Articles Posted in FINRA Arbitration

Stoltmann Law Offices has brought arbitration claims against dozens of brokerage firms like Ameriprise Financial, Merrill Lynch, Morgan Stanley, Wells Fargo, and JP Morgan Securities involving the unsuitable recommendations for investors to invest in oil and gas related securities.  In 2014 and 2015, we represented dozens of investors against various firms involving Master Limited Partnerships, or MLPs, which are almost always related to the oil and gas industry.  Then, during a big drop in the price of oil, a lot of oil and gas companies went into bankruptcy, dragging a lot of investor money with them.  History is repeating itself.

The price of oil has completely tanked in the last month. Even before the COVID-19 pandemic, the price of oil was being pressured by a price war involving Saudi Arabia, Russia, and OPEC.  Combined with the broad-based ongoing market crash, oil and gas investments – which are inextricably linked to the price of oil – have suffered catastrophic losses.  There are some well-know names on this list:

Goldman Sachs MLP and Energy Renaissance Fund – GER: Year to Date has dropped from 4.37 to 0.68 per share

Chicago-based Stoltmann Law Offices has represented investors who suffered losses in alternative investments like BDCs for many years.  Market fissures like the one impacting the markets now expose alternative investments for the speculative and unstable investments they truly are. For years, Stoltmann Law Offices has prosecuted cases against brokerage firms and advisors for selling these high-commissioned and unsuitable products to their clients. We approach these cases like the product-liability claims they truly are. These alternative investments have dozens of iterations. Private placements or all colors, limited partnerships, oil and gas drilling interests and partnerships, real estate investment trusts (REITs), and Business Development Companies (BDCs).

A BDC is a closed-end company that raises money for private businesses. They are basically banks for small companies that have poor credit profiles. They take in investor money and then lend it out to a portfolio of privately held businesses. The companies to whom investor money is lended to are typically not on the high-end of credit quality scale and typically seek funding through a BDC because more conventional funding is not available. So, these BDCs are speculative, high risk investments dependent exclusively on the underlying debt portfolio to make timely payments.  BDCs can be publicly-traded, non-traded, or private placement securities called “private BDCs“.

According to a recent article by InvestmentNews, BDCs, led by the largest issuer of non-traded BDCs, Franklin Square, are getting crushed by the recent bear market. That makes sense if you understand the structure of these products. If the success or failure of an investment is dependent on otherwise uncreditworthy companies paying interest and principal on loans, then any disruption in the economy can be devastating to that investment. Similar to how non-traded REITs were wiped out after the real estate crash and financial crisis, BDCs will face a similar fate in the coming economic malaise brought on by COVID-19.

Stoltmann Law Offices, P.C. has been representing investors in FINRA arbitration cases involving the GPB Funds since March 2019, and we have filed dozens since. There is one common thread with GPB over the last year or so.  They consistently oversell “good news” which is followed up with more bad news.  Recently, GPB announced it had hired a new CFO – Someone who was going to right the ship and get those audited financials done so that GPB can comply with necessary SEC financial filing rules. Brokerage firms and their brokers who do not want to be sued for this mess, continuously promulgate the “good news”, trying to stave off investor complaints.  All that happens no matter the spin, is more bad news which brokerage firms and brokers do not tell their clients.

On  February 10, 2020 , GPB announced it would not be providing investors with IRS Form K-1 any time soon. So, as the lucky owner of units in a GPB fund, investors will have to wait to file their tax returns until GPB figures out how to send investors reliable tax documents.  Another mess created by GPB are for investors who received surprise IRS Form 1099-Rs because they or their brokers did not act fast enough last fall when GPB was bounced off of various trading platforms, including Charles Schwab. What this means is, those investors are being taxed as if they took a distribution of their GPB asset from their IRA.  So, if you invested $100,000 in a GPB fund in your IRA, and did not have it transferred to an IRA custodial firm, whatever the book value of the fund was on your statement, say $60,000, will be treated as an IRA distribution, and the investor likely will have to pay income tax on that amount. GPB is the gift that keeps on giving!

About a week after GPB announced that it could not even get tax forms to investors, another lawsuit was filed in Delaware Chancery Court against the fund by a group of angry investors.  This lawsuit, Lipman v. GPB Capital Holdings, LLC, Case No. 2020-0054, is a derivative suit filed against GPB on behalf of investors and the GPB Auto and Holdings II funds. The first paragraph of this complaint refers to David Gentile, Jeffrey Lash, and Jeffrey Schneider as “scoundrels who never should have been allowed to run a legitimate company.” Only days later, GPB was sued in the Federal District Court for the Southern District of New York by Volkswagen of America regarding control over three dealerships. This lawsuit relates back to David Rosenberg, who was the head of these three Volkswagen dealerships. He blew the whistle on GPB to the SEC, warning the regulator that GPB was engaging in financial fraud. GPB terminated him and Volkswagen alleges that this termination violated the agreement between GPB and the car company. The more things change with GPB, the more things stay the same. At the end, it is the investors left holding the bag.

