Articles Posted in Private Placement

Scott Wayne Reed (“Agent Reed”), of Scottsdale, Arizona, has been engaging in various misconduct in customer accounts for years now. Most recently, earlier this year Wells Fargo customer alleged that Agent Reed solicited him to invest in “an investment opportunity in a company not offered by Wells Fargo Advisors”, Reed broker-dealer at the time. Upon information and belief, Reed tried to solicit several customers to invest in outside business activities sponsored by Hollywood producers. This “selling away” activity led to Reed’s departure from Wells Fargo on April 7, 2020.

Several of Agent Reed’s customers have complained that he sold them unsuitable investments in private placements, oil and gas investments, hedge funds, and mutual funds and over-concentrated their accounts in private placements. In 2017, elderly clients of Reed filed a complaint against Reed’s previous brokerage firms, Accelerated Capital Group (“ACG”) which is now out of business, and Coastal Equities, and later adding him personally to the complaint, for selling them several unsuitable investments. Included in these investments were various Staffing 360 issuances, Aeon Multi-Opportunity Fund, which became Kadmon, and Aequitas, which ended up being a Ponzi scheme. The clients lost their entire investment in Aequitas. They lost between 92% to 99% of their investments in Staffing 360 and lost 70% of their investments in Aeon/Kadmon. Reed sold these investments to his clients even after there were red flags that these companies were completely failing and drowning in debt.

Agent Reed has bounced around several brokerage firms, and has also worked as a registered investment advisor. From 1999-2001, he was registered with Ameritrade. His longest tenure was at Fidelity from 2001 through July 2010. He had brief stints at Strategic Advisors, Inc. and Meridian United Capital before joining Accelerated Capital Group from 2010 through 2015. Agent Reed was registered with Coastal Equities for only five months then joined Wells Fargo from April 2016 through April 2020. While his CRD Report states that he “voluntarily resigned” from Wells Fargo, the explanation details that his resignation came while he was under investigation for selling away. He has been registered with First Financial Equity Corporation since April 2020. Reed was also a dually registered RIA with Gentry Wealth Management from July 2010 through April 2016, which became Ashton Thomas Financial in 2015. According to his FINRA BrokerCheck Report, Mr. Reed operates as “Reed Private Wealth”.

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.

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.

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.

Chicago-based Stoltmann Law Offices, P.C. is currently investigating claims on behalf of TCA Global Credit Fund and TCA Fund Management Group investors involving Royal Alliance advisor Mark Young, and Watts Capital, LLC and Thomas Watts. On May 11, 2020, the United States Securities and Exchange Commission (SEC) filed a civil suit in federal court in Miami, Florida against TCA Fund Management Group and TCA Global Credit Fund.

The SEC complaint seeks to prevent TCA Fund Management Group and the Global Credit Fund from committing ongoing securities law violations and also sought the appointment of a receiver. The SEC alleges that for many years, the TCA Global Credit Fund, through its affiliate TCA Fund Management, intentionally inflated the net-asset-value – or price – of the fund hiding massive losses from investors. The SEC alleges that TCA inflated these values in two ways.  First, the fund recognized revenues that it never actually received. It would essentially book a gain on loan fees prior to actually receiving them and if the loans never closed, TCA would not adjust their books to reflect reality. The second way TCA artificially inflated its books, according to the SEC, was to book investment banking fees it never actually earned, and actually knew in many instances that it would never earn. Basically, the way this scam worked, according to the SEC, is TCA would enter into a contract with a company to perform investment banking services for, let’s say, $100,000.  Instead of waiting to actually perform the services and receive the $100,000 payment, TCA would book the $100,000 as received on their books at the time the contract was executed. The result of these practices was to provide investors with inflated values of these funds. The SEC alleges that these practices violations Section 17(a) of the Securities Act of 1933, 15 U.S.C. Section 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R. Section 240.10b-5; and violations of Sections 206(1), (2), and (4), along with Section 2076 of the Investment Advisers Act of 1940, 15 U.S.C. Sections 80b-6(1), 80b-6(2), 80b6(4), and 80b-7, and Advisers Act Rules 206(4)-7 and 206(4)-8, 17 C.F.R. Sections 275.206(4)-7, 275.206(4)-8.

According to documents field with the SEC for TCA funds, called a Form D, TCA Fund Management Group used numerous FINRA-Registered broker/dealers to sell  investments in the TCA Global Credit Fund for many years including:

Aeon Multi-Opportunity Fund I is a pooled private-equity fund. This investment was originally offered by John Thomas Financial and called the JTF Multi-Opportunity Fund. According to the amended Form D filing with the SEC, “various” placement agents sold Aeon, including Accelerated Capital Group. The funds raised by this Regulation D offering were invested in various technology and medical companies, such as Kadmon, Jawbone, Spotify, and Square. It also invested in Staffing 360, increasing the Claimants’ concentration in this failing company even further. According to the Regulation D filing, the total offering was $500 million. By April 27, 2012, only $3.35 million was sold. The expenses to invest were extraordinary. Aeon charged a 2% Annual Management Fee, an 8% Placement Agent Fee, 20% performance fee, and additional fund and transaction related expenses.

In January 2017, Aeon Multi-Opportunity Fund shares were converted into shares of Kadmon, a publicly-traded biotech company. By July 27, 2016, Kadmon was already a massive failure. It downsized its IPO to $75 million from originally a $100 million offering. It priced at the bottom of its proposed share range at $12 and fell to almost $10 despite existing investors committing to buy $40 million at the IPO. Kadmon (KDMN) has been recently trading for around $4 per share.

