Would you complain about your broker to the Financial Investor Regulatory Authority (FINRA) if you thought your odds of success were good?  They are, at least so far in 2019.  In the first half of 2019, investors won 44 percent of the arbitration cases they filed against brokers and brokerage firms from January through June of this year, according to FINRA statistics.  This is an improvements from the 38 percent investor win rate five years ago.

Another piece of good news for investors is mediation cases are being decided faster.  Mediation is a common way to resolve investor cases filed with FINRA without having to go through an arbitration hearing.   The turnaround time it takes to resolve cases through mediation has shrunk from 126 days to 93 days, a 26 percent improvement.

The number of private equity claims filed by investors cases are increasing as more of these types of investment products are appearing in the portfolios of retail investors with 63 claims filed in the first half of 2019 compared to 54 filed in all of 2018.  Investors are also bringing more actions involving Real Estate Investment Trusts (REITS) while claims involving Exchange Traded Funds (ETFs) declined by close to half from January to June 2019 (60) compared to January to June 2018 (104).  Claims involving muni bonds, a mainstay of retirees aiming to safeguard their principal, have also dropped from 331 from 462.

No yield hungry investor wants to miss out on the next Google, the next big thing.  But as this Securities and Exchange Commission civil prosecution shows the only big things in some start-ups may be fraud.  A number of high net worth individuals thought an Orange County, California investment adviser was appealing.  But they were mistaken and taken to the cleaners for $14 million for undisclosed and excessive fees, claims the SEC.

According to an SEC court filing, Stuart Frost and his investment advisory firm, Frost Management Company, raised $63 million from the investors to put into another firm he owned, Frost Data Capital (FDC) that was supposedly performing operational support and other services to help incubate a portfolio of start-ups.  In reality, much of the money was said to have been diverted to fund a lavish lifestyle for him which included a boat, luxury cars and an archery range.

“When Frost needed more cash to fund his lavish lifestyle, he created new portfolio companies and, after investing more fund capital into the new companies, FDC then extracted even more incubator fees,” according to the SEC complaint.  The SEC is alleging Frost and his investment advisory firm violated their fiduciary duties by keeping the super-charged fees hidden from the investors.

On August 2, 2019, a class action complaint was filed against GPB Capital Holdings and several affiliated entities in the United States District Court for the Southern District of New York, Case No. 19-cv-7250. There are two named plaintiffs, one an investor in the GPB Automotive Fund, there other an investor in the GPB Holdings Fund II. The class action is actually quite limited in scope, broadly alleging that the investors have been damaged by GPB Capital because the funds have collectively failed to provide audited financial statements as required by the private offering memoranda and the Securities and Exchange Commission. The class action complaint has two counts: breach of contract and breach of fiduciary duty. There are no allegations of fraud or other misconduct and the complaint parrots many of the published claims about GPB, including many of the same facts identified on this blog before.

Investors should not be lulled into complacency by the filing of this class action complaint, as if it will be from where their investment losses are recovered. Investors need to continue to honestly assess their individual situations and determine whether their financial advisors or brokers sold them these funds based on misrepresentations or omissions of material fact.  Many of the GPB investors represented by Stoltmann Law Offices have made allegations of unsuitability and breach of fiduciary duty against the brokerage firm responsible for selling GPB Funds to them. Those FINRA arbitration claims also include other alternative investments too, because brokers who sell private placements tend to sell more than just one. Many of our investors have serious concentration issues, with substantial percentages of their assets under management – some near 100% – in alternative, private placements including the GPB Funds.

GPB Capital utilized a network of independent brokerage firms, including Madison Avenue Securities, FSC Securities, Royal Alliance, amongst about 60 others, to sell almost $2 billion worth of their securities to retail investors. Now investors are locked into investments that have been marked down up to 70% in some instances, with no dividends being paid, and with a constant drip of negative news. Brokers are telling their clients not to worry; to sit tight; to wait it out. Advisors are telling investors this will “blow over” and that GPB will be paying dividends again in no time. These “lulling” statements should not be relied on by investors. Brokers and advisors have no more information about what is happening inside GPB Capital than the investors do at this point, and any statement or advice from a broker to “hold tight” is self-serving. Investors should ask their brokers 1) how much money in commissions they were paid to sell them GPB Funds; and 2) ask to see the due diligence file the broker created on GPB prior to selling it. The responses will not be friendly.

