The White Law Group, LLC, a South Florida securities fraud, broker fraud, securities arbitration, investor protection and Chapter 7 bankruptcy law firm based in Boca Raton, Florida.

Posts tagged ‘Provident Royalties scam’

Milkie/Ferguson Investments shuts down.

According to reports, Milkie/Ferguson Investments Inc., a small broker-dealer that was a big seller of fraudulent Provident Royalties LLC private placements, has shut down.

Apparently, the vast majority of the registered representatives with Milkie/Ferguson will transfer to Berthel Fisher & Co. Financial Services Inc.

Milkie/Ferguson filed its broker-dealer withdrawal request with the Financial Industry Regulatory Authority Inc. on July 26.

According to U.S. Bankruptcy Court filings, Milkie/Ferguson reps sold at least $4.1 million of Provident Royalties preferred shares. That made it the eleventh largest firm that sold those shares.

The figure may be incomplete, however, as the bankruptcy filing counted only about half of the $485 million in Provident Royalties shares sold by independent broker-dealers to investors.

Selling Provident Royalties preferred shares from 2006 to 2009 turned into a death warrant for dozens of independent broker-dealers. At least 23 of the 60 broker-dealers that sold Provident Royalties shares are out of business, many of them swamped by the cost of fighting clients’ lawsuits related to the fraud.

With about 40 brokers and $6.6 million in revenue last year, Milkie/Ferguson was a small firm. Such firms are having a difficult time staying in business due to several factors: equity markets that scare retail investors, rising costs of technology, increased fees from regulators such as Finra and the fallout from failed investments such as Provident Royalties, Medical Capital, Desert Capital REIT, and Behringer Harvard.

The foregoing information, which is publicly available, is being provided by The White Law Group.  The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.

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.

Workman Securities Reaches Agreement on Medical Capital and Provident Royalties Cases

According to Investment News, a broker-dealer that was a prominent seller of high-risk private placements that wound up going bust has almost wiped the slate clean of costly litigation that could have impaired the firm’s financial condition.

Workman Securities Corp. this month reached an agreement with the Financial Industry Regulatory Authority Inc. to pay $700,000 for partial restitution to more than a dozen clients who had sued the firm over investments in Medical Capital Holdings Inc. and Provident Royalties LLC — two series of private placements that the Securities and Exchange Commission charged were fraudulent in 2009.

Both the Medical Capital and Provident deals were widely distributed by dozens of independent broker-dealers, some of which have shut down because they were unable to face the burden of litigation costs.

“Workman views this as a terrific resolution so it can move forward,” said Benjamin Skjold, partner at Skjold Barthel PA and attorney for Workman, which has 171 reps. The firm has “effectively” paid the $700,000 and now turns to face about a half dozen remaining individual securities arbitration claims from clients.

Workman’s insurance carrier, Catlin Specialty Insurance Co., has paid $2.3 million to clients who sued the firm, Mr. Skjold said, adding that the process of settlement and restitution took about a year. “We’ve worked diligently internally, with the insurance carrier and with Finra to get claims resolved,” he said.

Workman’s reps sold a little more than $9 million of Provident Royalties private placements, according to U.S. bankruptcy court filings from last summer in the Northern District of Texas. The amount of Medical Capital notes the firm’s reps sold to investors is not known.

According to Workman’s profile on Finra’s BrokerCheck system, the firm’s supervision and due diligence when selling Regulation D private placements had big holes.

“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” Finra alleged. “The firm failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.” (Read the full Finra letter of acceptance, waiver and consent with Workman.)

Broker-dealer sales of Reg D private placements are very high up on Finra’s watch list. In a meeting of brokerage executives this month in Phoenix, James Shorris, executive vice president and executive director of enforcement with Finra, Regulation D private placements and non-traded real estate investment trusts are listed as the first and second areas of focus for Finra, respectively. (For more, read ‘Private deals at the top of Finra’s hit list’.)

Other broker-dealers have not fared well in settling the gusher of litigation that erupted after the SEC charged Medical Capital and Provident with fraud. On Friday, QA3 Financial Corp., another leading seller of Provident deals, submitted a request with Finra and the SEC to terminate its license as a broker-dealer. QA3 and its insurance carrier, also Catlin, had been sparring in court and exchange lawsuits in the past six months about the amount of coverage owed to the firm.

If you have questions about investments you made with Workman Securities, 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.