Posts tagged ‘DBSI fraud’
Broker Dealers Suing Insurance Carriers Over Coverage For Customer Claims
According to the Investment News, three independent broker-dealers are suing their respective insurance carriers for failing to cover investors’ legal claims, with one charging that its insurer has exposed it to “financial ruin.”
The broker-dealers, Next Financial Group Inc., Berthel Fisher & Company Financial Services Inc. and Brecek & Young Advisors Inc., allege that the insurance carriers are refusing to meet the maximum coverage amounts for claims that investors have filed over various private placements, real estate investments and unsuitable investment products.
The insurance carriers, however, contend that the maximum coverage is millions of dollars less than the broker-dealers seek, because the investors’ lawsuits are related to one another and arise, at least in the case of Next Financial and Berthel Fisher, from the failure of a specific product.
For example, in Next Financial’s lawsuit against Arch Specialty Insurance Co. in U.S. District Court in Dallas, the broker-dealer’s amended complaint, which was filed last month, claims that it has liability limits of $2 million per occurrence and a total coverage limit of $15 million per policy period.
Next Financial has $9.5 million in claims stemming from its sales of Provident Royalties LLC private placements and wants Arch to cover them. Arch, in its counterclaim, alleges that the maximum amount it should pay is $2 million because all the claims are related to one product.
Next Financial is one of the firms named in a class action, also in federal court in Dallas, alleging damages by broker-dealers as a result of the sale of Provident private placements. Next Financial is alleging that Arch is in breach of contract and that its positions make resolution of the class action “impossible and expose Next to financial ruin.”
In total, Next Financial sold $43 million of Provident and received more than $3 million in commissions and fees. Provident, which raised $485 million and sold its oil and gas deals through dozens of independent broker-dealers, was charged with fraud in 2009 by the Securities and Exchange Commission.
Barry Knight, chief executive of Next Financial, didn’t return calls last week seeking comment.
Conflicts between broker-dealers and insurance carriers over whether claims can be bundled together or are “interrelated” are becoming more common, industry executives and attorneys said.
If firms are thinly capitalized and have little cash reserved for legal costs and lawsuits, the results could prove debilitating, particularly if firms suffer big dollar losses in arbitration claims, executives said
Before it closed its doors this month, QA3 Financial Corp. was also involved in a lawsuit with its insurance carrier, Catlin Specialty Insurance Co., disputing the extent of its coverage over private investments, claiming that it faced bankruptcy if the matter was not resolved. (See related stories on Pages 4 and 16.)
In the dispute between Berthel Fisher and Arch, the former is claiming $7 million in aggregate coverage, while the latter is claiming a $1 million limit to all related claims. Berthel’s lawsuit is in federal court in Cedar Rapids, Iowa.
As with Next Financial, the Berthel claims stem from client lawsuits regarding one product.
In this case, it wasn’t a private placement but a series of real estate deals known as tenant-in-common exchanges that were packaged by DBSI Inc. DBSI filed for Chapter 11 bankruptcy protection in November 2008.
The trustee in the DBSI bankruptcy is seeking to claw back $49 million in commissions from broker-dealers that sold DBSI. Berthel reportedly generated $5.6 million in commissions from DBSI, according to bankruptcy court documents.
According to the Berthel and Arch lawsuits, investors have filed up to 20 different arbitration claims against Berthel with the Financial Industry Regulatory Authority Inc.
Tom Berthel, chief executive and owner of Berthel Fisher, declined to comment on the firm’s lawsuit against Arch, saying only: “I hope there is a resolution to it. I think there can be.”
Mr. Berthel added: “We’re not interested in going out of business.”
He said that recent chatter among broker-dealers included “badmouthing” some firms, particularly after the collapse of QA3 Financial this month.
“There’s talk of who’s next,” Mr. Berthel said, adding that he has no interest in indulging in speculation.
“Let’s figure out what caused some of the issues with insurance carriers,” he said. “I’m a little disgusted” with the recent industry gossip about broker-dealers potentially closing, Mr. Berthel said.
Regarding QA3, he said that it was “not good for the industry to have a firm go down like that” and that it was particularly harmful to the advisers and their clients, as they were scrambling to find a firm to land their accounts.
Attorneys for Arch in the lawsuits by Next Financial and Berthel Fisher didn’t return calls seeking comment.
