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Monthly Archives: May 2010

Behringer Harvard, Other Non-Traded REITs Warrant Closer Look By FINRA

Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II and Piedmont Office Realty Trust are non-traded real estate investment trusts, or REITs – an industry that has garnered new interest from the Financial Industry Regulatory Authority (FINRA).

As reported May 28 by Investment News, FINRA is paying close attention to non-traded REITs and, in particular, the ways in which broker/dealers marketed and sold the products to investors.

Non-traded REITs are considered illiquid investments because they do not trade on a stock exchange. The majority of non-traded REITs have a specific time frame that outlines when investors can redeem their REIT shares. Non-traded REITs also come with high commissions and fees, a fact that may lead some broker/dealers to misrepresent the products for personal profit.

The market for non-traded REITs experienced an especially tumultuous year in 2009. Many of the largest non-traded REITs either slashed dividends to investors, shut down redemption programs or both.

In March 2009, for instance, the Behringer Harvard REIT I suspended shareholder redemption requests. A short time later, it announced plans to slash annualized dividends from 6.5% to 3.25%, based on an original share purchase price of $10.  The Behringer Harvard Opportunity REIT I also halted its shareholder redemptions.

Maddox Hargett & Caruso is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning non-traded REITs, please Contact Us.

100% Principal Protected Notes Fail To Live Up To Their Hype

Complex securities sold as 100% principal protected notes have failed to live up to their billing. In recent months, untold numbers of investors have witnessed billions of dollars in losses because of so-called investments that were touted by brokers as good as cash investments.

A May 21 article by Gretchen Morgenson in the New York Times highlights the questions surrounding 100% principal protected notes and how these complex securities became the darling of Wall Street and a disaster for many investors.

Principal protected notes are essentially zero-coupon notes whose return is partly tied to the performance of an equity index, such as the Standard & Poor’s 500 or the Russell 2000. How an investor makes money on these types of investments, however, is a complex process. The securities promise to return an investor’s principal, typically at the end of 18 months, along with the added gain from the index’s performance if that index trades within a certain range.

The tricky part is this: For an investor with one of these notes to earn the return of the index, as well as get his principal back, the index cannot fall 25.5% or more from its level at the date of issuance. The index also cannot rise more than 27.5% above that level. If the index exceeds those levels during the holding period, an investor would receive only his principal back.

As the New York Times article points out, 100% principal protected notes were sold by many brokerages to conservative investors who typically put their money in low-risk financial products like certificates of deposit. Many investors quickly became disenchanted with their decision to buy into principal protected notes, especially those who bought notes issued by Lehman Brothers Holdings. Those investments are now worth mere pennies on the dollar following the company’s bankruptcy filing in September 2008.

Two investors who lost big on 100% principal protected notes with Lehman were Corinne and Gregory Minasian, according to the New York Times. On the suggestion of their UBS broker they invested almost $100,000 – more than half of their savings – into Lehman notes in early 2008. They ultimately lost everything, and currently have an arbitration case pending in an attempt to recover their losses.

The Minasians contend their UBS broker failed to explain the risks in the securities, and never provided them with a prospectus. They contend they didn’t’ even know their investment had been issued by Lehman Brothers until the firm actually collapsed in 2008.

“I am not a sophisticated investor,” said Mr. Minasian in the NYT’s article. “Many years ago I dabbled in the stock market, but I learned my lessons. Over the past 10 to 15 years my wife and I invested in CDs.”

UBS sold $1 billion of these notes to investors. Commissions were 1.75%, a percentage that is far higher than those generated on sales of CDs. When Mr. Minasian asked about the commission, he says his broker said none existed.

Piper Jaffray Fined By FINRA

Investment firm Piper Jaffray & Co. has been fined $700,000 by the Financial Industry Regulatory Authority (FINRA) for email retention violations, related disclosure issues and supervisory and reporting violations.

According to a statement issued by FINRA, Piper Jaffray failed to retain approximately 4.3 million emails from November 2002 through December 2008. The company also failed to inform FINRA of its email retention and retrieval issues.

This isn’t the first time Piper Jaffray has been cited for email retention deficiencies. Information on FINRA’s Web site reports that the company was sanctioned in November 2002 in a joint action by the Securities and Exchange Commission (SEC), the New York Stock Exchange Regulation and NASD following investigations tied to conflicts of interest between Piper’s investment banking and research departments. As part of that settlement, Piper Jaffray was required to review its systems and certify that it had established systems and procedures designed to preserve electronic mail communications.

In settling the latest matter with FINRA, Piper Jaffray neither admitted nor denied the findings.

Read FINRA’s action against Piper Jaffray here.

Citigroup, Morgan Stanley & Jackson Segregated CDO

Citigroup and Morgan Stanley appear to be taking a lead from Goldman Sachs when it comes to collateralized debt obligations (CDOs). As reported in a May 21 article by Bloomberg, Citigroup is the focus of several inquiries for allegedly selling a series of mortgage-linked securities – known as the Jackson Segregated Portfolio – to investors without disclosing the fact that Morgan Stanley helped shape the investments while also betting they would fail.

According to the Bloomberg article, marketing documents for the products – which were underwritten by Citigroup in 2006 – failed to provide information on the entity responsible for selecting the underlying mortgage bonds. Sources close to the deal contend that the entity was a Morgan Stanley unit. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, according to Bloomberg data.

So far, Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals.

In a similar situation last month, the Securities and Exchange Commission (SEC) accused Goldman Sachs of misleading investors by failing to disclose that the hedge fund, Paulson & Company, had a role in picking securities it then bet against.

As in the Goldman Sachs case, the Jackson Segregated investments involved a synthetic CDO. Derivatives linked to mortgage bonds were pooled together, packaged into new bonds and then sold investors. On the other end of the Jackson derivatives was a “short” investor. Profits were made when the underlying bonds failed.

“To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed . . . Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities,” the Bloomberg article reports

Margin Calls, Human Error To Blame For May 6 Crash?

Margins calls? Human error? Whatever the reason, billions and billions of dollars in capital vanished in the blink of an eye on May 6, the day the Dow Jones Industrial Average witnessed nearly a 1,000-point drop. Individual and institutional investors alike felt the pain – and will for some time to come. For those needing further proof of the repercussions, just look at your next 401k or brokerage statement. The losses rendered from May 6 will be poignantly clear.

Many are blaming the market’s crash on the debt crisis in Greece. Others point the finger at high-frequency trading. And some fault human error. Specifically, a number of people contend that the crash was tied to someone hitting “B” instead of “M” on the keyboard, resulting in a billion shares of a certain investment sold instead of a million. Various news sources have reported that the firm behind the trading error is Citigroup. Citigroup denies the claims.

Other analysts believe stocks plummeted on May 6 because of massive forced selling by big hedge funds that were responding to margin calls. Margin calls happen when people borrow heavily against their assets and then see their value plummet drastically. This, in turn, forces them to sell part of their holdings in order to make good with their lenders. The end result affects not only individual investors or institutional investors like hedge funds but also the entire economy.

Federal regulations limit the amount of margin trading that individual investors can conduct. This isn’t the case, however, with hedge funds, which are essentially unregulated and can typically borrow many times over the real value of their assets.

Regulators continue to review the financial free-fall that occurred on May 6. Regardless of what they determine, the end result will be the same: Investors are going to feel considerable financial pain for a long time to come.

Morgan Stanley, CDO Deals Face Scrutiny

Investments deals involving CDOs have come back to haunt Morgan Stanley. Federal prosecutors apparently are investigating whether the investment bank intentionally misled investors about various synthetic collateralized debt obligations that it helped design and sometimes bet against. The story was first reported by the Wall Street Journal on May 11.

According to the story, Morgan Stanley marketed and sold the CDOs in question to investors and then subsequently placed bets that their value would fall. Among other things, investigators want to know whether the bank disclosed certain facts to investors, as well as its role in the deals themselves.

In April, the Securities and Exchange Commission (SEC) charged another investment firm – Goldman Sachs – with fraud in connection to sales of synthetic CDOs.

According to the SEC’s complaint, Goldman Sachs failed to tell investors certain details regarding the financial products, including the fact that a major hedge fund not only selected the securities held by the CDO but also bet against them to fail.

Meanwhile, the probe into Morgan Stanley’s CDO is at a preliminary stage.

Goldman Sachs Expects More CDO Lawsuits In Its Future

Already facing a fraud lawsuit by the Securities and Exchange Commission (SEC) related to collateralized debt obligations (CDOs), Goldman Sachs says additional CDO lawsuits over its mortgage-trading activities are likely in the coming months.

“We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced against us with respect to offering of CDOs,” Goldman Sachs said in its 10-Q filing with the SEC on May 10.

The SEC’s lawsuit against Goldman accuses the investment bank and Vice President Fabrice Tourre of misleading investors about a mortgage-linked security and the role the hedge fund, Paulson & Co., played in selecting and then betting against the investment.

Following the SEC’s lawsuit, Goldman Sachs stock fell 22%.

Last month, current and former Goldman Sachs executives, including CEO Lloyd Blankfein and Tourre, faced intense grilling by the Senate’s Permanent Subcommittee on Investigations. Members of the committee subsequently released potentially damaging e-mails that showed various Goldman Sachs employees questioning the securities at the heart of the SEC’s lawsuit and referring to them as “junk.”

Goldman also warned in its 10Q filing that any settlement with the SEC could affect its business operations, including potentially hindering its core broker/dealer activities, as well as its ability to advise mutual funds.

Medical Capital Fraud: How Did It Happen?

Medical Capital fraud is on the minds of many investors. The shuttered lender, based in Tustin, California, has left thousands of investors in financial straits, with many still asking how it happened and why regulators didn’t do a better job of scrutinizing sales of private placements.

Private placements are stocks, bonds or other instruments that a corporation issues to investors outside of the public markets. Because the issuing companies don’t have to register private placements with the Securities and Exchange Commission (SEC), these investments are considered riskier than traditional securities.

Medical Capital Holdings operated its business by providing funds to financially troubled hospitals and health-care facilities. Once it secured the unpaid bills, or receivables, of those companies, interests in the receivables were sold to investors in the form of private placement securities called Medical Capital Notes.

From 2003 to 2009, through a group of special-purpose subsidiaries, Medical Capital Holdings issued more than $2.2 billion of Medical Capital Notes to some 20,000 investors across the country. By the time the Securities and Exchange Commission (SEC) sued Medical Capital for fraud in July 2009, Medical Capital had more than $543 million in phony receivables on its books and had lost $316 million on various loans. Meanwhile, the company had collected $323 million in fees for managing money-losing loans.

The SEC also uncovered the makings of a massive Ponzi scheme at Medical Capital. The scam ultimately would be called one of largest alleged Ponzi schemes in the history of Orange County, California. According to the SEC, Medical Capital was selling receivables at a markup among the funds it controlled and using money from newer investors to pay investors in the older funds.

In addition, the SEC says Medical Capital spent $4.5 million on a 118-foot yacht called the Home Stretch and another $18.1 million on unreleased movie about a Mexican Little League team.

In March 2010, federal prosecutors launched a criminal investigation into two key executives at Medical Capital: CEO Sidney M. Field and President Joseph J. “Joey” Lampariello. Interestingly, Field had previous run-ins with regulators. In the early 1990s, he was essentially ousted from the auto insurance industry after California insurance regulators sued him for fraud and revoked his license.

Adrian Cross invested more than $1 million of her “nest egg” money in private placement securities issued by Medical Capital and another company, Provident Asset LLC. As reported in a March 27, 2010, article in the Wall Street Journal, the former schoolteacher made the investment on the recommendation of the broker/dealer she trusted: Securities America. When Medical Capital and Provident Royalties collapsed in 2009, Cross’s investment was wiped out.

“I felt gutted like a fish,” Cross said in the Wall Street Journal article. “He had pushed it as a safe alternative to stocks.”

Cross isn’t alone. Hundreds of other Medical Capital investors express similar sentiments. Many have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA), accusing their broker/dealer of misrepresenting private placements in companies like Medical Capital as safe and secure.

In January, Massachusetts Secretary of State William Galvin brought the first state enforcement case against Securities America over sales practices regarding Medical Capital. Among the charges, Galvin alleges that Securities America representatives failed to disclose certain risks to customers, many of whom were retirees.

The case is awaiting a hearing.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with FINRA on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us today.

Goldman Sachs Annual Meeting: A Showdown With Shareholders

Embattled investment bank Goldman Sachs hosted its annual shareholder meeting this morning in downtown Manhattan. As expected, Lloyd Blankfein, Goldman Sachs’ chairman and chief executive officer, faced a litany of questions from shareholders. Prior to the meeting, dozens of protesters lined up outside of Goldman’s office building, holding signs that spelled the words, “Greed” and “Financial Reform Now.”

“I recognize that this is an important moment in the life of this institution,” Blankfein said during the actual meeting, adding that he had “no current plans” to step down as the leader of Goldman Sachs. Blankfein also tells the crowd that Goldman understands there is a disconnect between how the company views itself and how Goldman is viewed in the public’s eye.

Goldman Sachs’ stock has fallen more than 23% since the Securities and Exchange Commission (SEC) filed fraud charges against the company on April 16. In its complaint, the SEC accuses Goldman and employee Fabrice Tourre of defrauding investors in the sale of securities tied to toxic mortgages. Goldman Sachs also is facing a criminal investigation, according to numerous news reports.

During questioning by the Senate’s Permanent Subcommittee on Investigation, emails came to light that showed Goldman Sachs employees refer to the securities the bank created and sold to investors as “junk.”

Meanwhile, the agenda for Goldman’s annual meeting – which was standing room only – included a number of shareholder proposals. Among them: executive compensation, collateral increases for derivatives trading and splitting the chairman/CEO position. On the latter issue, three other banks – Bank of America, Citigroup and Morgan Stanley – have, in fact, split the chairman and CEO roles.

The Wall Street Journal provided live blogging of Goldman’s annual meeting. Among the highlights:

  • A shareholder states that Goldman Sachs bonuses have “contributed to a culture of greed.”
  • Blankfein comments that the recent Senate hearing “was not the most comfortable moment in my life.”
  • An asset manager from Boston says the chairman split is “very important to regain credibility.” Another shareholder suggests that Blankfein step down at the end of the month.
  • To no surprise, Blankfein firmly rejects the notion of resigning from Goldman. “I will not be stepping down Monday,” he says.
  • Jesse Jackson states that “Wall Street is rising. Citizens are sinking.”

In other Goldman Sachs news, the New York Times reports that American International Group (AIG) has replaced Goldman as its main corporate adviser. The move could be the first of many client defections to come for Goldman.

Goldman Sachs Fined Over Short Sales Deals

Embattled investment bank Goldman Sachs has been fined $450,000 by the Securities and Exchange Commission (SEC) and the New York Stock Exchange over what regulators say are hundreds of violations involving short sales.

According to the SEC’s complaint, Goldman continued to write naked short sale orders following a ban by regulators two days after Lehman Brothers collapsed in September 2008.

Short-sellers often borrow a company’s shares in a short sale deal, sell them, then buy them back when the shares decline and pocket the difference in price. As reported May 4 by the Associated Press, the SEC requires brokers to promptly buy or borrow securities to deliver on a short sale. In the case involving Goldman, the SEC and the NYSE allege that the company failed to procure shares to cover its customers’ short positions in the time required.

Read the SEC’s complaint.

Meanwhile, Goldman Sachs and Goldman VP Fabrice Tourre face a fraud lawsuit by the SEC, which alleges the bank and Tourre sold a collateralized debt obligation called Abacus 2007-AC1 without disclosing the fact that the hedge-fund firm of Paulson & Co. helped to pick some of the underlying mortgage securities and was betting on the financial instrument’s failure.


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