Articles Posted in Unsuitable Investments

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers selling unsuitable Exchange Traded Products (ETPs).  When a broker sells you a product that is “guaranteed” to make money during volatile markets, there’s no downside for the person selling the vehicle. They always make money on investors’ fear and ignorance.

A prime recent example is the widespread sale of volatility-linked Exchange-Traded Products. While these vehicles may make money in the short term when the stock market turns bearish, they can lose money in the long run, which brokers may not disclose. Volatility ETPs are linked to “fear” indexes like the CBOE Volatility Index, or VIX, a short-term gauge of downside activity. When the market dips, they can increase in value.

Average investors, however, get burned when they hold onto fear indexes. Brokers who sold these products know that, but often don’t get clients out before they lose money. The U.S. Securities and Exchange Commission (SEC) recently cracked down on broker-dealers who sold these vehicles to unsuspecting investors.

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”.

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, 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.

Thirty New Orleans area investors have learned a lesson painfully you don’t have to.  Investor fraud isn’t always a flood. It can go drip-drip-drip. The 30 have joined together to file a claim with a Financial Industry Regulatory Authority (FINRA) arbitration panel charging that their brokers tried to line their pockets with high commissions from high-risk securities instead of following the investors’ directions to put their money in low-risk assets.

One of the investments Craig Accardo and Frank Briseno III put the burned investors money into was a real estate investment trust that has lost more than half its value in a year and is being sued on claims it mislead investors. The brokers affiliated with FSC Securities Corporation frittered away the nest eggs slowly, one of the accusers, Gordon Dalrymple told Nola.com, a New Orleans news website.

“When I started drawing on it, as time went on, I noticed that the principal kept going down,” said the 70-year-old retired investor who worked in management for the technology firm Zedi. On the advice of a former boss who was also a friend, Darylmple entrusted nearly half of a million dollars from his 401 (k) with Accardo and Briseno III with FSC Securities who he now is charging with squandering the money in grossly unsuitable investment recommendations.  A lawyer called the alleged fraud: “A long con, this kind of misconduct can be hard to detect, but the reverberations can linger.”

LiquidSpace, Inc. is an illiquid Regulation D private placement in which investors have lost their hard-earned retirement savings. LiquidSpace is a flexible office space rental start-up that rents office space and meeting rooms on an hourly or monthly basis. The first Regulation D offering by LiquidSpace was registered on December 16, 2012 for $412 and a second registered on the same day for $1,805,740. The second offering stated that $1,299,999 had already been sold. On June 2, 2014, Robertson Stephens, an investment bank that provides capital to entrepreneurial clients, affiliated with LiquidSpace and registered the Robertson Stephens LiquidSpace LLC in California. Subsequently, LiquidSpace Inc. filed a third Regulation D offering of $19,999,997 with $14,015,701 sold.

Investments in LiquidSpace were sold as “convertible promissory notes”. According to the “Convertible Note Purchase Agreement”, the outstanding principal and unpaid accrued interest of the client’s note would be converted into Conversion Shares upon the closing of a Qualified Equity Financing. Stoltmann Law Offices has addressed the issues with promissory note investments in other articles. It is common for clients to be sold investments in the form of promissory notes, which are considered securities. Unfortunately, it is also common for promissory notes to be used in fraudulent investment schemes, such as Ponzi schemes, selling away (i.e. when a broker sells you an investment that was not approved by the brokerage firm), and theft. Given that these investments also are not publicly traded, it is impossible for investors to know the true value of their investment. It also makes it extremely difficult, and in many cases impossible, for them to liquidate the investment, unless the investment becomes publicly traded or the investment offers a liquidation period. At least some investors have not received any distributions or income from their investment in LiquidSpace, and it is unclear when they will be able to liquidate their investment.

If you invested in LiquidSpace through a FINRA Broker Dealer, Registered Representative, or a Registered Investment Advisor, then we may be able to file a complaint on your behalf to rescind your investment. Brokerage firms owed duties to their clients to perform due diligence into LiquidSpace prior to recommending it to their clients, and disclose any risks and conflicts of interests at the time of any recommendations to invest. In exchange for pushing speculative products like LiquidSpace, broker dealers were paid hefty commissions of approximately 10% which is why it was sold to clients regardless of the known risks or each client’s investment objectives. If you invested in LiquidSpace, contact Stoltmann Law Offices for a free evaluation to determine the best course of action for you to take. We are a contingency fee law firm which means we do  not get paid until you do.

 

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