Articles Posted in Alternative Investments

Stoltmann Law Offices represents investors that were sold high-risk structured products. FINRA, the federal securities industry regulator, fined J.P. Morgan $200,000 for “failing to reasonably supervise a broker who made unsuitable, unauthorized trades in his grandmother’s account with the firm,” according to thinkadvisor.com.

From March 2014 through March 2019, Evan Schottenstein, along with his brother, Avi Schottenstein, another broker at Morgan, “allegedly made the trades in question, which were largely in structured products, according to FINRA. During that period, Evan Schottenstein was responsible for his grandmother’s investment strategy and made all trade recommendations for her account, FINRA said. At the time, the grandmother was 88 years old, retired and widowed.

“Evan Schottenstein filled his grandmother’s account with structured products, exceeding his firm’s limits for such investments,” FINRA stated. “The firm used an ‘exception report’ that generated monthly alerts when structured products exceeded a 50% threshold for a client’s net account equity and a 15% threshold for a client’s liquid net worth,” FINRA noted.

Stoltmann Law Offices, P.C. is a Chicago-based securities and consumer protection law firm offering nationwide representation to investors and victims of fraud nationwide on a contingency fee basis.  Recently, we were contacted by an investor/client who was sold a basket of structured notes offered by RBC Capital. He’s a retired investor and believed what he was sold was suitable, offered a stable and fairly high interest rate, which was important because he is on a fixed income, and that the note had down-side protection.  He was made to believe these important facts because his trusted financial advisor pitched these products to him this way. In reality, the structured notes he was sold were speculative, extremely complicated, conflicted proprietary products.

The investment at issue is called the:

Auto-Callable Contingent Coupon Barrier Notes Linked to the Common Stock of Teladoc Health, Inc., Due July 3, 2024

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from getting fleeced in Ponzi schemes. All too often, financial advisors assign fancy names to “investments” that turn out to be swindles. The Securities and Exchange Commission (SEC) filed suit against Michael Mooney, Britt Wright, and Penny Flippen in connection with their participation in a Ponzi scheme that raised more than $110 million from approximately 400 investors.

The former representatives of Livingston Group Asset Management Company (doing business as Southport Capital), “recommended clients invest at least $62 million in `Horizon Private Equity III.’ Horizon was billed as a private fund controlled by John Woods, Southport’s former owner and manager.” In August 2021, the SEC charged Woods and Southport with multiple counts of securities fraud for operating Horizon as a Ponzi scheme, according to thediwire.com.

As with many, if not most, Ponzi schemes, the fake investments were marketed heavily to older clients, who thought they were legitimate. According to the SEC, “many of the defendants’ clients were elderly and inexperienced investors who communicated that they wanted safe investment opportunities for their assets, a large percentage of which were earmarked for retirement.”

Stoltmann Law Offices, P.C., is a Chicago-based investor rights law firm offering services nationwide to victims of investment fraud on a contingency fee basis. Our attorneys are currently investigating allegations raised against National Realty Investment Advisors LLC, a New Jersey-based real estate investment company. On June 7, 2022, NRIA filed for protection under Chapter 11 of the US Bankruptcy Code, Case No. 22-14539, in the Bankruptcy Court for the District of New Jersey. The court filings indicate that NRIA raised money from investors through dozens of private placement investments over several years through dozens of subsidiary-LLCs.  If you invested in one of these dozens of private placements, your investment is certainly at risk. If you were solicited by a financial advisor, investment advisor, accountant, or lawyer to invest in these private placements, you may have an actionable claim to recover your investment.

In 2021, an investigation was launched by the Securities and Exchange Commission, the Alabama Department of Securities, the New Jersey Securities Division, and the Illinois Securities Department into the working of NRIA and investor solicitations.  A whistleblower also filed a report with the SEC alleging NRIA was running a massive Ponzi scheme.  According to Barrons, the US Attorney’s office has also subpoenaed NRIA seeking testimony in front of a grand jury.  This article also points out that NRIA has over 2,000 investors holding $540 million in securities issued by NRIA and its myriad subsidiaries. In February 2021, a former employee of NRIA, Tom Salzano of NRIA was arrested by the FBI for using fake documents to try and extract money from a NRIA investor. Mr. Salzano has not been convicted and is presumed innocent.

When financial advisors or other professionals recommend private placement investments like those offered by NRIA, they have duties and obligations to their clients to fully vet the deals before the recommend them. It is likely that sufficient red flags existed about NRIA, most notably some of the outlandish representations made in commercials including on YouTube about its promised rates of return, that any professional recommending this investment could be liable to the investor for losses.