Crypto related currencies have been called a lot of things. The next big thing. A bright, shiny object.  When top financial regulators say they aren’t comfortable that they haven’t learned about the full dangers of crypto, you’re wise to be wary too. Investment promoters often try to convince hungry investors they can turn hot topics of the day from oil and gas fracking to self-driving cars into wealth.

But often the only wealth that surfaces from their drumbeat is an abundant pile of victims.  Crypto crooks stole over $4 billion from investors this year, the blockchain consulting firm CipherTrace warned in a new study.  Even the sophisticated are vulnerable and increasingly so.

“Exchanges and users are facing a greater sophistication in the tactics, techniques and procedures (TTPs) cybercriminals are using to target the cryptocurrency space. In the case of exchange robberies, hackers have developed advanced methods to overcome even the current “best practice” security in place at the more vigilant exchanges,” CipherTrace cautioned.

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.”

Hungry, creepy creatures are crawling abundantly on the web eager to swallow your money and your stocks and bonds and ETFs from your brokerage account.  But while many of the crooks employ the latest technology to do their dirty work, you can use a centuries old salve to thwart (some) of them: An ounce of prevention is worth a pound of cure.

A good way to start is with the off button on a computer or your broker’s web site.  You could still leave the door open to cyber thieves if you simply close or minimize your browser or type in a new Web address when you’re done using your online brokerage account, warns the broker self-regulatory body, the Financial Industry Regulatory Authority (FINRA).  So be sure to hit the “log off” button on your broker’s web site when you are finished or turn off the computer or mobile device completely.

Generally turning off your computer when it is not in use or at least disconnecting it from the Internet can also keep intruders from your account.  Regularly check your brokerage account for unauthorized transactions—especially withdrawals or wire transfers to an account that is not yours —and ask the firm to investigate if you find any, the brokerage regulator suggested.

On August 5, 2019, FINRA fined Morgan Stanley registered representative Ken Kavanagh $25,000 and suspended him from practicing in the securities industry for eighteen after discovering that he concealed his outside business activity. According to FINRA’s order, beginning in 2003, Kavanagh provided personal management services to professional athletes. In October 2007, he registered his business as CEO-Sports in New Jersey, then formed another LLC in Pennsylvania, MGMT LLC. His services included coordinating travel and dinner arrangements, housing, bill payment, opening and managing bank accounts, and referrals to other professionals for tax return preparations and wills. Kavanagh had approximately 42 clients and generated at least $5 million in fees from 2012 through 2018 for providing these services.

FINRA Rule 3270 (formerly NASD Rule 3030) prohibits FINRA financial advisors from engaging in outside businesses unless they are properly disclosed to and approved by the advisor’s  brokerage firm. Mr. Kavanagh did not disclose his interest in MGMT or CEO-Sports to Morgan Stanley. He also attested in annual questionnaires required by Morgan Stanley that he was not involved with any outside business activities. He named a close relative as the sole owner or member of MGMT and CEO-Sports and also as the authorized representative on the each company’s bank accounts.  As a result of these FINRA Rule violations, FINRA fined Kavanagh $25,000 and suspended him for eighteen months.

As Stoltmann Law Offices previously alerted investors, Kavanagh has not been registered in the securities industry since resigning from Morgan Stanley in April 2018 after a client complained of his undisclosed outside business activities. On August 15, 2018, a customer also complained that Kavanagh placed unauthorized trades and forged documents.

