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Monthly Archives: January 2011

UBS AG Yield Optimization Notes: What You Need to Know

Maddox, Hargett & Caruso currently is investigating complaints tied to UBS structured investments and the way in which the products were marketed and sold to investors.

Specifically, numerous complaints allege that these products, which include the UBS AG Yield Optimization Notes with Contingent Protection linked to the common stock of Lehman Brothers Holdings, were sold by certain brokers with the characterization that investors’ principal investment would be fully protected.

In reality, these notes subjected investors to significantly more risk than they expected based on the risk characterization portrayed by their broker. Many of the investors who eventually purchased UBS AG Yield Optimization Notes were conservative, risk-averse investors looking to preserve their capital and generate income.

UBS AG Yield Optimization Notes are considered a reverse convertible. This type of investment is not only difficult to understand but also highly risky. In the case of the UBS Optimization Notes, the investment’s actual performance was linked to Lehman Brothers stock. When Lehman Brothers filed bankruptcy in September 2008, the notes became worthless.

As a result, investors lost all their principal investment. The contingent protection associated with the product turned out to be of little benefit because that protection vanished overnight when Lehman’s stock price went south.

Many investors failed to realize key details about UBS AG Yield Optimization notes because certain information was never disclosed to them. Making matters worse: They also never learned about the worsening financial condition of Lehman Brothers – until it became too late.

If you have suffered losses in Lehman principal-protected notes and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, please contact us.

Merrill Lynch Settles SEC Fraud Charges

On Jan. 25, the Securities and Exchange Commission (SEC) charged Merrill Lynch with civil securities fraud for “misusing customer order information” to place proprietary trades and for charging customers undisclosed trading fees.

Without admitting or denying the charges, Merrill has agreed to pay a $10 million fine and consent to a cease-and-desist order.

According to the SEC, the infractions occurred between 2003 and 2005 on Merrill Lynch’s proprietary equity strategy desk, which traded for the firm’s benefit and had nothing to do with executing customer orders. Merrill’s trading desk was located on its main equity trading floor in New York, where market makers received and executed customer orders.

The SEC says Merrill’s equity strategy traders had access to institutional customer orders and used that access to place trades on Merrill’s behalf after the customer trades were made. The SEC went on to say that this misuse of information was contrary to claims by Merrill Lynch to customers that orders would be maintained on a strict need-to-know basis.

“Investors have the right to expect that their brokers won’t misuse their order information,” said Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement. “The conduct here was clearly inappropriate. Merrill’s proprietary traders had improper access to information about the firm’s customer orders, and misused it to place trades on the firm’s behalf.”

The SEC’s order also found that between 2002 and 2007 Merrill had agreements with certain institutional and high net-worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

Bank of America acquired Merrill Lynch in 2009 in a $20 billion deal forged with the help of government bailout dollars during the height of the financial crisis in 2008.

Capital Financial Tries To Combine Investor Claims In Provident Royalties Case

Apparently short on cash, broker/dealer Capital Financial Services is trying to combine 36 separate investor arbitration claims and lawsuits as part of a class action settlement. The claims are tied to private-placement sales totaling millions of dollars in Provident Royalties.

As reported Jan. 23 by Investment News, a federal judge recently issued an order stating that all arbitration claims and lawsuits against Capital Financial Services would be halted until he decided if they should all become part of a single class action lawsuit.

Combining the pending litigation, which involves sales by broker/dealers of Provident Royalties LLC private placements, could save them millions of dollars in damages and legal fees, according to the Investment News story.

Capital Financial is among several broker/dealers named in the class action, Billitteri v. Securities America Inc. Other defendants listed include National Securities, Next Financial Group and QA3 Financial Corp.

The lawsuit itself was filed in the summer of 2009, after the Securities and Exchange Commission (SEC) charged Provident Royalties with fraud and allegedly running a Ponzi scheme. According to the SEC’s complaint, Provident sold $485 million in securities and developed a wide network of independent broker/dealers to pitch the investments to investors.

Court documents show that Capital Financial is facing 36 separate legal cases from investors who bought almost $11.9 million in Provident Royalties private placements.