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses from alternative investments. Some brokers like to pitch investors on the idea of making a lot of money by investing in alternative investments, mostly because brokers get paid handsome commissions for selling them.  GPB Capital and more recently, GWG Holdings are examples of alternative investments that were pushed hard by brokerage firms, with terrible results. There is a sub-category of these investments called “liquid alternative”, which are complex and costly for clients.

FINRA, the U.S. securities industry regulator, recently issued a warning about liquid “alts,” which invest in assets “other than stocks and bonds — such as real estate, commodities and derivatives — to give retail investors exposure to alternative investments in a vehicle that can be traded daily. They are touted as a way to beat market returns but also can be risky and expensive.”

“While these funds may be appropriate for some investors,” the regulator’s warning stated, “FINRA has consistently emphasized the importance of member firms’ sales practice obligations for these and other products, especially when such products may carry additional risks for customers.” These products are inappropriate for investors unless their objective is speculation – plain and simple.

The securities attorneys at Chicago-based Stoltmann Law Offices are representing investors in FINRA arbitration actions against multiple brokerage firms that recommended GWG-L-bonds to their clients. Our investigation into GWG, which includes monitoring and being involved in the Chapter 11 bankruptcy, is focused on two issues: First, GWG L-Bonds were speculative, high risk, unrated debt instruments. One of the biggest issues with this bond program is, the bondholders were subordinate to hundreds of millions of dollars other debt.  The debt owed by GWG in these bonds are not the first priority to be paid back by the company on the “capital stack”.  These were very high risk investments, so unless that was made clear to you by your financial advisor, you may have a claim to pursue for misrepresentations and commissions and for recommending an unsuitable investment.  Either of these are actionable.

The other main issue here from the brokerage firm perspective is the failure to perform reasonable due diligence. Although 160 brokerage firms sold GWG Financial, this is actually a super-minority, roughly 5%, of all brokerage firms nationwide. In reality, very few firms approved GWG for sale to their customers.  GWG was allowed to borrow up to 90% of its listed assets. Its assets are almost all illiquid and subject to “fair valuation” which is an extremely dangerous financial situation for investors.  Big firms like Merrill Lynch and Morgan Stanley don’t go anywhere near unrated speculative bonds like this. But a lot of firms do because GWG paid brokers massive 8% commissions to sell these bonds which were the financial life-blood of GWG.  Even through the US government began investigating GWG in October 2020, and brokerage firms still continued to sell them.  As early as march 2020, GWG was reporting publicly about “several material weaknesses” with respect to the company’s accounting processes.  By 2020, there were more Red Flags about GWG than a Soviet May-Day parade and yet brokerage firms continues to sell it, and one reportedly BOOSTED sales.

It was reported this week that Centaurus Financial, with 640 brokers nationwide, actually increased the amount individual investors could invest in GWG from $100,000, to $150,000. Brokers went on the sales push to recommend their clients increase their investment in the GWG L-Bonds in April 2020, after GWG reported material issues with accounting and after it entered into a highly questionable transaction with the Beneficient Company, alleged now to have been securities fraud.

Stoltmann Law Offices is representing investors whose brokers or financial advisors sold them GWG Holdings, Inc. L Bonds. Brokerage firms, including but not limited to Aegis Capital, recommended this speculative private placement to clients, collecting up to 5% of the Bond’s market price as their commission. The L Bonds are high-yield life insurance bonds used to finance the purchase of life insurance on the secondary market. Any type of investment in the secondary life insurance market is an extremely risky investment, and these bonds certainly were not suitable for many, if any, clients. Given recent events, default on the L Bonds seems to be imminent, and may leave investors with a total loss of their investments. These investment losses may be recoverable from the financial advisors who sold the L Bonds as a result of their due diligence failures, and for making unsuitable recommendations.

According to their filings with the Securities and Exchange Commission (“SEC”), GWG has halted the sale of the L Bonds and failed to issue $10.35 million of interest payments and $3.25 million of principal payments to L Bond investors by the January 15, 2022 due date. If these payments are not made by the end of the 30-day grace period on February 14, 2022, GWG will be in default. Pursuant to GWG’s Amended and Restated Indenture, when in default, noteholders or trustees holding at least 25% of the aggregate outstanding principal amount of the L Bonds may elect to accelerate liquidation of the Bonds.

By halting the sale of the L Bonds, GWG has also cut-off a main source of its liquidity. If the “interest” payments that GWG was making on the L Bonds was actually paid from incoming principal from new investors, rather than revenue, then GWG will not be able to make interest payments any time soon. GWG is underwater based on its balance sheets.  While it has close to $1 billion in tangible assets, GWG has over $1.5 billion in outstanding L Bonds, plus $327.7 million in senior credit facilities. Based on these numbers, if liquidation of the L Bonds is accelerated, GWG will not have enough in assets to cover the liquidation.