Stoltmann Law Offices is investigating on behalf of defrauded investors claims made by the Securities and Exchange Commission that Lester W. “Chad” Burroughs, a financial advisor for Lincoln Planning of Torrington, Connecticut, misappropriated client money for personal use. Burroughs was also a registered investment advisor through Capital Analysts. According to the SEC complaint filed on December 9, 2019 in the Federal District Court, District of Connecticut, Burroughs ran his scheme from November 2012 through at least January 2019.  It was a simple scam, one that is all too common in fact.  Burroughs offered victims an investment called a “Guaranteed Interest Contract”, also known as a “GIC”.  The terms of these “GICs” offered by Burroughs included interest at either 4% or 7% per year for the term of the contract. Once again, and these scams are becoming so much more common, 4% to 7% per year is not an exorbitant return people typically think of when being sold a fraudulent investment.  In fact, 4% per year barely pays more than the average rate of inflation.

In furtherance of his scheme to defraud his clients, Burroughs created fake account statements, and according to the SEC, the reason he sold GICs to subsequent investors was to pay off previous investors – the hallmark of a Ponzi scheme. According to his FINRA BrokerCheck Report, Burroughs is no stranger to customers complaints. When he was hired by Lincoln Planning, Burroughs had fourteen customer complaints disclosed on his CRD Report, which is a statistically enormous number.  Burroughs also paid a fine to the Insurance Commission of the State of Connecticut in 2003 for violations. This history of complaints and compliance issues put Lincoln Planning on notice when they hired Burroughs in 2012 that he was a compliance risk.  Standard operating procedure at a brokerage firm like Lincoln Planning under these circumstances would be to place the advisor on “heightened supervision”.  These heightened supervision programs regularly require increased compliance surveillance like random, unannounced on-sight branch audits and direct communications with clients without the knowledge of the advisor. Certainly, had Lincoln Planning put the necessary resources into supervising Burroughs, he would not have so brazenly created and sold these phony GICs to clients.

This “heightened supervision” requirement for brokers like Burroughs with a history of customer complaints has been part of the regulatory lexicon required by FINRA for almost 20 years.  In NTM 03-49, then NASD (now FINRA) explained to brokerage firms like Lincoln Planning that brokers with a history of customer complaints should be more closely monitored because they are a compliance risk. NASD provided some statistics in this notice which were pretty shocking when one considers the number of complaints Burroughs had on his record prior to even being hired.  According to this notice, only 3.3% of all registered brokers had at least one customer complaint; 0.71% had two; 0.22% had three, and only 0.09% were subject to at least four customer complaints. The Fourteen complaints on  Burroughs record put him in extremely rare company.  Lincoln Planning had an obligation to adequately supervise Burroughs and the firm clearly failed to do that.  As such, Lincoln Planning can be liable for the damages caused by Burroughs to his clients.

The news continues to get worse for the thousands of retail investors with money locked-up in various GPB Capital Funds. Those funds include the GPB Automotive Fund, GPB Waste Management Fund, and GPB Fund II, amongst others. Stoltmann Law Offices has been investigating these funds for several months. We have filed roughly two dozen FINRA Arbitration claims on behalf of our clients to recover their losses in these funds from the brokerage firms responsible for soliciting them to invest in these ill-fated private placements.

On November 22, 2019, GPB sent a letter to their “partners” informing them of some really bad news.  The recent indictment of GPB Capital’s Chief Compliance Officer by the United States Attorney for the Eastern District of New York for obstruction of justice, amongst other claims, has caused the auditing process to fall off the rails. All of those promises by GPB to investors, all of those promises repeated by financial advisors to their clients, that GPB was well on its way to finally providing restated, audited financial statements, have officially been broken. The letter states that GPB’s auditor has “decided to suspend work on outstanding financial statement audits. In addition, the Audit Committee has elected to resign effective ups the earlier of the completion of the Rosenberg Investigation or by November 27, 2019.” The “Rosenberg investigation” is the self-implemented third party investigation into how the company’s CCO obstructed justice, and what GPB knew and when it knew it. Well, according to the indictment, detailed on this blog last month, GPB hired the CCO with knowledge that he had confidential information obtained from his participation in the SEC’s investigation of GPB. They knew he had  obtained information from the SEC in the course of its investigation, it would seem, and GPB made him their chief compliance officer.

