Articles Posted in Fiduciary Duty

Chicago-based Stoltmann Law Offices is representing investors who were solicited by their financial advisors to invest in junk-bonds offered by now bankrupt Hornbeck Offshore. The bonds sold to our clients were rated D by Standard and Poor’s at the time of the solicitation, which is as low as bond ratings go.  This was not even speculation, it was financial homicide. The financial advisor at issue in our clients’ cases, Thomas M. Bonik was registered with NTB Financial Corporation (f/k/a Neidiger, Tucker, Bruner), which is headquartered in Colorado and has offices all over the country.  Mr. Bonik’s office was primarily in St. Augustine, Florida.

Hornbeck Offshore had been struggling financially for years.  The company is primarily engaged in offshore oil drilling and transportation. The persistently low prices for oil and gas for the past few years resulted in Hornbeck struggling financially due to a heavy debt load. Part of that debt was in the form of bonds purchased by investors.  Covid was the last straw for this struggling company and in June it filed a pre-packaged Chapter 11 plan in the Bankruptcy Court for the Southern District of Texas.  These pre-packaged plans are negotiated in advance with the “Secured” creditors, and typically burn bond holders like our clients. No surprise, our clients have lost every dime they invested in these Hornbeck bonds.

Financial advisors recommend clients invest in corporate or municipal bonds that are technically “junk” rated because these bonds have much higher yields than higher rated bonds. In the persistent low-rate environment in the US and to some degree the worldwide economy has been in since after the financial crisis, investors and advisors alike reach for higher yields, often investing in esoteric alternatives to grab that extra yield.  In this instance, the recommendation was to invest in corporate bonds that were rated “D” by S&P, which defines this rating as:

Stoltmann Law Offices, P.C. is a Chicago-based securities, investor protection, and consumer rights law firm that offers victims representation on a contingency fee basis nationwide. We’ve represented investors who’ve suffered losses in connection with the recommendation to invest in variable annuity products.

One strategy that unscrupulous brokers employ is to switch clients out of variable annuities into other insurance products or mutual funds. This move, of course, generates even more commissions, but may not be in the best interest of their customers. With variable annuities, investors who cash out of them within a short period of time also may incur high “surrender” fees, which are onerous. Variable annuities – the more complex and costly version of low-cost fixed annuities – are often oversold by brokers and advisors. Due to high “surrender” fees, they may lock in investors for a certain period of time. Then they may be paying even more commissions and fees in new investments.

Such practices hurt investors and have caught the attention of FINRA, the securities industry regulator. FINRA recently fined Wells Fargo Advisors Financial Network and Clearing Services more than $2 million for switching 100 clients from annuities to other products.  The regulator found that from January 2011 through August 2016, Wells Fargofailed to supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase investment company products, such as mutual funds or unit investment trusts.”

Chicago-based Stoltmann Law Offices continues to represent investors who’ve suffered losses in connection with financial advisors who have oversold energy stocks and other energy-related investments. With the COVID-19 pandemic depressing demand for everything from gasoline to jet fuel, it’s been a mostly rotten year for energy stocks. In fact, when news first hit the markets in early March, stocks in many oil & gas companies and funds that invested in them crashed. At one time, the Energy Select SPDR (XLE), an exchange-traded fund that invests in energy companies, was down as much as 58%.

The net effect of tens of millions of Americans sheltering in place, avoiding travel and not commuting slashed demand for fuels. Only a handful of people were getting on jets, buses, ships, trains, or driving to work. That resulted in energy companies eliminating dividends and losing money.  While the economy has recovered somewhat as more states have re-opened in recent months, energy demand is nowhere near where it was at the beginning of 2020. The U.S. economy is now in a recession, which may continue into 2021.

What is important to realize about oil/gas prices is, the decline in energy demand actually began a few years ago – primary energy consumption dropped by half in 2019 alone — hasn’t stopped brokers from selling investments in oil & gas companies. They have sold stocks, limited partnerships, and mutual funds that concentrate in fossil fuels, which are volatile commodities and have a long history or volatility.

Chicago-based Stoltmann Law Offices continues to see a surge of complaints from investors who bought unlisted or non-traded Real Estate Investment Trusts (REITs). For most investors, the prospect of getting a higher yield on any investment has been alluring. With rates near zero, it’s been hard to earn a return that beats inflation. Enter REITs and funds that invest in them. These are special vehicles that bundle real estate properties into one investment: You can invest in everything from apartment buildings to storage units.