Brecek & Young is suing Lloyds of London Syndicate 2003 over an arbitration claim that it settled in 2009 for about $1.4 million, which includes a settlement with investors and legal costs. Lloyds has paid only $390,000 toward Brecek & Young’s defense-and-indemnity expenses, according to court filings.
The firm is suing Lloyds in federal court in Kansas City, Kan. David Buchanan, an attorney for Lloyds, didn’t return a call seeking comment.
Securities America Inc. acquired Brecek & Young in 2008, and Janine Wertheim, a spokeswoman for Securities America, said that the lawsuit “involves Brecek & Young pursuing coverage for a previously known case that arose prior to Securities America‘s acquisition” of the firm.
If you have questions about investments you made with Next Financial, Berthel Fisher, or Brecek & Young, the securities attorneys of The White Law Group may be able to help. For a free consultation, call the firm’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.
FINRA focused on possible securities fraud Involving Private Placements and Non-Traded REITs
Broker-dealer sales of opaque and illiquid private investments are squarely in the sights of securities regulators at the Financial Industry Regulatory Authority Inc.
In fact, Regulation D private placements and “close cousin” non-traded real estate investment trusts are listed as the first and second areas of focus, respectively, for FINRA’s enforcement department, according to James Shorris, executive vice president and executive director of enforcement.
Watching the marketplace for Reg D deals, known as such for how they are filed with the Securities and Exchange Commission, is a “major, major initiative” at FINRA, Mr. Shorris said Tuesday. He was speaking on a panel at the annual meeting of broker-dealer members of the Financial Services Institute, an advocacy group for independent firms.
He said FINRA officials have monitored failures at some broker-dealers that sold private placements as suitable investments for their clients — but noted that there were some firms that failed to perform appropriate due diligence on certain private offerings.
During his comments, he specifically named the offerings of Medical Capital Holdings Inc. and Provident Royalties LLC. Both of those offerings raised hundreds of millions of dollars through sales by independent broker-dealers. In 2009, the SEC charged both with fraud.
Mr. Shorris then pointed to the sale of non-traded REITs as a big focus of FINRA staff. “Those may not have been sold properly by reps to customers,” he said, with the reps at times not telling clients about the lack of liquidity that came after buying the product (as well as the general lack of oversight of these investments compared with more scrutinized investments such as stocks, mutual funds, etc.)
FINRA is also zeroing in on exotic products such as reverse convertibles and leveraged exchange-traded funds, and anti-money-laundering issues at broker-dealers.
If you have suffered investment losses in private placement or non-traded REIT investments, the securities attorneys of The White Law Group may be able to help.
The firm is currently representing numerous investors in cases involving private placements and non-traded REITs, including cases involving Medical Capital, Provident Royalties, DBSI, Desert Capital REIT, Behringer Harvard (among others).
For a free consultation, please call the firm’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions attempt to recover their investment losses.
FINRA Rules on Private Placements
Private Placements have become a hot button issue for FINRA regulators and securities attorneys representing investors. The number of private placement cases has spiked considerably over the past few years in large part because of the sizable commissions brokerage firms generate from selling private placements. We are currently handling numerous cases involving private placement investments that went under like DBSI, Medical Capital, and Provident Royalties (among others).
New rules have been implemented requiring full disclosure of these commissions, and even more rules are being contemplated. The following is a brief overview of those FINRA Rules, as well as some of the relevant case law that discusses a brokerage firms obligation to perform due diligence on a private placement investment prior to recommending it to any of its clients.
The first significant rule that applies in private placement fraud cases is NASD Rule 2310. NASD Rule 2310 states that a brokerage firm must have a reasonable grounds to believe that a customer recommendation to purchase, sell or exchange a security (including a private placement investment) is suitable for the customer. See, also FINRA Notice to Member 03-71 concerning non-conventional investments and Notice to Member 05-18 concerning private placements of tenants-in-common interests.
This suitability analysis has two principal components. First, the “reasonable basis” suitability analysis requires the brokerage firm to have a reasonable basis to believe, based on a reasonable investigation, that the recommendation is suitable for at least some investors. This is where certain private placements, such as Medical Capital, DBSI, and Provident, fail the suitability test. Had brokerage firms perform the proper amount of due diligence on these investments, the firms would have realized that ponzi schemes are obviously not appropriate investments for any investors.
