Articles Posted in Fiduciary Duty

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.

Chicago-based Stoltmann Law Offices, P.C. continues to see a surge of investor cases involving “alternative” investments like non-traded REITs, BDCs, oil and gas LPs, and other private placements. These “alts” are almost always considered to be on the speculative end of the risk scale, and frankly, they usually perform poorly and result in investor losses.

Alternative investments cover a wide variety of unconventional investment vehicles. They may employ novel or quantitative trading strategies or pool money for investments in commodities or real estate, for example. The one thing they all usually have in common is steep management fees along with commissions. Both expenses come out of investors’ pockets. Examples of alternative investments, or “alts” in industry parlance, include unlisted or “private” Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds. While they are generally sold to high-net worth investors who can afford to take on increased risk, they are usually illiquid and complex. Brokers who sell these vehicles may not fully disclose how risky they are. Most of these investments are unregulated, so supervision by regulators is typically light or non-existent.

Investors can file arbitration claims with FINRA if brokers sell inappropriate alternative investments to clients. A year ago, FINRA censured and fined the broker-dealer Berthel Fisher in connection with sales of “inappropriate” alternative investments. FINRA awarded six investors $1.1 million and fined the firm $675,000. Berthel Fisher has had a history of running afoul of investors and regulatory fines. In 2014, the firm was fined $775,000 by FINRA for “supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs).” The firm was also selling managed commodity futures; oil and gas programs; business development companies; leveraged and inverse Exchange Traded Funds and equipment leasing programs.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered investment losses at the hands of financial and investment advisers who churned and burned their accounts. One of the most prevalent abuses in the securities industry is excessive trading, or “churning” client accounts. This practice, which is forbidden by industry regulators like FINRA and the SEC, is done to generate commissions, almost always at the expense of the client. As the stock market swings wildly during the Covid-19 pandemic, brokers take advantage by trading their clients’ accounts to generate commissions.

Brokers can open the door to churning by asking customers if they want an “active” trading strategy, which gives brokers discretionary ability to trade at will. Unless clients give specific directions on how and when to trade, brokers may take the opportunity to trade excessively and charge needlessly high commissions.

Churning has been the subject of numerous regulatory actions over several decades. Broker Frank Venturelli, a representative for First Standard in Red Bank, New Jersey, was cited by FINRA for excessive trading between 2016 and 2018. According to FINRA settlement, clients lost more than $373,000 during that period. Venturelli was suspended from the industry for 11 months and ordered to pay partial restitution of $30,000 to his clients.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with unscrupulous investment brokers selling exchange-traded products. Many of these high-risk products are unsuitable for retail investors.

With the COVID-19 crisis roiling financial markets, many investors have been sold products that rise when market indexes or individual securities fall. Many “exchange-linked products” (ETPs) often use borrowed money, or leverage, to magnify gains when the market drops, but they can also increase losses. They are generally only suitable for sophisticated investors and are linked to complex underlying futures contracts.

When the coronavirus crisis first made major headlines in the U.S. in early March, the stock, bond and commodities markets crashed. Since markets over-react to widespread greed and fear, traders went into mass selling mode over (later justified) expectations that demand for nearly everything from luxury goods to commodities would drop dramatically.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with unscrupulous investment brokers selling risky variable annuities.

Variable annuities are hybrid products that combine mutual funds within an annuity “wrapper.” As a retirement savings vehicle, you can invest in a variety of stock, bond and other funds that compound earnings tax free. Unlike “fixed” annuities, which pay a set rate of return and a guaranteed monthly payment, variables are not focused on guaranteed income and performance is based on market returns, so you could lose money. Both products provide a death “benefit,” that is, a lump-sum payment to survivors when the annuity holder dies.

The main reason variable annuities are often a bad deal for retirement investors is they are extremely expensive to own. In addition to sales commissions, mutual fund managers levy fees. There are also insurance-related expenses, riders, and other fees that act as a drag on return. Brokers often tout the tax “benefit” of owning a variable annuity, but then sell then to investors in their IRAs, which is a huge problem.

It has taken longer than most practitioners expected, but finally, a securities regulator has formally filed a complaint against GPB Capital and its myriad private placement funds.  Stoltmann Law Offices has been representing GPB Fund investors since January 2019 and filed dozens of cases against a laundry-list of brokerage firms that sold these speculative, conflict-laden disasters to their clients. Those brokerage firms we have filed cases against include National Securities, Madison Avenue, Kalos Capital, Newbridge Securities, Ausdal Financial, D.A. Noyes, and others. Every client’s case is unique, but fundamentally, each one of our GPB cases begin with the brokerage firm’s duties and obligations to perform due diligence on private placements prior to offering these opaque, complicated, unregulated, and speculative investments. This obligation is rooted in FINRA RN-10-22 and several other notices. Stoltmann Law Offices has written extensively on this blog about GPB and its numerous issues.