The November 22, 2019 notice also eviscerates another false narrative promoted by GPB and passed along to clients by financial advisors, who are scrambling at this point to come up with excuses.  Despite operating in a red-hot economy where car sales are through the roof, the GPB Automotive Fund has managed to lose over $200 million and GPB Holdings II has lost roughly $125 million.  To add insult to injury to the investors stuck holding this rapidly depreciating asset, GPB is not allowing investors to unload their units on secondary markets.  Unfortunately for investors, this is what a Ponzi scheme looks like when it is no longer able to attract new investor money.

The smoke has been steadily rising from GPB Capital Holdings for about a year at this point. Over the last few months, however, it has been all quite on the GPB Capital front. The main talking points being communicated by GPB Capital to brokers and financial advisors to then deliver to their investor-clients, have been that everything at GPB Capital is fine and that the audited financial statements will be delivered in no time. Well, as the Wizard of Oz said, “Pay no attention to that man behind the curtain.” Just today, InvestmentNews published a story reporting that an executive at GPB Capital has been indicted for obstruction of justice. Nothing happening indeed.

According to a press release issued by the United States District Court for the Eastern District of New York, on Wednesday, October 23, 2019, a superseding indictment was unsealed charging Michael S. Cohn, Managing Director and Chief Compliance Officer with obstruction of justice, unauthorized computer access, and unauthorized disclosure of confidential information. According to the indictment, Mr. Cohn was an employee of the United States Securities and Exchange Commission (SEC) when he left the commission for a position with GPB Capital Holdings. In the course of that transition, Mr. Cohn is alleged to have stolen investigatory files and materials relevant to the ongoing SEC investigation into GPB Capital and then delivered those materials to his brethren at GPB Capital. FBI Assistant director-in-charge William Sweeney was quoted in the press release stating, “When Cohn left the SEC to join GPB, he left with more than his own career ambitions.” What’s worse, when Cohn was interviewing for his job with GPB, he let them know he had this information and shared it. The grand jury indictment  contains allegations, which if proven beyond a reasonable doubt, could land Mr. Cohn in prison for decades.

The fact that GPB Capital hired Mr. Cohn after he told them that he had inside information about the SEC’s ongoing investigation into GPB, is as clear an indication yet that GPB Capital is running an unreliable and highly questionable business, where at a minimum, ethics are of no concern. Investors should be concerned about this latest development because it indicates a few important points. First, it’s an indication that the SEC’s investigation into GPB is still ongoing. Second, the indictment reflects the acts of an allegedly corruptible person who was entrusted at GPB with being the company’s chief compliance officer – a position for the incorruptible. It is staggering that GPB would hire Mr. Cohn after he approached the firm with clearly illegally obtained information and highly confidential documents.

Stoltmann Law Offices, P.C. continues to investigate investor claims and reports involving former Invest and LPL Financial  registered representative James T. Booth, of Norwalk, Connecticut, who was indicted on charges of securities fraud, wire fraud, and investment advisory fraud on September 30, 2019.  According to the unsealed indictment, Booth is alleged to have executed a Ponzi scheme which effectively converted almost $5 million from forty clients. The unsealed indictment was filed in the United States District Court for the Southern District of New York, Case No. 19-CRIM-699, and can be viewed here. Although Booth operated his own company called Booth Financial Associates, he was at all time relevant to this scheme a licensed and registered representative with FINRA member brokerage firms Invest Financial Corporation and LPL Financial.

As we previously discussed on this blog, James Booth was  terminated from LPL Financial on June 26, 2019 for allegedly converting $1 million from his clients. On July 1, 2019, Booth consented to a lifetime ban from the securities industry after FINRA investigated information provided to it by LPL established that Booth converted – or stole – $1 million from clients by depositing the funds into personal accounts for his own use. According to the FINRA Acceptance Waiver and Consent (AWC), Booth committed these alleged acts from approximately April 2014 to May 2019. Looking back, it appears that both LPL and FINRA underestimated the scope of this scam because the SDNY now alleges that Booth stole $4.9 million.

According to FINRA, numerous clients have filed complaints against Invest and LPL Financial to recover funds stolen by Booth. Some of these complaints have already been settled with full recoveries. FINRA Rules and securities industry regulations require brokerage firms like Invest Financial and LPL Financial to supervise their financial advisors. The foundation for this obligation to supervise to found in the Securities Exchange Act of 1934 which states:

Has the Harvest Volatility Management Collateral Yield Enhancement Strategy (“Harvest CYES”) been a deceptively bitter harvest for you? You are not alone in your complaint.  Well known brokerage firms like Merrill Lynch, Morgan Stanley, J.P. Morgan, Schwab and Fidelity have sold the product from the 11-year-old little known vendor of options-focused portfolios.  But as time goes by dozens of investors have complained they weren’t told by their brokers that the product is excessively risky.  Many of these investors were seeking low-risk places to put their money.