The second prong, is the “customer specific suitability analysis, which requires that the brokerage firm determine whether the security is suitable for the customer to whom it would be recommended. This is often referred to as the Know Your Customer Rule, but in essence, brokerage firms are required to account for a client’s age, investment experience, net worth, and investment goals in determining whether an investment is appropriate for a particular client. Private placements often fail the suitability test for this reason. Private placements, by there very nature, are often risky investments, which are virtually never appropriate for conservative or retired investors.
In addition to determining suitability, brokerage firms have a high due diligence requirement. Specifically, brokerage firms are charged with exercising a high degree of case in investigating and independently verifying an issuer’s representations and claims. Additionally, when an issuer is seeking to finance a new speculative venture, a broker dealer can not blindly rely on the issuer’s representations and are required to be particularly careful in this instance and must verify the issuer’s obviously self-serving statements.
A brokerage firm has an even greater responsibility to perform due diligence on a specific investment if the firm is deemed to be affiliated in some way with the issuer. This can occur if the brokerage firm assists the company in preparing the private placement memorandum or if there are red flags present.
Finally, brokerage firms are required to follow NASD Rule 3010 and to ensure that the firm’s personnel, including its registered representatives, comply with their legal and regulatory requirements.
Much of the foregoing is discussed in FINRA Regulatory Notice 10-22 on Regulation D offerings.
Brokerage firms are also required to follow FINRA Rule 5122 when dealing with private placements. FINRA Rule 5122 was developed in response to abuses in the sale of private placements issued by broker-dealers and their control entities. The Rule generally requires that a member firm or associated person (financial advisor) engaging in a private placement of unregistered securities issued by the firm:
(1) disclose to investors in a private placement memorandum, term sheet or other offering document the intended use of offering proceeds, the offering expenses and the amount of compensation that will be paid to the broker-dealer and its associated persons;
(2) submit the offering documents to the FINRA Corporate Financing Department; and
(3) comply with the requirement that at least 85% of the offering proceeds raised may not be used to pay for offering costs, discounts, commissions or any other cash or non-cash incentives.
Obviously, the big one here is the disclosure of the commission paid. In many cases we have handled, the commission is either not disclosed or is disclosed in such a way that an unsophisticated investor cannot determine the commission paid to the brokerage firm making the representation. Private placements often pay a commission far in excess of other traditional types of investments (sometimes as high as 8-10%) and investors would certainly be more concerned about making such an investment if they knew that the broker was being paid this commission.
For more information on FINRA Rule 5122 look at FINRA Regulatory Notice 11-04.
If you have additional questions about private placements or are concerned about a private placement investment you made through a brokerage firm, the securities attorneys of The White Law Group may be able to help. For a free consultation, please call the firm’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.
Recovery of DBSI Investment Losses
| The White Law Group is currently investigating numerous securities fraud claims involving DBSI and DBSI tenants-in-common investments. Specifically, the firm is investigating whether the broker-dealers that recommended DBSI to its clients failed to perform the necessary due diligence on DBSI prior to recommending it to its clients. Brokerage firms have a fiduciary duty to its clients to research investments prior to recommending the investment to its clients and based on what is known about DBSI it appears that the brokerage firms that were selling DBSI failed to perform the necessary due diligence.
According to the Investment News, the following brokerage firms sold DBSI TIC’s to its clients:
If you have questions about an investment you made in DBSI at the recommendation of your financial professional or brokerage firm, The White Law Group may be able to help. For a free consultation, call the firm’s Chicago office at 312-238-9650. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions. For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com. |
Recovery of Investment Losses
If you have suffered investment losses as a result of the fraud or negligence of your financial professional or brokerage firm, The White Law Group may be able to help.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.
The White Law Group reviews all types of securities and investment frauds, including churning (excessive trading), unsuitability, theft (conversion), unauthorized trading, etc. The firm also reviews securities fraud claims involving most if not all of the various investment products currently being sold by brokerage firms – limited partnerships, hedge funds, mutual funds, commodities, Unit Investment Trusts (UITs), Real Estate Investment Trusts (REITs), variable annuities, stocks, bonds, and tenants-in-common investments (TICs).
The firm also represents investors who have been the victims of a ponzi scheme.
The following are some of the investments that the firm is currently investigating:
(1) Desert Capital REIT
(2) DBSI TIC and DBSI Promissory Notes
(3) Medical Capital
(4) Capital Solutions Monthly Income Fund
(5) Provident Royalties
(6) Behringer Harvard
(7) CIT InterNotes
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.