Investor Lawyers Blog

Securities Fraud: Ex-Broker Jerry McCutchen Under Investigation for REIT Sales, Hedge Fund Manager Must Pay $18M to SEC, and NASAA Steps Up Fight Against Elder Financial Fraud

Published on: February 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Broker Is Subject of Numerous Securities Claims
If you are an investor who sustained losses after purchased real estate investments trusts with the help of former broker Jerry McCutchen, you may have grounds for a securities claim. According to the Financial Industry Regulatory Authority’s BrokerCheck Report, McCutchen is accused of making unsuitable investment recommendations and he has been the subject of over a dozen broker fraud claims alleging negligence, misrepresentations, and other claims.

In one case, McCutchen, while registered with Berthel Fisher & Company Financial Services, Inc., is accused of placing a couple’s retirement funds in speculative, illiquid, alternative investments that he misrepresented as safe investments in line with the husband and wife’s investment goal to keep their money safe. In reality the Tier REIT, the Icon Leasing Fund Twelve LLC, and others, did not have proper diversity or allocation and were not suitable for the couple.

McCutchen is not registered with any firm at this time nor is he a licensed broker at the moment. He was registered with Berthel Fisher & Co., Bay City Securities, Next Financial Group, First Funds Inc., FSC Securities Corp, Central Brokerage Services, Commonwealth Equity Services, MML Investors, Proequities Inc., and Walnut Street Securities.

NY Hedge Fund Manager Ordered to Pay $18M
Moazzam “Mark” Malik, and his American Bridge Investment Group LLC are facing SEC charges accusing them of bilking 19 clients of over $1M through the sale of limited partnership interests in a fake hedge fund that was run under different names. The SEC said that Malik claimed that the fund held $100M when that amount was never more than about $90,000. Now, the regulator is ordering Malik to pay $18M.
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Aequitas Lays Off More Employees in the Wake of Faulty Subprime Bets

Published on: February 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In the second round of layoffs, Aequitas Capital Management announced that it is letting of even more workers in the wake of financial problems. A week after disclosing that it would lay off about a third of its workers, the investment firm told employees that almost everyone else would have to go. Workers were given 60 days notice. A spokesperson for Aequitas explained that the Oregon-based investment firm was modifying its strategy and changing its business model.

The firm which manages investments for rich individual investors appears to be having serious cash flow issues. This is a definite about-face for a company that once held $500 million in assets under management. Not only was it a challenge for Aequitas to make payroll during the first month of this year, but also the firm angered investor clients last year when it told them that it couldn’t meet scheduled payouts because of liquidity issues. Company officials claimed that the delays were unexpected because of “incoming investments” and “timing mismatches involving cash flow.”

Over the last few years, the investment firm has become more focused on subprime credit to purchase consumer healthcare debt, student debt, and motorcycle loans. In total, investors have bet close to $600M on Aequitas’ subprime lending strategies.

Aequitas was also connected Corinthian Colleges Inc., which has been accused by federal regulators of using deceptive and predatory tactics to get students to enroll and borrow money for tuition. According to The Oregonian, a firm affiliate purchased over $500M in Corinthian student loans at a reduced rate and charged the college chains millions of dollars in fees for its assistance. The company had set up the Campus Student Funding LLC to purchase the debt from Corinthian.

Bondholder Group with $17.3B in Puerto Rico Debt Proposes Debt Restructuring Plan

Published on: February 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Puerto Rico Sales Tax Financing Corporation (COFINA) has submitted a plan to restructure the financially beleaguered island’s debt. COFINA, which is comprised of investors who possess debt backed by sales-tax revenues, has issued $17.3 billion in Puerto Rico debt-$7.5 billion in senior debt and $9.7 billion in second lien debt.

COFINA’s proposal is in response to another plan submitted by the island’s development bank earlier this month. With its proposed plan, COFINA is asking Puerto Rico to suspend repayments to members of the bondholder group until 2018, when payments would steadily grow to at least $600 million by 2021.

In exchange for the delayed payment, the bondholders are asking for the preservation of the notes’ tax-backed guarantee. Already, COFINA’s payments due this fiscal year have been put aside with its bond trustee.

The bondholder’s group includes creditors such as Whitebox Advisors, Metropolitan Life Insurance and Golden Tree Asset Management. The bondholder group believes that delaying repayments for two years should give the island time to recover financially.

