Articles Posted in Private Placement

Stoltmann Law Offices, a Chicago-based securities, investor, and consumer rights law firm has spoken to victims of the DeepRoot Funds scam and continues to investigate claims against third parties to recover these losses. On August 20, 2021, the Securities and Exchange Commission filed a complaint against Robert J. Mueller, DeepRoot Funds, LLC, Policy Services, Inc., and several other “relief defendants” alleging that Mueller and DeepRoot abused their roles as investments advisors to the two primary DeepRoot funds; the 575 Fund, LLC and the Growth Runs Deep Fund, LLC. The SEC flat-out alleges that Mueller used these funds as his personal piggy bank, including paying for weddings to wives number 2 and 3, and paying for the divorce from wife number 2.  Investors are likely looking at a total loss of funds invested amounting to nearly $58 million. Because the SEC has already gone after Mueller and the Funds, investors need to look for viable third parties that could have liability for investor losses.

The first and most obvious target for investors here would be the financial or investment advisor that solicited the transactions in the first place.  If your RIA or broker solicited you to invest in DeepRoot, it is almost certain this solicitation constituted a breach of fiduciary duty. RIAs will, with a straight face, ask clients in these situations rhetorically “how were we supposed to know?” Well, the investment advisor with the licenses, training, education, and statutory fiduciary duties to their clients are paid to know.  Whether your advisor is a FINRA registered broker or a Registered Investment Advisor (RIA), they have obligations to understand and know the products they sell to their clients.  On their faces, these DeepRoot Funds were unregistered, private, unproven, and speculative private-investment plays. Right there is enough information to disqualify these funds for investment by almost every retail investor in America.

To put it bluntly, the law obligates fiduciary investment advisors to understand the risks and characteristics of the investments they offer to their clients. Failing to do so constitutes a breach of a fundamental and basic duty. Investment advisors can be liable to their clients for this fundamental breach of duty. How are they supposed to know? They are paid to know and they are licensed professionals who are obligated to know whether the fund that are recommending uses investor funds to legitimately invest, or, as with DeepRoot, used investor funds to pay for divorces, a wedding, amongst other abuses.

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, P.C. offers contingency fee representation to investors nationwide who have been hit by the IRS for tax issues related to conservation or land easement investments sold by investment and financial advisors.  High-income investors are lured into investing in these products based on the promise of legal tax savings.  Through a complicated and circuitous waterfall, investors in conservation or land easements, can receive income tax breaks sometimes worth several times the amount of their actual investment. As the old adage goes, if it sounds too good to be true, it probably is.

A recent article by Investment News lifted the lid on three specific easements that resulted in an arbitration complaint by the investors, and includes an unsavory connection to motivational speaker Tony Robbins. The easements at issue in the investor complaint are:

  • GWM Capital Real Estate

Stoltmann Law Offices, P.C. is a Chicago-based investor rights law firm that offers nationwide representation to investors who suffer investment losses as a result of unscrupulous, negligent, or fraudulent misconduct of financial advisors. In a tale as old as time, people prefer to avoid paying taxes if they can do so legally. The legality of tax breaks can be a touchy and constantly developing subject.  An increasingly popular way for very wealthy land owners to generate massive tax write-offs is called the “conservation easement.”  Simply put, in exchange for promising not to develop land, in the name of conservation, a land owner promises not to develop the tract. By doing so, the value of the property depreciates – because it cannot be developed – and theoretically, the owner of the land gives up something of value – the right to develop and exploit the land.  The land owner then gets a tax deduction, which depends on two critically important factors: 1) the value of the property before the easement; and 2) the value after the easement. The spread between these two numbers is then used as a tax deduction.

And there is where the fraud begins, according to the IRS. Recent report published by Bloombergtax describes the increasing aggression with which the IRS and Department of Justice are prosecuting conservation easement transactions as crimes.  One very notable transaction being investigated by the Manhattan District Attorney’s Office involves former President, Donald Trump, and an approximate $25 million tax break he received in connection with a conservation easement on land he owned in upstate New York. The tax scam begins with the appraisal of the land at values exponentially higher than reality, to appraisals after the easement well-below reality.  That increases the spread – the tax loss – taken by the owner.  These appraisals are done by professional outfits with attorneys and appraisers who sign off on all of these deals, and who can find themselves in a serious lurch with authorities.

These conservation easements became increasingly complex over time, involving massive tracts of land and found themselves being marketed and sold by FINRA registered broker/dealers as Regulation D private placement investments.  The purpose of this scenario for investors is the tax break for the land owners trickles-down, through a series of complicated trusts and transactions, to the investor.  Sometimes investors get upwards of 10X their investment back in the form of a tax write off.  Usually, the write-off is for between 2X and 6X the investment. For example, if an investor puts $25K into a conservation easement offering 4X reduction, that investor can write-off $100,000 in income for tax purposes the next year.  For high income investors, that is a dream scenario.

Stoltmann Law Offices previously posted about Scott Wayne Reed, former broker at Wells Fargo Advisors, selling away to his customers, including customers of Wells Fargo. On December 15, 2020, the Arizona Corporation Commission filed a “Notice of Opportunity for Hearing Regarding Proposed Order to Cease and Desist, Order for Restitution, Order for Administrative Penalties, Order for Revocation and Order for Other Affirmative Action” against Reed, his wife, Sarah Reed, Pebblekick, Inc. and Don K. Shiroishi, the Chief Executive Officer and President of Pebblekick.

According to the ACC’s notice, Mr. Reed sold at least $3.5 million of investments in short-term, high-interest notes issued by Pebblekick. Mr. Reed sold these notes as offering an annualized rate of return of sixty-percent (60%). In turn, Pebblekick paid at least $191,340 to Reed. He sold these notes to clients as “100% safe” investments and represented that he also invested in Pebblekick. He went as far as personally guaranteeing $100,000 of the $200,000 investment made by one investor.Reed also sold other outside investment to customers, which he alleged were connected to Pebblekick, including but not limited to Precision Surgical, Mako Studio, and Ascensive Creator.

Reed was a registered representative of Wells Fargo Advisors at the time that he sold this investment, but did not disclose that he was selling notes in Pebblekick or that he received nearly $200,000 in commissions and fees for selling Pebblekick. According to the ACC, “when Reed’s firm reported him for potentially selling away and the Securities Division requested Reed to provide information and documents concerning the allegation, Reed impeded the Division’s investigation by providing responses that were false, incomplete, and misleading.”

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 a 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 at 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:

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