In this digital era, where iris biometrics are flowering prints of digits are still being relied upon by brokerages and banks to catch crooks and to stop them from working at cashiers’ windows.  A few days ago, Citigroup Global Markets was fined $1.25 million in part for failing to screen over 500 employees through fingerprinting, a technology first employed in the United States in the first decade of the 20th century.

Three workers with criminal convictions fell through the cracks. While it does happen, finger pointing of financial firms for failure to do mandatory fingerprinting by regulators is rare.  Two years ago, FINRA fined J.P. Morgan the same amount for not fingerprinting 2,000 workers.

FINRA and state regulators require fingerprinting for broker-dealers. The SEC doesn’t mandate fingerprinting for investment advisers, but some states do for the smaller advisers who are under their oversight. All job applicants to the FDIC must submit fingerprints.

If you lost money in investments with John Hoidas, a registered representative of Uhlmann Price Securities LLC, contact our office. We are representing investors who lost hundreds of thousands of dollars in private placements and annuities that were sold to them by Mr. Hoidas, including GPB, LiquidSpace and IGF Investment Grade Fund. These investments were sold to unsophisticated clients who could not afford the risk that these investments presented.

In July 2019, three customers filed complaints against Uhlmann Price and Hoidas. He also has a laundry list of financial disclosures on his CRD Report, including over $67,000 in IRS and state tax liens. Hoidas disclosed several outside business activities, including:

  • Consultant with Gerson Lehrman Group;

The news just keeps getting worse for investors in GPB Capital Holdings. On July 19, 2019, a former GPB Capital business partner sued GPB Capital in Norfolk County, Massachusetts court alleging, amongst other things, that GPB Capital has been engaged in a massive Ponzi-like scheme for some time. The allegations are in connection with a $230 million deal gone wrong, including that this former partner was forced out of GPB Capital after complaining to the SEC about the company’s financial misconduct.  The complaint alleges that GPB Capital uses investor money to prop-up flailing auto-dealerships it owns and also uses investor funds to make interest or distribution payments to other investors – the hallmark of a Ponzi scheme. The complaint alleges that GPB Capital also engaged in an elaborate coverup to cause investors to believe their investments were safe.

As we have discussed on several posts on this cite, GPB Capital has run into trouble in numerous ways. GPB Capital raised almost two-billion dollars from retail investors beginning in 2013 from an array of brokerage firms, including Cetera Advisors, FSC Capital, and Royal Alliance, amongst others. Abruptly in late 2018, GPB Capital’s auditor resigned, which is almost always a bad sign. Then GPB Capital announced it was under investigation by a slew of regulators and law enforcement.  It was then informed by National Financial Services, an affiliate of Fidelity, that it would no longer allow GPB Capital securities to be held on its account statements.  In response to that, GPB Capital rushed to provide an “accurate” Net-Asset-Value (NAV) which reduced the value of its funds by anywhere from 35% to 50%.  These massive markdowns caused sticker-shock when investors received their monthly account statements and they saw the historically “stable” investment suddenly reflecting massive losses.  Investors are now rightly looking at the the financial advisors and brokerage firms responsible for soliciting and selling units in GPB Capital to them.

Brokerage firms have many duties and obligations when they sell clients investments in private placements like GPB Capital Holdings. Initially, a brokerage cannot even approve an offering in a private placement to be sold by their brokers until the firm engages in a due diligence investigation. Only after this investigation meets with the approval of the firm can it sell the investment to their clients. These duties and obligations are encoded in FINRA Rule 2111 Suitability Rule and at least a half-dozen Regulatory Notices, including RN-10-22 which is an opus on brokerage firm due diligence responsibilities to perform due diligence on private placements prior to offering them to firm clients, NASD NTM 03-71 which speaks to a firm’s obligations to vet non-conventional investments, and NTM 05-26 which discusses the vetting of new products.  This vetting process is mired in a massive conflict of interest. Brokerage firms like FSC and Royal Alliance were paid at least 7% commissions for selling GPB Capital.  If the investment never gets past the due diligence step, then the firms and brokers can’t reap those huge commissions!

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