Judge Refuses to Overturn Conviction of UK Traders for Rigging Libor

Published on: February 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jed Rakoff in New York has upheld the guilty convictions of former Rabobank (RABO) traders Anthony Conti and Anthony Allen for wire fraud and conspiracy. They are accused of involvement in the scam to rig the yen Libor rates and the U.S. dollar to benefit Rabobank’s trading positions. In 2014, the Dutch lender settled European and US probes into Libor rigging for $1B.

Allen and Conti, who face up to ten years behind bars, are claiming that they didn’t receive a fair trial because Paul Robson, the federal government’s star witness, read 300 pages of statements that the two British citizens were required to give during a parallel probe in the U.K.

Chesapeake Energy Corp. Stops Investor Payouts After Its Shares Plummets

Published on: February 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. natural gas driller Chesapeake Energy Corp. (CYC) has been halting investor payouts and cutting jobs to keep its cash flow from drying up. Now, with its shares dropping 51% following reports by Debtwire that the company has hired restructuring attorneys to help deal with its $9.8 billion debt, investors may have a reason to worry. During the first hour of trading alone on Monday, $838M in market value was eliminated.

Chesapeake has a debt load that is eight times larger than its market value. Even though it pumps more gas in the U.S. than any driller besides Exxon Mobil Corp., Chesapeake has $1.3B in debts that are scheduled to mature by the end of next year.

Last month, Standard & Poor’s reduced Chesapeake’s credit rating to CCC+, while issuing a negative outlook that gas and oil prices would stay on the weak end. S & P declared the natural gas driller’s debt leverage “unsustainable.

Investors are not the only ones at risk now that Chesapeake is in trouble. Oil and gas pipeline companies, many of which are master limited partnerships, with contracts worth billions of dollars could also take a hit. Companies with contracts with Chesapeake include Kinder Morgan Inc., Williams Companies Inc., Marathon Petroleum Corp’s unit MPLX LP, Columbia Pipeline Partners LP, and Spectra Energy Partners LP. Reuters reports that according to federal filings, Chesapeake said it is on the line for about $2B a year for pipeline space run by MLPs.
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UK Regulator Fines Ex-JPMorgan Executive $1.1 Over London Whale Debacle

Published on: February 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The UK’s Financial Conduct Authority is fining former JPMorgan Chase (JPM) executive Achilles Macris approximately $1.1M for failing to cooperate and communicate properly with regulators during the agency probe into the London Whale fiasco. Although Macris is now agreeing to settle the securities charges, he continues to defend himself. He insists that he stayed “above and beyond any reasonable” transparency standards and that he is only agreeing to resolve this case because the F.C.A. had accepted his contention that he did not mislead anyone on purpose. The FCA would not comment on Macris’ statements about the settlement.

The former JPMorgan executive was in charge of the firm’s chief investment office in London, which was supposed to invest funds for the bank and help offset possible losses. Unfortunately, a bad bet made by the unit on credit derivatives cost the bank $6.2B.

Texas Hedge Fund Manager Accuses United Development Funding IV of Ponzi Scam

Published on: February 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

J. Kyle Bass, the hedge fund manager who runs the Dallas-based Hayman Capital, has set up a website accusing Texas-based REIT United Development Funding IV of running a Ponzi-like real estate scam. On the site, Bass published a letter to readers, claiming that his firm had conducted research and found that the nontraded real estate investment trust displayed characteristics in line with a billion-dollar Ponzi scheme.

Bass contends that UDF used money from a public affiliate to rescue its first fund. According to Business Insider, Bass also claims that UDF management has been distorting its poor track record and the financial state of its affiliates going as far back as the financial crisis. He alleges that UDF has been taking advantage of retail investors and using UDF- controlled entities and real estate backed loans to conceal the fact that new investors money is b used to pay existing investors.
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FINRA Cases: Firms To Pay $1.2M Over UIT Sales, Broker Charged for Lying to a Native American Tribe, and Morgan Stanley Ordered to Pay Clients $825K

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brokerage Firms to Pay $1.2M for Not Applying UIT Discounts
The Financial Industry Regulatory Authority has charged Next Financial Group Inc., Stephens Inc., and Key Investment Services with failing to grant sales charge discounts when certain customers that were buying unit investment trusts were eligible for the reduced rates. The three broker-dealers are also face charges for inadequate supervision. The self-regulatory organization is ordering the three firms to pay $1.2M in restitution and fines. The FINRA settlements stated that Stephens did not give the discounts from 1/10 to 5/15 and the other two firms did not give them from 5/09 to 4/14.