As it is, however, Capital Financial may have little money for legal fees and claims. According to court filings, its assets include $1.4 million of insurance and $120,000 in excess net capital, totaling $1.52 million. That means Capital Financial has about 12 cents per dollar available for clients who have sued the firm or plan to.

Arguments for and against combining the arbitrations and other lawsuits against Capital Financial are scheduled to be heard at a hearing in April.

If you’ve suffered financial losses of $100,000 or more in PRovident Royalties or Securities America and believe those losses are the result of inadequate information on the part of your broker/dealer, please Contact Us.

SEC Charges West End Investment Firms, Top Officers With Fraud

The Securities and Exchange Commission (SEC) has charged three New York investment firms – West End Financial Advisors LLC, West End Capital Management LLC, Sentinel Investment Management Corp. – and four senior officers – William Landberg, Kevin Kramer, Steven Gould and Janis Barsuk – of conning investors into believing their money was invested in stable, safe investments designed to provide steady streams of income. In reality, West End was in the throes of a deepening financial crisis stemming from failed investment strategies.

The misconduct reportedly occurred from at least January 2008 to May 2009, the SEC says.

“The investment advisers here grossly abused the trust of their clients,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They misappropriated and commingled their clients’ assets and sustained the illusion of a viable and successful business through a range of false representations.”

David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems, and the misappropriation of investor assets.”

In its complaint, the SEC alleges that Landberg used substantial amounts of fraudulently obtained bank loans to make distributions to certain West End fund investors, thereby creating the false impression that West End’s investments were performing well. During the same period, Landberg also misappropriated at least $1.5 million for himself and his family. Landberg’s wife, Louise Crandall, and their family partnership are named as relief defendants in the SEC’s complaint.

The SEC further alleges that Gould and Barsuk knew, or were reckless in not knowing, that Landberg was defrauding the bank that provided loans to a West End fund by misusing funds in a related interest reserve account. Both officers nevertheless participated in the fraud by facilitating Landberg’s misappropriations from that account, the SEC says.

The SEC also alleges that Gould conceived and used improper accounting methods to conceal aspects of the fraud, as well as issued account statements to investors showing false investment returns. Barsuk facilitated Landberg’s uses of investor money to cover his personal obligations.

Similarly, Kramer knew, or was reckless in not knowing, that West End faced severe financial problems and had difficulty obtaining sufficient financing to sustain its investment strategy. Kramer failed to disclose those material facts to investors as he continued to market the funds to new and existing investors through April 2009.

Med Cap, Provident Legal Claims Take Toll On QA3 Financial

Private placement investments in Medical Capital Holdings and Provident Royalties have caused financial devastation for hundreds of investors after the deals later soured and the companies issuing the securities went belly up. Now, several independent broker/dealers that sold the products to investors are facing financial issues of their own.

As reported Jan. 17 by Investment News, QA3 Financial Corp. is one of those broker/dealers. The story says QA3 is looking at bankruptcy because of a dispute with its insurance carrier over the amount of coverage available for legal claims stemming from private placement sales in Medical Capital and Provident Royalties.

According to the article, QA3 claims it had coverage for $7.5 million of legal claims, damages and expenses, while its carrier, Catlin Specialty Insurance Co., said the coverage is capped at $1 million.

A lawsuit filed in September states that QA3, which includes about 400 independent representatives and advisers, is facing bankruptcy because of its issues with Catlin. Catlin later sued QA3, claiming that private-placement claims under the policy were, in fact, limited to $1 million. That suit is pending.

Like a number of broker/dealers that sold private placement in Medical Capital and Provident Royalties, QA3 is facing a slew of arbitration claims filed by clients who suffered huge financial losses in their investments when the companies were sued by the Securities and Exchange Commission for fraud. Today, both Medical Capital and Provident Royalties are in receivership.

In the case of Medical Capital, Securities America was a top seller of Med Cap private placements. QA3 was a leading seller of Provident deals. By some estimates, QA3 sold $32.6 million in Provident notes, reportedly collecting almost $7 million in commissions.

Arbitration Claims Pile Up For Securities America

Broker/dealer Securities America is finding itself entrenched in arbitration claims filed by disgruntled investors over soured private-placement deals involving the now-bankrupt Medical Capital Holdings.

As reported Jan. 9 by Investment News, the broker/dealer could face 150 or more arbitration claims over the next 12 to 18 months. The claims, filed with the Financial Industry Regulatory Authority (FINRA) involve $90 million in investor losses connected to Medical Cap Holdings.

Last month, Securities America’s legal woes began to mount in earnest when a FINRA arbitration panel awarded almost $1.2 million in damages and legal fees to an elderly client who had sued the broker/dealer and broker Randall Ray Talbott for misrepresentation over sales of Medical Capital private placements.

In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital in connection to sales of $77 million of private securities in the form of notes. In its complaint, the SEC accused the Tustin-based medical receivables firm of lying to backers as it allegedly raised and misappropriated millions of dollars of investors’ money while failing to disclose information about $1.2 billion in outstanding notes and $993 million in notes that had entered default.

In addition to arbitration claims from investors, Securities America faces legal issues from state securities regulators. Securities divisions in Massachusetts and Montana filed lawsuits again the broker/dealer last year over sales of Medical Capital private placements.

Over the years, many independent broker/dealers have pitched investments in Medical Capital notes to investors. Securities America, however, is by far the biggest seller of Med Cap private placements, with 400 brokers selling almost $700 million of the products.

Securities America has about 1,900 representatives and advisers. It is owned by Ameriprise Financial.

If you have a story to tell involving Securities America and/or investments in Medical Capital Holdings, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Investor Wins In UBS, Lehman Principal-Protected Notes Case

A $2.2 million arbitration award is the latest win for investors in cases involving UBS and Lehman Brothers Principal-Protected Notes. The award, which was announced in December by a three-person arbitration panel of the Financial Industry Regulatory Authority (FINRA), is the seventh consecutive win for investors with pending complaints against UBS over the Lehman Brothers notes.

The focus of investors’ complaints centers on the failure of the 100% principal-protected notes touted by UBS to live up to their hype. Instead of the safety and security of fixed- income investments, the notes were actually complex products comprised of risky derivatives.

What UBS and other brokerages failed to emphasize to investors was the fact that the notes were unsecured obligations of Lehman Brothers. When Lehman filed for bankruptcy on Sept. 15, holders of the notes were left with investments that traded for pennies on the dollar.

UBS sold $1 billion of Lehman Principal-Protected Notes to investors. Commissions on the notes were 1.75%, a far higher percentage than what could be generated from sales of certificates of deposit.

If you’ve suffered financial losses in Lehman Principal-Protected Notes and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, please contact us.

2010: A Bad Year For Broker/Dealers

Soured private-placement deals left dozens of broker/dealers in dire straits this past year, forcing many to close their doors entirely. As reported Jan. 2 by Investment News, the broker/dealer community has shrunk by 9% since 2005 to 4,619. Through November 2010, the number of broker/dealers registered with the Financial Industry Regulatory Authority (FINRA) was 101 below the total at the end of 2009.

The reasons behind the decline vary. Bad business practices over private placements tied to such firms as Medical Capital Holdings and Provident Royalties led several broker/dealers to bite the dust in 2010. Others closed down because of capital-requirement violations. And some went out of business due to soaring legal costs associated with investor lawsuits.

In March 2010, GunnAllen Financial, which at one time had 1,000 affiliated registered representatives, closed its doors because of net-capital violations. Several months later, Jesup & Lamont Securities Corp. followed suit.

Meanwhile, a slew of broker/dealers that allegedly sold private-placement offerings from the now-defunct firms of Medical Capital Holdings and Provident Royalties are the subject of class actions and arbitration complaints from investors. Okoboji Financial Services, a top seller of Provident Royalties’ private placements, closed its doors last May.

One month later, Dallas-based Cullum & Burks Securities, a leading seller of private placements in Medical Capital Holdings, also shut down its business.

More failures and business closings of independent broker/dealers are predicted in 2011.

“It’s been a horrible market and firms are thinly capitalized,” said Larry Papike, president of Cross-Search, a recruiting firm specializing in independent representatives and executives at such firms, in the Investment News article.


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