The regulatory complaint filed by Secretary Galvin of the Commonwealth of Massachusetts, alleges that GPB misrepresented material facts in connection with the offer of several of its funds. Galvin’s complaint details the gross conflicts of interest at play inside of and between these various GPB Funds. The Administrative Complaint alleges that GPB Capital Holdings, LLC violated MASS. GEN. LAWS ch. 110A, the Massachusetts Uniform Securities Act (the “Act”), and the regulations promulgated thereunder at 950 Mass. CODE REGS. 10.00 – 14.413 (the “Regulations”). The Enforcement Section also alleges that GPB Capital engaged in acts and practices in violation of Section 101 of the Act and Regulations. The Massachusetts action goes for the jugular, seeking ten forms of relief including rescission or all Massachusetts GPB investors, disgorgement of profits, civil penalties, and permanent bars from the securities and investment adviser industries.

Generally, the complaint alleges what those of us prosecuting FINRA cases for investors have known for some time. GPB began to pay investor distributions with new investor money beginning as early as 2017.  This created an accounting disaster and GPB cannot find an auditor worth its salt to perform and sign off on an audit. The complaint also confirms the exceptionally complex spider web of interrelated companies across the funds and holding companies, including hundreds of different bank accounts. Eventually, all road lead back to David Gentile, the founder. The Massachusetts complaint also confirms that GPB used the promise of high commissions payable to selling brokers, and lots of bold promises about 8% distributions and a profitable exist plan, to raise $1.5 billion from retail investors nationwide. Selling brokerage firms collectively earned close to 10% of that total raise, or $150,000,000 in commissions for selling these conflict-laden complicated funds.

Stoltmann Law Offices is investigating claims made by the Securities and Exchange Commission (SEC) against Robert Gravette, Mark MacArthur, and their Registered Investment Advisory firm, Criterion Wealth Management Insurance Services, Inc. According to the complaint filed by the SEC on February 12, 2020, Gravette and MacArthur orchestrated a scheme whereby they funneled their clients’ money into four private placement funds without disclosing that the fund managers, with whom they were personal friends, paid them compensation in excess of $1 million for doing so. This compensation arrangement was recurring, so Gravette and MacArthur had an undisclosed financial incentive to keep their clients’ money in these funds, as opposed to allocating the money elsewhere, when appropriate.  Further, the huge fees Gravette and MacArthur received reduced the investment returns that the investors would have otherwise received.  The SEC alleges that these acts violated the fiduciary duties owed by Gravette and MacArthur to their investment advisory clients, and constituted fraud.  The SEC complaint alleges an impressive list of federal statutory violations, including Sections 206(1), 206(2), 206(4), and 207 0f the Advisers Act, 15 U.S.C. sections 80b-6(1), 80b-6(2), 80(b)-6(4), and 80b-7, and Rule 206(4)-7 thereunder.

At all times relevant to these allegations, both Gravette and McArthur were dually registered representatives with a FINRA registered broker/dealer called Ausdal Financial Partners. According to the SEC, Ausdal Financial was involved in these transactions because Criterion opened accounts for them at Ausdal and the private placement funds were held on Ausdal’s account statements.  Under FINRA Rules and regulatory notices, Ausdal Financial, at all times relevant, had a duty to supervise the disclosed Advisory activities of its registered representatives.  See FINRA Rule 3280, NTMs 91-32, 94-44, and 96-33.  The dual-registration of investment advisors creates supervisory challenges for brokerage firms like Ausdal because under SEC Rules, they must maintain and record transactions like those entered into by their dually registered agents on their books and records, or its a violation.  Since they must maintain transaction records which they did by virtue of holding these funds on their account statements, they also must supervise those transactions and the activities of their registered representatives, even if they appeared to be acting solely on behalf of their advisory firm. FINRA does not care and neither should the victims of this scam, which was executed in plain sight.  Any competent compliance department would have supervised the transitions in these real estate private placement funds.

The very nature of these funds being “private placements” would have required an added measure of scrutiny by Ausdal compliance. Private placements tend to be speculative and exposed investors to unique risks like lack of liquidity, concentrated risk, key-man risk, and management risk not typically found in publicly traded investments like mutual funds.  The most substantial issue with a private placement is that they typically pay their brokers very high commissions compared to more standard investments.

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