Unit Investment Trusts
A UIT is a fund that combines a fixed portfolio of income-producing securities that are bought and held to maturity and an actively managed fund. These funds usually issue securities, also known as units that are redeemable-meaning that the UIT will repurchase the units from an investor at the approximate net asset value.

FINRA has been looking into whether firms are giving clients that are entitled to purchase discounts the reduced rates. Last year, the SRO ordered a number of firms to pay $6.7M in restitutions and fines for not giving discounts to clients when selling them UITs.

Broker Accused of Fraud, Targeting Native American Tribe
Broker Gopi Krishna Vungarala is facing FINRA charges for lying to a Native American Tribe about the $11M in commissions they paid him when he sold the tribe $190M of business development companies (BDCs) and nontraded REITS. The SRO said that from 6/11 to 1/15 Vungarala, who was the tribe’s treasury investment manager and registered representative, lied to the tribe about investments he recommended to them.
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SEC News: Brokerage Firm Fined $1M to Resolve Anti-Money Laundering Violations, Ocwen Financial to Pay $2M Over Misstated Financial Results, and Software Company is Accused of FCPA Violations

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

E.S. Financial Accused of Anti-Money Laundering Violations
The Securities and Exchange Commission is charging E.S. Financial Services, now called Brickell Global Markets, with violating anti-money laundering rules. To resolve the charges, the Miami-based firm will pay a $1M penalty.

According to the regulator, on two occasions E.S. Financial did not provide the needed books and records to identify foreign costumers that they were soliciting and providing with investment advice. U.S. law mandates that financial institutions keep a customer identification program (CIP) that is adequate enough to make sure that the institutions know who their customers are so that don’t inadvertently get involved in terrorist financing or money laundering.

An SEC probe found that the firm’s CIP did not procure and keep up documentation to confirm the identities of certain foreign customers who used a brokerage account set up by a Central Bank affiliate. E.S. Financial has consented to hire an independent monitor to assess its CIP policies and anti-money laundering procedures, policies, and practices.

Ocwen Settles SEC Charges for $2M
Ocwen Financial Corp. will settle civil charges accusing the firm of misstating financial results via the use of an undisclosed, flawed methodology to value complex mortgage assets. The SEC found that Ocwen inaccurately disclosed to investors that assets were valued independently at fair value under GAAP when the firm had actually used valuation conducted by a related party that bought the rights to service certain mortgages that were still a financial liability in the company’s accounting.

The SEC that Ocwen’s audit committee did not examine the methodology with an outside auditor or company management and the valuation that occurred strayed from fair value measures. Because of this, Ocwen misstated its net income for four quarters.

SEC Files Fraud Charges Against American Growth Funding II

Published on: February 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is pursuing a securities fraud case against American Growth Funding II, LLC. The regulator contends that the company, which raises money for business loans, lied to investors that bought high-yield securities. Also subject to charges is brokerage firm Portfolio Advisors Alliance, Ralph Johnson, Kerri Wasserman, and Howard Allen III.

In its complaint, the regulator said that AGF II sold about $8.6M AGF II units to at least 85 investors through Portfolio Advisers Alliance. The sales occurred in a private placement between 3/11 and 12/13.

However, investors were purportedly not told that AGF II’s principal asset had significantly dropped in value, which lessened the chances that investors would be repaid in full let alone make the12% interest yearly they were promised.

In private placement memoranda that were put out in ’11 and ’12, Johnson is accused of misrepresenting that the lending company’s financial statements had been audited and would continue to be audited periodically. The statements for ’11 and ’12 were not audited until 2014.

The SEC believes that Johnson, who played a central part in preparing the private placement memoranda, knew and acted in reckless disregard and was aware that misrepresentations were made to investors. He also is accused of causing investors to get an email in 2013 that contained false statements noting that an accounting firm was working on an audit, which was not, in fact, the case, and issuing monthly statements that concealed the company’s financial woes. Investors were not made aware that because most of AGF II’s loans were likely uncollectible, the firm wouldn’t be able to pay the account balances that were noted in the statements.
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