Articles Tagged with broker misconduct

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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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Oil Drilling RigsIf your financial advisor recommended an investment in All American Oil & Gas (“AAOG”) stock, limited partnership units, or high yield (“junk”) bonds, you may be able to recover losses sustained through FINRA arbitration, in the event your broker lacked a reasonable basis for the recommendation, or if your financial advisor failed to disclose the many risks associated with an investment in AAOG.  Headquartered in San Antonio, TX, AAOG is a privately held oil and gas producer that is the parent company of subsidiaries Western Power & Steam, Inc. (“WPS”) and Kern River Holding Inc. (“KRH”), an upstream exploration and production outfit with approximately 124 producing wells in the Kern River Oil Field.  Together, AAOG, WPS and KRH are referred to as the Company.

On November 12, 2018, the Company filed for Chapter 11 bankruptcy in U.S. District Court in the Western District of Texas, citing “an ongoing dispute with its lenders.”  As of the date of filing its petition, the Company has a total of $141,942,197 in debt obligations.  According to the bankruptcy petition, in a number of instances KRH is the borrower on the Company’s loan facilities, as it requires regular ongoing cash flows to maintain its exploration and production activities.

With U.S. crude oil now trading below $50 per barrel (in 2014 oil was trading around $100, and as recently as September 2018 was hovering around $80 per barrel), many oil and gas companies may now be encountering financial distress after leveraging their balance sheets in order to fund costly exploration, drilling and related operations.  Predictably, this overleveraging has placed some oil and gas companies in a precarious financial position, particularly those operating in the capital-intensive and risky upstream sector of the oil and gas market.

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Money WhirlpoolAs recently reported, both the SEC and FINRA have commenced their own investigations into GPB Capital Holdings, LLC (“GPB”).  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.  These investigations by federal regulators come on the heels of Massachusetts securities regulators announcing in September 2018 their own investigation into GPB, as well as the sales practices of more than 60 independent broker-dealers who reportedly offered private placement investments in various GPB funds to their clientele.

GPB has raised approximately $1.8 billion in investor funds across its various private placement offerings, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.  Private placement investments are complex and fraught with risk.  To begin, private placements are often sold under a high fee and commission structure.  Reportedly, one brokerage executive has indicated that the sales loads for GPB private placements were 12%, including a 10% commission to the broker and his or her broker-dealer, as well as a 2% fee for offering and organization costs.  Such high fees and expenses act as an immediate drag on investment performance.

Further, private placement investments carry a high degree of risk due to their nature as unregistered securities offerings.  Unlike stocks that are publicly registered, and therefore, must meet stringent registration and reporting requirement as set forth by the SEC, private placements do not have the same regulatory oversight.  Accordingly, private placements are typically sold through what is known as a “Reg D” offering.  Unfortunately, investing through a Reg D offering is risky because investors are usually provided with very little in the way of information.  For example, private placement investors may be presented with unaudited financials or overly optimistic growth forecasts, or in some instances, with a due diligence report that was prepared by a third-party firm hired by the sponsor of the investment itself.

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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.