Maryland REIT in July 2007.  Pursuant to its public offering, KBS II offered 280 million shares of common stock, of which 200 million shares were registered in its primary offering, and an additional 80 million common shares were registered under the non-traded REIT’s dividend reinvestment plan.  KBS II’s initial offering closed on December 31, 2010, with 182,681,633 shares sold, thus raising gross offering proceeds of $1.8 billion.

Many KBS II investors may have been steered into this complex investment by a financial advisor or stockbroker.  Unfortunately, KBS II investors may have been uninformed as to the illiquid nature of their investment (as a non-traded REIT, KBS II shares do not trade on a national securities exchange), and now have limited options if they seek liquidity on their investment.

In January 2016, KBS II’s board of directors formed a Special Committee for the purpose of exploring “the availability of strategic alternatives.”  Subsequently, the Special Committee determined that it was in the best interest of KBS II stockholders to market some of the non-traded REIT’s assets, and depending on the scope of the asset sales, “thereafter adopt a plan of liquidation that would involve the sale” of remaining KBS II assets.

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Money in WastebasketAs recently reported, the Massachusetts Securities Division (the “Division”) has commenced an investigation into the sales practices of some 63 independent broker-dealers who offered private placements sponsored by alternative asset manager GPB Capital Holdings, LLC (“GPB”).  Specifically, the Division has intimated that it began an investigation into GPB following a recent tip concerning the firm’s sales practices which allegedly occurred not long after GPB announced that it was temporarily halting any new capital raising efforts, as well as suspending any redemptions.

According to the Division’s head, Mr. William Galvin, the investigation is in its “very nascent stages.”  At this time, Massachusetts securities regulators have requested information about GPB from more than 60 broker-dealers, including HighTower Securities, Advisor Group’s four independent broker-dealers, as well as Ladenburg Thalmann’s Triad Advisors.

In August 2018, GPB – the sponsor of certain limited partnership offerings including GPB Automotive Portfolio and GPB Holdings II – announced that it was not accepting any new capital.  According to filings with the SEC, sales of the two aforementioned GPB private placements allegedly netted the broker-dealers marketing these investment products some $100 million in commissions, at a rate of about 8%, since 2013.

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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 whirlpoolAs recently reported, former financial advisor Hector Anthony May (CRD# 323779) was recently discharged from employment by Securities America, Inc. (“Securities America”) (CRD# 10205) on or about March 9, 2018.  Mr. May’s termination by Securities America, which is Ladenburg Thalman’s largest subsidiary and the tenth largest independent broker-dealer in the nation, occurred the day after the U.S. Department of Justice disclosed an investigation into a suspected felony concerning Mr. May’s business activities as a New City, New York financial advisor.  Specifically, allegations have been raised suggesting that Mr. May bilked his clients out of millions of dollars through the use of phony account statements and purported offers to invest in “tax-free corporate bonds.”

Hector May, 77 years of age, is a well-known figure in Rockland County, New York, having been politically active and engaged in the local business community for the past several decades.  Following the 2009 arrest of a Peral River hedge-fund operator charged with running a $150 million Ponzi scheme, Mr. May issued the following warning to investors: “I have a lot of empathy for the people who got hurt, but before you invest a million dollars, do your due diligence.  Otherwise, it’s like going to get a heart operation and you don’t even know if he’s a doctor.”

According to publicly available information through FINRA BrokerCheck, Mr. May was a long-time financial advisor, having first entered the securities industry in 1973.  Most recently, Mr. May worked as an independent advisor on behalf of Securities America, from 1994 until his March 2018 termination.  Mr. May’s financial planning business was conducted through his own Registered Investment Advisory (RIA) firm called Executive Compensation Planners, Inc. (“ECPI”).  Upon information and belief, Mr. May’s ECPI clientele included investors in the following states: New York, New Jersey, Connecticut, Pennsylvania, Maryland, Virginia, North Carolina, and Florida.  Mr. May’s firm, ECPI, was formed as a New York corporation on December 27, 1982.

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broker misappropriating client moneyOn May 30, 2018, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Mr. Steven Pagartanis, alleging that the East Setauket, NY stockbroker purportedly “[d]efrauded at least nine retail investors of approximately $8 million by soliciting and selling them securities using false and misleading statements from 2013 to at least February 2018 (the ‘Relevant Period’).”  During the Relevant Period, Mr. Pagartanis was affiliated with Cadaret, Grant & Co., Inc. (“Cadaret”) (CRD# 10641) from 2012 – 2017 and, thereafter, with Lombard Securities Incorporated (CRD# 27954) (“Lombard”).

As alleged by the SEC in its Complaint filed in federal court in the Eastern District of New York (SEC v Pagartanis Complaint), Mr. Pagartanis purportedly solicited certain of his customers — many of them retirees who relied upon his advice and investment recommendations — to invest in what was touted as a safe and conservative investment “[w]ith a fixed percentage return, generally between 4.5 and 8 percent annually.”  Specifically, the SEC alleged that Mr. Pagartanis informed at least five investors that they were investing in the common stock of Genesis Land Development Co. (“GDC”), a Canadian real estate firm listed on the Toronto Stock Exchange.  According to the SEC’s Complaint, in actuality the investment capital raised by Mr. Pagartanis was allegedly funneled to an LLC sharing the name Genesis, for which Pagartanis was the sole member and owner of the LLC.

The SEC has alleged that Mr. Pagartanis conducted a fraudulent scheme, under which he purportedly “[t]ransferred the money raised to his personal bank account, to other entities he controlled, and used around $1.8 million to make monthly interest payments to his customers.”  In typical Ponzi-like fashion, the scheme reportedly collapsed in early 2018 when Mr. Pagartanis failed to pay investors their monthly interest payments.

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Money MazeBased upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments.  In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions.  Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.

In January 2017, FINRA issued the following guidance with respect to investments in non-traded NCIs:

“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”

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financial charts and stockbrokerOn May 1, 2018, FINRA Department of Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Laidlaw & Company (UK) LTD. (“Laidlaw”) (BD# 119037).  Without admitting or denying any wrongdoing — Laidlaw consented to a public censure by FINRA, the imposition of a $25,000 fine, as well as agreeing to furnish FINRA with a written certification that Laidlaw’s “[s]ystems, policies and procedures with respect to each of the areas and activities cited in this AWC are reasonably designed to achieve compliance with applicable securities laws, regulations and rules.”

In connection with its investigation surrounding the matter, FINRA Enforcement alleged that “From April 2013 through December 2015… Laidlaw failed to establish and maintain a supervisory system and written supervisory procedures (“WSPs”) reasonably designed to ensure that” Laidlaw registered “representatives’ recommendations of leveraged and inverse exchange traded funds (“Non-Traditional ETFs”) complied with applicable securities laws and NASD and FINRA Rules.”

Non-Traditional ETFs are extremely complicated and risky financial products.  Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day).  Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA through previous regulatory guidance: