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The Securities Arbitration Commentator (SAC) recently took notice of a new investor education project that was spearheaded by our own Jason Doss.  Mr. Doss is a recent past president of the Public Investors Arbitration Bar Association, or PIABA, and the current president of the PIABA Foundation.  PIABA is an association of attorneys from around the country who represent investors against brokerage firms and their financial advisors. These investment-related disputes are resolved in arbitration proceedings and are often centered around investment fraud.  The damage done to victims of investment fraud – both financial and emotional – can be devastating.

Having seen the devastation up close for many years, Mr. Doss wanted to help alleviate as much of it as possible.  “Wouldn’t it be a good if we could help investors before they became victims,” he said.

Mr. Doss helped create the PIABA Foundation and has led the organization as its President to fulfill its mission of educating and protecting investors.  Mr. Doss and the PIABA Foundation then collaborated with the Alliance for Investor Education (AIE) in producing a National Investor Town Hall Meeting on October 29 in San Diego that SAC blogged about.  Mr. Doss also co-authored a book entitled “The Investors Guide to Protecting Your Financial Future,” and a short documentary entitled “Trust Me.”  The video uses the inability of government to prevent repeated financial collapses as a starting point for learning how investment fraudsters operate and what investors can do to protect themselves.  The video features the accounts of two actual investment fraud victims and commentary by several investor attorneys.

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A South Carolina grand jury has indicted a Greenville broker named Claus Foerster for defrauding his clients out of $2.8 million.  According to news reports, the indictments states that Foerster persuaded clients to invest in a fictitious company called SG Investment Management.  According to the Associated Press, Foerster provided his clients with bogus earnings statements that falsely indicated their funds were invested and earning profits.

Foerster allegedly perpetrated this fraud over a 14 year period from 2000 to 2014 while he was associated with three different brokerage firms.  Foerster was associated with Raymond James & Associates, Inc. from February 2013 to June 2014; Morgan Keegan & Company, Inc. from February 2008 to February 2013; and Citigroup Global Markets, Inc. d/b/a Smith Barney from July 1997 to February 2008.

In 2014, the Financial Industry Regulatory Authority (FINRA) barred Foerster from the securities industry due to allegations that he was running a Ponzi scheme.  Foerster was terminated by Raymond James in 2014 after he admitted that he had misappropriated client funds.

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Following up on our previous blog post, broker dealers that sold UDF non-traded REITs to investors include, but are not limited to, IMS Securities Inc., Berthel Fisher & Co. Financial Services Inc., Centaurus Financial Inc., and VSR Financial Services, Inc.

These firms have a history of regulatory violations and customer complaints:

  • The Financial Industry Regulatory Authority (“FINRA”) has fined and/or reprimanded IMS Securities Inc. twice for failure to supervise and once for allowing a registered representative to sell securities in Texas without being licensed in Texas.
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Following up on our previous blog post, United Development Funding IV was organized on May 28, 2008.  UDF IV shares began trading on the NASDAQ under the symbol “UDF” on June 4, 2014.  Prior to June 4, 2012, UDF IV was a public non-traded REIT.

An investment in a public non-traded REIT is essentially an investment in in an illiquid start-up real estate company that must accumulate assets quickly and is subject to significant risks. Such an investment is unsuitable for most investors.  Non-traded REITs are typically sold to unsuspecting retail (“mom and pop”) investors who are seeking yield in the low-interest rate environment.  They get pitched to investors by financial advisers who are incentivized to sell non-traded REITs by getting paid outsized commissions from the company.

Shares of UDF IV were initially sold through a securities brokerage firm named Realty Capital Securities, LLC (“RCS”), as the Dealer Manager of the securities offering, and possibly through various other Soliciting Dealers – securities brokerage firms that may have been retained by RCS to sell shares of UDF IV.  RCS reportedly raised over $1 billion from retail investors and was paid commissions and fees for selling UDF IV to retail investors.

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Shares of United Development Funding IV collapsed 55% to $3.20 per share on Thursday, February 18, before trading was halted.  UDF IV is a publicly traded REIT.  The collapse occurred after the FBI raided the company’s offices in Texas.  A prominent hedge fund manager had previously accused UDF IV of essentially operating as billion dollar Ponzi scheme.  In addition, the firm’s independent accounting firm resigned and has not been replaced, according to reports.  Shareholder class action lawsuits have been filed.

What investors need to know is this.  Class actions lawsuits are designed to take a large group of investors with very small losses and aggregate them into a single lawsuit.  At the end of the process, the recovery is typically small.  There is another, better path for investors with significant losses, and that is filing a securities arbitration claim against the brokerage firm that sold the investment.

Investment advisers, brokers and their firms have a legal duty to understand and communicate to investors all the material facts about an investment, including the risks, before the investment is made.  In other words, they have a duty not to misrepresent or fail to disclose any important facts before the investment is made.  In addition, they have a duty not to recommend an investment that is unsuitable for the investor based on the investor’s investment objective, risk tolerance and time horizon.  If any of these duties is breached, and losses occur, the investor has a compelling claim to recover those losses in arbitration.

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F-Squared Investments, Inc., a SEC registered investment adviser firm, filed a Chapter 11 bankruptcy petition in July 2015 after paying $35 million and admitting wrongdoing to settle SEC charges that it falsified its advertised track record of investment performance, giving investors the false impression that its performance results were significantly better than they really were. Its AlphaSector investment strategies were used by other investment advisor firms, including Wells Fargo Advisors.

F-Squared’s AlphaSector strategies belong to a group of managed account strategies known as ETF managed portfolios.  According to Morningstar, in the typical ETF managed portfolio, more than 50% the assets are invested in exchange-traded funds.  Money managers like F-Squared package portfolios of ETFs into investment strategies to meet a variety of investment objectives.

Appealing to thousands of individual investors who were burned by the 2008-2009 market declines, F-Squared held out its algorithm-driven AlphaSector investment strategies as a way to manage risk in volatile financial markets.  However, the SEC accused F-Squared of presenting false and misleading performance numbers in its advertising and marketing materials, and also charged its co-founder and ex-CEO, Howard Present, with making false and misleading statements to investors.

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On March 15, 2013, the SEC announced that S.A.C. Capital Advisors affiliate hedge fund advisory firm, CR Intrinsic Investors, has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. This settlement is the largest ever in an insider trading case, requiring CR Intrinsic to pay $274,972,541.00 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541.00 penalty.

The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial.

The SEC’s complaint alleged that CR Intrinsic and Dr. Gilman tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week.

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Over the last six weeks, we have spoken to over sixty (60) nervous investors with concerns about the recent events and negative press swirling around FINRA’s complaint filed against David Lerner and the Apple REIT investments. Most, if not all of the those investors indicated that they intended immediately to redeem their shares in Apple REITs 6-9.

Redemption requests are considered by the Apple REIT entities on a quarterly basis and June 23, 2011 was the deadline to submit redemption request forms to David Lerner for the current quarter. This week, investors began receiving letters from David Lerner providing information on how much of their investment they are going to receive this quarter. The results are as follows:

Apple REIT 6 – 11.88%

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According to the Los Angeles Times, Robert Khuzami, the Securities and Exchange Commission’s (SEC) director of enforcement, has initiated a new whistle-blower program to attempt to catch fraudsters in the act. This program hopes to stop the fraudster before they have caused too much damage and to attempt to seize the most assets possible for returning to victims.

In exchange for coming forward and cooperating with the SEC, the SEC will provide levels of protection to individuals who were involved in the scheme but now wish to turn in their co-conspirators or the individual running the scheme. The whistle-blower may even avoid an SEC suit as a result of their cooperation with the SEC. Further, there is a proposal to even provide the whistle-blower with a reward, a percentage of what is recovered, for coming forward and providing key information which leads to the prosecution of individuals like Madoff.

Although rewarding wrongdoers, who become whistleblowers, may seem distasteful, unfortunately this may be extremely important in the efforts to bring down powerful fraudsters and their schemes. The protection from a lawsuit and monetary reward, encourages individuals to come forward, when likely they would not otherwise. Further, as Khuzami pointed out “cooperator’s testimony allows [the SEC] to act more quickly — find out where the bank accounts are located and increase our chance of returning money to investors.” Finally, Khuzami reminded us that “the earlier you shut down a case, the less victims there are. Tomorrow’s victims will not materialize.”

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According to the Securities and Exchange Commission (SEC), a father-son investment team has been charged with securities fraud for their role in an extensive hedge fund fraud. It is alleged by the SEC that these men, Neil V. Moody and his son, Christopher Moody, both investment advisers in Sarasota, Florida, mislead investors concerning the financial condition of the three hedge funds they managed. The three hedge funds were, Valhalla Investment Partners L.P., Viking IRA Fund LLC and Viking Fund LLC. Additionally, the SEC claims that Moody and his son represented to individuals that they were in control of the funds’ investment and trading activities, when in fact they were not. The funds were alleged to actually be controlled by Arther G. Nadel.

Specifically, the SEC alleges that these men disseminated misleading information to investors misrepresenting the hedge funds’ investment returns and overstating the values of the funds by as much as $160 million. These misrepresentations were alleged to have been made in account statements, offering materials, and newsletters prepared by the Moodys. The SEC claims that the Moodys did not independently verify the figures given them by Nadel and failed to notice and/or appreciate the multiple red flags which should have caused them to more carefully review the information given them by Nadel. It should be noted that Nadel was charged with fraud last year by the SEC and his assets were frozen by an emergency court order.

Glenn Gordon, the Associate Director of the SEC’s Miami Regional Office, sums it up by stating that the Moodys “abdicated their responsibilities to investors and ignored warning signs that should have alerted them to the fraud that was occurring all around them.”