Many REITs are listed and traded on stock exchanges, but some are not, which are called “private” or “unlisted” REITs. In their heyday, REITs routinely paid double-digit yields. Unlisted or “non-traded” REITs have been a consistent sore spot for investors in recent years. Many are loaded with fees and commissions, which dramatically lower investors’ net returns. They even may be money losers, even though they are sold with the promise that 90% of the income generated by properties they hold must be paid to investors. Middleman expenses, which can be as high as 15%, eat up returns in most cases.

Disclosure of the actual financial condition of these vehicles has also been troublesome. It’s hard for investors to know the true value of the properties within these vehicles, which have been aggressively sold by broker-dealers, who make high commissions selling them. When the COVID-19 crisis wracked the economy earlier this year – at first hitting commercial real estate developers and owners particularly hard – REITs that specialized in retail and office properties got clobbered. Retail and Hotel REITs were down 48% and 53%, respectively (as of April 15), according to Deloitte. Investors in these funds, of course, may be still experiencing large losses.

Chicago-based Stoltmann Law Offices continues to investigate investor claims related to UBS YES products.  In recent years, with savings yields at rock bottom, investors have been eager to attempt to safely earn a higher return on their money. Wall Street has responded with so-called “yield enhancement strategies” (YES) designed to pump up returns. But these strategies eek out this extra yield by employing extremely risky options trading strategies.

What brokers haven’t told investors in countless pitches, however, is that yield enhancement products are complicated and carry numerous hidden risks. The UBS YES program, involving an “iron condor” options trading plan, has attracted a great deal of attention recently. Investors are suing UBS, the Swiss wealth management firm, claiming they lost money when UBS brokers enrolled them in the strategy. Arbitration claims against the company have also been filed with FINRA, the securities industry regulator.

Investors who invested in the UBS YES program claim they suffered losses, even though the firm claimed the strategy was “conservative” and “low risk,” according to Wealthmanagement.com. What investors apparently were not told is how complex and convoluted the YES strategy was:

Chicago-based Stoltmann Law Offices has been representing investors nationwide against unscrupulous brokerage firms and their financial advisors for more than fifteen years. Sometimes one of the best ways to avoid bad brokers is to do a little homework. Doing a simple background check can reveal a number of red flags that will help you steer clear of bad actors. All broker records are publicly accessible through the regulator FINRA’s website on a service called BrokerCheck.

What does BrokerCheck tell you? While it may not give you a complete background profile, it will show you if they have been disciplined or fined by FINRA, the US Securities and Exchange Commission (SEC) and other agencies. A pattern of multiple violations is a sure signal that you should avoid them. BrokerCheck will also give you an employment history and information on the firms that employed them. Although it’s not unusual for brokers to jump from one firm to another, repeated employment disruptions may be a warning sign as well.

As the prime securities brokerage regulator, FINRA can fine, sanction and bar brokers from the industry. Complaints about brokers must be investigated – and recorded – by FINRA. If brokers refuse to cooperate with the regulator, they can lose their securities licensing and be expelled from the business.

Stoltmann Law Offices is a Chicago-based securities and investment fraud law firm that offers nationwide representation to victims of Ponzi schemes and other securities frauds.  We are currently investigating allegations made by the United States Securities and Exchange Commission (SEC) and the US Attorney for the Southern District of New York that contend the Belize Infrastructure Fund I, LLC was a Ponzi scheme.  According to published reports, Minish “Joe” Hede and Kevin Graetz sold $9.6 million worth of promissory notes to their clients, many of whom were customers of their brokerage/dealer firm Paulson Investment Company.

According to the complaint filed by the SEC, Brent Borland, the principal of the Belize Infrastructure Fund who is also under indictment, approached Paulson Investment Company to act as “placement agent” for this fund. After the sales pitch, Paulson declined to act as the placement agent and disapproved of the investment. Whether Paulson Investment Company approved of the deal or not, meant nothing to Hede and Graetz who went on to sell almost $10 million worth of notes issued by the bogus company to at least 21 Paulson clients.  In so doing, Graetz and Hede violated numerous FINRA Rules and SEC rules and regulations by selling a fund that was not approved of by their broker dealer.  The SEC complaint also alleged that Hede and Graetz received hundreds of thousands of dollars in illicit commissions from selling notes issued by the Belize Infrastructure Fund.

Paulson Investment Company can still be held liable for the conduct of the firm’s registered brokers, Hede and Graetz. First, even though Paulson Investment did not formally approve of these sales, Hede and Graetz were still registered with the firm as brokers when these sales occurred so that means Paulson had an obligation to supervise their activities pursuant to FINRA Rule 3010. Additionally, “red-flags” that brokers may be “selling away” increase that responsibility. Certainly, having sold almost $10 million in this fund to 21 Paulson clients means there was, at a minimum: 1) a paper trail that they were selling these notes; 2) communications via email discussing the Belize fund; 3) transactional records, including the sale of securities in the clients’ legitimate Paulson accounts in order to fund the Belize Fund investments; and 4) client meetings.  Furthermore, brokers with numerous disclosures on their CRD Report require firms to put those advisors on “heightened supervision.”  According to his FINRA BrokerCheck Report, Graetz had numerous tax liens and customer complaints on his record before he started selling the Belize Fund to his clients.  Paulson Investment Company should have had him under a supervisory microscope. Instead, as is typical at brokerage firms like Paulson, the company invests minimally in its compliance and supervisory structure and brokers like Graetz and Hede end up selling firm clients almost $10 million in a Ponzi scheme.

Chicago-based securities law firm Stoltmann Law Offices continues to represent investors in FINRA arbitrations nationwide recovering losses suffered in the GPB Capital Holdings group of funds, including the GPB Automotive Fund, GPB Holdings Fund II, and the GPB/Armada Waste Management Fund.

One of the appealing pitches that broker-dealers and investment advisers offer is the opportunity to invest in private companies with outstanding earnings potential, or in the case of GPB, relatively high annualized “interest” payments. Instead of buying shares in public companies on stock exchanges, the advisers sell interests in “closely held” companies, which are not listed on exchanges and not required to openly disclose their financial statements.

One such company was GPB Capital Holdings LLC, which has been the subject of federal and state litigation. GPB Capital is a New York City-based alternative investing firm that “seeks to acquire income-producing private companies.” So-called private placements have posed problems for investors in recent years because of sketchy financial disclosure and overselling.

Stoltmann Law Offices, P.C, a Chicago-based securities law firm specializing in representing investors nationwide, continues to hear from investors who have suffered devastating losses in alternative investments.  One of the most common and popular alternative investments peddled by brokers over the last several years are “business development companies” or “BDCs”. The most common issuer of BDCs is a company called Franklin Square, and brokerage firms have pushed hundreds of millions of dollars in these speculative investments to unsuspecting investors for a decade.

FSKR, the publicly-traded BDC called FS KKR Capital Corp. (NYSE: FSKR), was created by the merger of four Franklin Square non-traded BDCs in December 2019:

  • FS Investment Corporation II (FSIC II)

Chicago-based Stoltmann Law Offices has represented hundreds of investors who have been victims of one of the most egregious investment frauds: Ponzi schemes. These swindles promise quick riches and rely upon an increasing number of “investors” to keep the operation going, sometimes over a period of years. The schemes eventually blow up when new investors can’t be found to perpetuate it or promoters are outed by investors or associates for faking returns.

The most famous Ponzi scheme – and perhaps one of the largest – involved broker-money manager Bernie Madoff. Over a period of 17 years, Madoff defrauded thousands of investors, lying about profitable trades. In 2009, he was sentenced to 150 years in prison, after pleading guilty to a $65 billion swindle of some 65,000 victims around the world. Many of Madoff’s victims, which ranged from non-profit organizations to celebrities, were financially ruined. A court-appointed “Madoff Victims Fund” has distributed nearly $3 billion to investors. His sons, who worked for their father’s firm, turned Madoff into authorities when they learned of the scam.

Despite the notoriety of the Madoff swindle, Ponzi schemes are still ensnaring innocent investors. As one of the oldest investment fraud vehicles around, the Ponzi scheme has two selling points: Promoters promise outrageous returns in a short period of time and rely upon continuing stream of new victims to “pay off” early investors in fake profits. This perennial false promise of easy riches makes it one of the most durable schemes for dishonest brokers, who continue to sell them — until the frauds collapse.

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