Kadmon was founded by Sam Waksal in October 2010, who became the CEO in 2014. Sam Waksal previously pled guilty and served jail time for insider trading at ImClone System, his brother Harlan’s company. In less than six years of operation, the Waksal brothers blew through $675 million of the cash raised by Kadmon leaving it with only $8.6 million in cash and a first quarter net loss of $32.8 million. In summary, Kadmon was a sinking ship years prior to the Aeon Multi-Opportunity Fund conversion, which was nothing more than a cash grab in an attempt to keep Kadmon afloat. At the time that investors could convert their shared from the Aeon fund to Kadmon, their investment was already down 47.81%.

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.

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 pursuing investment losses for customers who were sold investments in Staffing 360. Staffing 360 Solutions, Inc. (“Staffing 360”) started as a scam, and still is nothing more. Originally, the company was “Golden Fork Corporation”, a South African catering company that was organized in the State of Nevada in December 22, 2009. In 2011, Golden Fork reported to the SEC that it did not have any revenue, yet for whatever reason, in February 2012, TRIG Special Purpose 1, LLC purchased Golden Fork, and the following month the company changed its name to “Staffing 360 Solutions”. According to its website, Staffing 360 acquires domestic and international staffing organizations in the United States and United Kingdom targeting the finance and accounting, administrative, engineering and IT industries. It became publicly traded on the NASDAQ on February 22, 2013, but continued to make private offerings. Staffing 360 made a nominal Form D private offering of $1.75 million in November 2013, with $1.35 million sold at the time. Accelerated Capital Group, which is now out of business, was the placement agent for Staffing 360’s private offerings. Even when it went public, Staffing 360 was already drowning in debt and continued to report a net loss each quarter.

As of November 30, 2013, Staffing 360 reported that it had accumulated $5.5 million in debt, had a working capital of negative $2.5 million, and reported a net loss of $1.8 million for the previous six-months. Its 10-Q report for the end of 2013 was essentially a cry for help, explaining the desperate need to raise money to keep the company viable. Staffing 360 continued to sell PIPE offerings and convertible bonds as a last-ditch effort to raise equity. It financials only got worse. By April 2014, Staffing 360 reported $7 million in debt, and negative $5.1 million in working capital. This means that within just months, Staffing 360’s negative working capital doubled and its debt increased by 50%. Brokers continued to sell Staffing 360 to their clients despite these horrific financials.

Staffing 360 is currently being publicly traded on the NASDAQ (STAF) for pennies. Clients who invested in Staffing 360 when it was a private investment have lost between 90% and 99% of their initial investment.

Stoltmann Law Offices continues to investigate allegations that Robert Walberg of Arlington Heights, Illinois, defrauded a few dozens investors, including family, friends, and the Northwest Suburban Montessori School. As we previously discussed, on January 24, 2019, the Illinois Securities Department issued a Temporary Order of Prohibition against Robert C. Walberg, Chartwell Strategies LP, and Chartwell Advisory Group LLC. Chartwell Strategies LP is a hedge fund created and sold by Robert C. Walberg and his company, Chartwell Advisory Group LLC. According to the Illinois Securities Department, Mr. Walberg solicited an Illinois resident at the end of 2017 and early 2018 to invest in Chartwell Strategies LP. Mr. Walberg allegedly commingled his client’s funds with his personal assets. Walberg was charged in early October with wire fraud, investment advisor fraud, securities violations, and theft by deception. According to court papers, Walberg is alleged to have converted more than $600,000 from the Montessori school he acted as Treasurer for, which puts the school’s future at risk.  It was reported recently that Walberg also stole $45,000 worth of retirement money from his Aunt and Uncle.

Mr. Walberg was a registered FINRA broker on and off from 1984 through 2013, but he has not been registered with the SEC or FINRA since November 2013. Because he was not registered, in furtherance of his scheme, Walberg had his investor “clients” open accounts at Fidelity.  He then used the clients’ credentials to log-in to their accounts and transfer funds from their Fidelity accounts to Chartwell Strategies, a private entity allegedly created for investment purposes.

Depending on the nature of the transactions and specifically how Walberg gained access to his clients’ funds, Fidelity could be responsible for either negligence, or aiding and abetting breach of fiduciary duty. All too frequently, fraudsters use big named, well known companies like Fidelity to give their schemes an aura of legitimacy.  Fidelity has duties and obligations to all of its clients, including purported victims of Walberg’s scam, to at a minimum, perform its compliance, execution, and supervisory functions at or above the standard of care. Further, Fidelity, as a FINRA member firm, has explicit responsibilities to its clients to ensure it adaquetly monitors and supervises electronic access to their accounts and have reasonable measures in place to ensure someone other than the client is not logging-in using their credentials. This is a bright red flag that someone is acting in a questionable manner. In the normal investment advisor-client relationship which uses Fidelity as the broker/dealer, that investment advisor has his own log in credentials and uses the Fidelity RIA platform to run his business.  That Walberg did not do this and instead used client credentials is an indicia that he was not licensed or registered to act as an investment advisor. Upon information and belief, Walberg abused his trust in this way to numerous clients resulting in the theft of as much as $5 million.  Fidelity could have liability for these losses.

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