Investor Lawyers Blog

Fidelity’s National Financial Services Orders GPB Private Placements Removed

Published on: July 25, 2019 | by Shepherd Smith Edwards & Kantas, LLP

National Financial Services, which is Fidelity Investments’ clearing and custody unit, has given its brokerage firm clients 90 days to get rid of all GPB Capital Holdings private placements from its platform. The announcement means that investors and their financial advisers will have to move their GPB fund assets to a different custodial firm. Considering that there are a lot of broker-dealers who use National Financial as their primary custodial firm and to clear the investments of clients, the decision is likely to impact a lot of parties.

A main reason for the edict is that, reportedly, neither Fidelity nor National Financial are clear about the actual value of the GPB private placements. Third-party vendors typically provide this information. According to InvestmentNews, Fidelity spokesperson Nicole Abbott said that at the moment GPB is not meeting her company’s policy regarding alternative investments.

In Trouble with Investors and Regulators

Nomura Settles Two MBS Fraud Cases for $25M

Published on: July 22, 2019 | by Shepherd Smith Edwards & Kantas, LLP

In two mortgage-backed securities settlements reached with the US Securities and Exchange Commission (SEC), Nomura Securities International will collectively pay customers about $25M. The enforcement actions involve residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), respectively.

According to the SEC, Nomura failed to properly supervise its bond traders, who are accused of making statements that were false and misleading to customers by trying to get them to buy RMBS and CMBS. This purportedly included providing misleading information about:

- How much Nomura had paid for the securities.

GPB Capital Funds Continue To Plunge In Value

Published on: July 19, 2019 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, alternative asset management company GPB Capital Holdings has notified investors and custodians that its different private placement funds have recently suffered 25-73% losses in value. It’s largest funds, the GPB Automotive Portfolio and GPB Holdings II—together, these two raised $1.27B from investors—have experienced 38% and 25.4% drops, respectively. Such significant losses are clearly not good for investors, who, collectively, have invested about $1.8B in all of the GPB funds.

These private placement funds are invested mostly in waste management and car dealerships and they, along with GPB Capital Holdings, have come under intense scrutiny by both the government and investors. Set up in 2013, the company last year suspended all redemptions involving its funds. An auditing company retained by GPB Capital stepped down in November not long after questions regarding the company’s accounting practices and sales methods arose.

About 60 broker-dealers have sold GPB funds to investors. Advisers usually make a substantial commission for selling the private placements—a typically higher rate than what they’d get for selling mutual funds.

AR Capital, Nick Schorsch, and Brian Block Settle REIT Fraud Case for $60M

Published on: July 18, 2019 | by Shepherd Smith Edwards & Kantas, LLP

A $60M settlement has been reached between The US Securities and Exchange Commission (SEC) and AR Capital, the real estate investment trust (REIT) manager’s founder Nicholas Schorsch, and American Realty Capital Properties Inc. (ARCP) ex-CFO Brian Block. The three of them are accused of “wrongfully obtaining” millions of dollars related to two mergers involving REITS that AR Capital managed and sponsored.

According to the regulator’s complaint, between the latter part of 2012 and the beginning of 2014, AR Capital took steps so that ARCP, a publicly traded REIT, would merge with American Realty Capital Trust III and American Realty Capital Trust IV, two non-traded REITS that were publicly held. Schorsch was the principal owner and CEO of all three REITs during the time of the merger, while Block was the CFO and a minority shareholder.

The Commission contends that without their board’s permission, the REIT manager, Schorsch, and Block “inflated an incentive fee” during the mergers, which made it possible for them to get another $2.92M in ARCP operating partnership units as a portion of their “incentive-based” compensation.” The SEC is also accusing the three defendants of “wrongfully obtaining” at least $7.2M in charges that were not supported from the sale and asset purchase agreements that were related to the mergers.

Aequitas Ponzi Fraud Case Results in $234.6M Settlement

Published on: July 16, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Investors who lost money after investing in Aequitas Management LLC, which is accused of running a $350M Ponzi scam, have arrived at a $234M settlement in their fraud case against EisnerAmp LLP, Deloitte & Touche LLP, TD Ameritrade, Duff & Phelps, Sidley Austin LLP, Integrity Bank and Trust of Colorado, and Tonkon Torp. The defendants are accused of playing a part in the plaintiff’s losses because of their purported involvement in the sale of Aequitas securities.

More than 1,500 investors collectively invested over $350M in Aequitas securities while thinking that they were backing trade receivables in healthcare, education, transportation, and other areas. This investor fraud case, Ciuffitelli et al v. Deloitte & Touche LLP et al, was brought as a proposed class action and filed over three years ago by claimants in Oregon and California.

Based on a complaint brought also in 2016 by the US Securities and Exchange Commission (SEC), Aequitas is accused of misleading investors about the extent their money became involved in for-profit education company Corinthian Colleges, which filed for bankruptcy in 2015. The regulator accused Aequitas of becoming a Ponzi scam after Corinthian failed, with the company continuing to sell securities for the purposes of paying back earlier investors and to support its executives’ expensive lifestyles.

CYES Strategy Investments Prove Too Risky for Investors

Published on: July 15, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Over the last several months, it has come to light that brokers from some of the largest firms on Wall Street firms sold Collateral Yield Investment Strategies (CYES Strategies) that may not have been suitable for many investors, causing them to suffer devastating losses. Offered through registered investment adviser Harvest Volatility Management, LLC, the CYES Strategy is a type of Yield Investment Strategy (YES Strategy), only even more risky and complex.

YES Strategy Investments

Reportedly, UBS (UBS), Credit Suisse (CS), Bank of America’s (BAC) Merrill Lynch, Morgan Stanley (MS), and other brokerage firms brokers sold YES Strategies to many wealthy investors, touting the approach as safe way to increase returns on conservative portfolios. These were supposed to be small returns at a low risk, using a strategic approach that involved the purchasing and selling of SPX index options spreads.

Kristofor R. Behn, Fieldstone Financial Management Face Fraud Charges

Published on: July 12, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Kristofor R. Behn and his Fieldstone Financial Management are now facing US Securities and Exchange Commission (SEC) charges accusing them of defrauding retail investors. Behn and the firm, which was a registered investment adviser until March, recommended that their clients invest in Aequitas Management LLC-issued securities. In 2016, Aequitas and four of its affiliates were accused of defrauding over 1500 investors of around $350M–although that figure could be as high as around $600M.

The Commission contends that between 2014 and early 2016, Behn and Fieldstone advised about 40 individuals to invest over $7M in Aequitas securities, while failing to disclose that the company had given Fieldstone a $2M credit line and a $1.5M loan. Both were reasons for him and his firm to recommend the investments to clients seeing as, per the terms:

If $25M of the assets of Fieldstone’s clients went into Aequitas securities, then Behn could pay back the loan by “converting the debt into an equity interest” in Fieldstone, with the interest belonging to Aequitas.

Summit to Pay Over $880K for Excessive Trading, Inadequate Supervision

Published on: July 11, 2019 | by Shepherd Smith Edwards & Kantas, LLP

For alleged supervisory failures and excessive trading by one of its former brokers, Summit Brokerage Services, Inc. has been ordered to pay over $880K– $558K in restitution with interest to customers that were harmed, as well as a $325K fine to the Financial Industry Regulatory Authority (FINRA). The broker-dealer consented to the entry of the findings but did not admit to or deny wrongdoing.

According to the SRO, from 1/2012 to 3/2017, Summit neglected to review certain automated alerts for the trading activities of its registered representatives, of which there are more than 700. Because of this, one of its brokers, was able to excessively trade in accounts belonging to 14 clients, including 533 trades on behalf of one customer. This compelled her to pay over $171K in commissions.

The broker’s excessive trading resulted in 150 alerts for this type of activity, none of which were purportedly reviewed by Summit. FINRA has since barred the former registered rep.

Former LPL Broker and Ex-Convict Accused in $3.3M Investor Fraud

Published on: July 10, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Ex-target=”_blank” rel=”noopener noreferrer”>LPL Financial (LPLA) broker, Kerry L. Hoffman, is now facing fraud charges brought by the US Securities and Exchange Commission (SEC). Hoffman is accused of fraudulently selling $3.3M of unregistered securities, along with childhood friend Thomas V. Conwell, who is also a defendant in the civil case. The latter was barred by the regulator from the industry in 2000 after a separate $800K fraud that harmed 19 investors. Conwell pleaded guilty to criminal fraud charges against him and was sentenced to time in prison.

According to the SEC’s current complaint, the two men defrauded at least 46 investors in a dozen states by selling GT Media, Inc. securities to them. Hoffman was a registered LPL Financial broker during most of the time of the fraud, which allegedly took place between July 2015 and July 2018. He resigned from the firm in the wake of allegations that he served as consultant to GT Media without getting LPL’s approval or notifying the firm about these outside activities. He also was accused of helping a number of LPL clients and his own family members to invest in the company.

Hoffman allegedly offered and sold $350K of GT Media convertible promissory notes and $500K of the company’s stock to five advisory clients, making $50K in commissions. The Commission is accusing him of soliciting some of his advisory clients to invest in the unregistered securities but without letting them know that he had a conflict of interest. Not only was GT Media paying him compensation, but also the company was paying back money he had let it using investors’ money.

Legend Securities to Pay Almost $967K to Investor

Published on: July 9, 2019 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) panel is ordering Legend Securities, CEO Anthony Fusco, and three of the firm’s former brokers to pay one investor $966,708 in damages. Legend Securities was expelled by the self-regulatory authority two years ago and is no longer in operation.

The claimant, Frederick Blake, alleged the following:

- Churning