Harvest CYES is an complex “Iron Condor” investment structure that was peddled by multiple asset management firms in recent years.  Investopedia describes iron condor as a strategy  “constructed by selling one call spread and one put spread (same expiration day) on the same underlying instrument.”  Most often, the underlying asset is one of the broad-based market indexes, such as the S & P 500 Index (SPX); the NASDAQ-100 Index (NDX); or the Russell 2000 Index (RUT), the financial dictionary adds.

Investopedia goes on to show the head-scratching complexity of the Harvest Volatility Management and Collateral Yield Enhancement Strategy and its ilk by saying it involves selling an at-the-money put with a strike price closer to the current cost of the underlying asset.  “Sell one at-the-money call having a strike price just above the current price of the underlying asset. Buy one out-of-the-money call with a strike price further above the current price of the underlying asset. The out-of-the-money call option will protect against a substantial upside move,” Investopedia explains.

FINRA permanently barred former Securities America financial advisor, Bobby Wayne Coburn (“Coburn”) on August 27, 2019 after he failed to appear at the disciplinary hearing. This came after Securities America terminated Mr. Coburn on March 20, 2019 for soliciting multiple clients to invest in an unapproved private securities transaction. He also tried to settle a complaint made by a customer without notifying the firm. According Mr. Coburn’s FINRA BrokerCheck report, the securities were in the form of promissory notes and real estate securities.

On notice of Coburn’s violations, FINRA promptly initiated an investigation into Coburn in July 2019. According to the Acceptance, Waiver, and Consent (“AWC”) FINRA entered against Coburn, Securities America learned in January 2019 that Coburn sold unregistered securities to clients in 2010 and 2011. Securities America also discovered the Coburn settled a customer complaint relating to this scheme in 2016 without providing the required notice to his firm and FINRA.  When FINRA requested documents and information from Coburn, he informed FINRA that he was no longer working in the securities industry and refused to produce the documents and information, in violation of FINRA Rule 8210. FINRA also found that Coburn violated Rule 2010, which is a “catch all” rule requiring that brokers and firms conduct business with “high standards of commercial honor” and maintain “just and equitable principles of trade”. FINRA permanently barred Coburn from the securities industries for violating these rules.

Coburn’s career in the financial services industry began in 1986 at Ameritas Investment Corp. During his thirty-three year career, he bounced from firm to firm, and landed at Securities America in January 2009. He worked from the Fort Meade, Florida branch office. Two customers have filed complaints against Coburn, including one complaint related to the real estate investment scheme. According to his BrokerCheck report, Coburn sold the client an investment in a Costa Rica real estate development, which did not make the required payments pursuant to the promissory note. The complaint for $32,000 was settled for $7,000. The entire settlement was paid by Coburn. Another client of Coburn and Securities America formally complained about an unsuitable variable annuity that Coburn sold, and the $5,000 complaint was settled for nearly $55,000, with Coburn contributing $5,000.

This week the sun has set on the near quarter of a century career of Bank of America Merrill Lynch top private wealth manager Patrick Dwyer.  The top earning Dwyer, who wore both the broker and adviser hats for the firm has departed in the wake of company concern about a $25,000 political contribution he made in a suspected attempt to pressure the Financial Investor Regulatory Authority (FINRA) to wipe out customer complaints on his record.

That record includes a claim where customers were trying to seek more than $7.2 million in damages. All but one of the complaints were closed or denied without being resolved as detailed by the Miami Herald. The campaign contribution went to Florida Chief Financial Officer Jimmy Patronis who is one of the Florida officials who oversees the state banking regulator.  That paper said an arbitration panel agreed to remove the complaints, but FINRA itself balked.

Dwyer had seven customer complaints filed against him between 2001 and 2009. Two were denied, one was settled and the rest were closed without any action.  Six of the complaints alleged he had made unsuitable investment recommendations.  In the one dispute that was settled, the client received $111,000 in 2001 after complaining Dwyer didn’t delay the purchase of an investment as the investor instructed. As is customary, the firm disclosed the matter was settled to avoid the expense of litigation and that the complaint arose from a misunderstanding between Dwyer and the investor. Before leaving, Dwyer had run a 12-person unit that had close to $4 billion in assets under management and took in $10 million in revenue for the firm annually.

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