Stoltmann Law Offices, P.C., a Chicago-based securities, investment, and consumer protection law firm offering representation on a contingency fee basis to investors and victims nationwide, is concerned about the slow drip of news coming out of Bermuda about the NorthStar Financial liquidation. Recently, investors received a letter from the NorthStar informing them about the appointment of  representatives for the various investor classes. These representatives would serve the function similar to a creditor’s committee in US bankruptcy court. These representatives would stand in the shoes of and represent the investors from each class of NorthStar investors. The Chief Judge overseeing the liquidation in Bermuda along with the group known as the “joint provisional liquidators” will ultimately choose the representatives.

Regardless of how this liquidation ultimately unfolds, investors need to realize they are looking at substantial losses on their annuities and insurance contracts. There does not appear to be assets sufficient to make investors whole, really, nowhere close to it.  As this liquidations process unfolds and crawls along through this process, investors hoping for a miracle, need to splash some cold water on their face and look to other options to recover their investment losses.

If you were sold your NorthStar Bermuda insurance or annuity contracts by a U.S.-based financial advisor, broker, or investment advisor, you could have viable claims to pursue against the brokerage firm that employed the advisor at the time of sale.  These actions cannot be filed in a U.S. Court. Instead, pursuant to the contract binding you, the investor/client, to the brokerage firm, you must submit all disputes to arbitration through the Financial Industry Regulatory Authority (FINRA).  The FINRA Arbitration process is simpler than filing a claim in court. There are no depositions and motion practice is limited, specifically, motions to dismiss which bar claims for legal reasons without being heard. In FINRA Arbitration, these sorts of motions to dismiss are greatly limited, making it easier for investors to gain access to the discovery they need from the brokerage firm to win their case.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from brokers whose firms promote high risk alternative investments and private placements. Did you know that brokerage firms can be held accountable when their brokers sell high-risk, illiquid investments that are unsuitable for their clients? Such was the case with Sanctuary Securities, which was forced to pay more than $530,000 in fines and restitution to investors for  “failures to supervise certain product sales,” according to Advisorhub.com.

Sanctuary was fined $160,000 and ordered to pay restitution of $370,161.39 plus interest “for the various supervisory failures dating as far back as 2014 that were uncovered over multiple FINRA examinations, according to a letter of acceptance, waiver and consent finalized on July 1.” Formerly David Noyes and Company, Indianapolis-based Sanctuary has about 190 registered brokers and 35 offices. The company said that no current employees were involved in this action. The FINRA enforcement action involved the firm’s sales of money-losing, risky products called “leveraged exchange-traded funds (ETFs).” These investments multiply gains and losses based on market movements of popular securities indexes. These “non-traditional” or “alternative” investments can lose money for investors if brokers or investors guess wrong on market movements.

According to FINRA, from January 2014 through December 2018, “Sanctuary did not sufficiently address the unique features and risks related to solicited sales of inverse and leveraged ETFs (collectively, non-traditional ETFs) as required by suitability obligations under FINRA Rule 2111. Around 30 brokers recommended customers purchase about $5 million worth of non-traditional ETFs, resulting in significant net losses for those who held their positions for extended periods of time. The firm, meanwhile, generated roughly $60,000 in commissions over the course of about 600 purchases in 150 customer accounts,” FINRA stated.

Chicago-based Stoltmann Law Offices continues to hear from investors who’ve suffered losses from dealing with financial advisor who sold them annuity products from Bermuda-based Northstar Financial Services. Northstar filed for bankruptcy last year. Investors have been filing claims as the company is being liquidated by the Bermuda Monetary Authority. Investors across the world are filing claims against Northstar and the many brokerage/financial firms that sold these “annuities” to investors.

One Japanese investor, for example, contends her “Bancwest Investment Services broker proposed a Northstar investment rather than keeping her money in savings and checking accounts.” She is just one of many investors who are filing claims against brokers through FINRA Dispute Resolution, charging they unsuitably recommended and sold Northstar’s fixed- and variable-rate annuity and other products that proved to be unsafe.

“Investors in Northstar Financial wanted their money and the company was unable to pay liquidation or redemption requests,” according to David Fox in the Royal Gazette. “The company was estimated to have incurred a deficit upwards of $260 million. By September 2020 they were reporting just $8 million in assets, and they filed for bankruptcy protection in 2020.”

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