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Monthly Archives: April 2011

Provident Royalties Private Placements Haunt CapWest Securities

Sales of risky private placements in Provident Royalties and DBSI Inc. have come back to haunt broker/dealer CapWest Securities, possibly putting its future existence in peril.

As reported April 26 by Investment News, CapWest Securities stated in its latest filing with the Securities and Exchange Commission (SEC) that a number of events – including a rash of lawsuits tied to private placement deals that went south – has “raised substantial doubt” about the company’s ability to meet regulatory net-capital requirements.

CapWest is far from alone. Several other broker/dealers that sold private placements have shuttered in recent months, including QA3 Financial Corp. in February. As a result, regulators are stepping up their oversight of private placements and the broker/dealers that market and sell them to investors.

According to court documents, CapWest brokers sold about $22 million of private placements issued by Provident Royalties LLC. In the summer of 2009, the SEC charged Provident with fraud. CapWest also sold an unknown volume of sales in DBSI Inc., a packager of real estate deals that is now in bankruptcy court.

Securities America Up For Sale?

Plagued by legal woes involving private-placements sales in Medical Capital Holdings and Provident Royalties, Securities America may soon have a new owner. As reported April 25 by Investment News, parent company Ameriprise Financial is looking to sell the troubled independent broker/dealer.

“In reporting its first quarter financial results this afternoon, Ameriprise management said it was looking to shed Securities America – the 17th largest independent broker-dealer in the industry according to Investment News data, which it acquired in 1998. Ameriprise indicated the potential sale of the firm would not have an impact on its $150 million settlement with investors suing the firm over private placements that have gone bust,” the article said.

In recent months, sales of private placements have been under the microscope by the Financial Industry Regulatory Authority (FINRA). Evidence of the new scrutiny became apparent in early April, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.

FINRA’s disciplinary actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Private placements are high-commission products, oftentimes producing hefty fees and commission for broker/dealers of up to 8%.

FINRA Fines UBS Over Lehman-Issued 100% Principal-Protected Notes

Principal-Protected Notes (PPNs) – and the misrepresentation of them – are back in the news. The Financial Industry Regulatory Authority (FINRA) has fined UBS Financial Services $2.5 million over PPNs, requiring the brokerage firm to pay $8.25 million in restitution for omissions and statements made to investors about the products.

According to FINRA, UBS’s statements about the products effectively misled some investors about the “principal protection” feature of 100% Principal-Protection Notes issued by Lehman Brothers Holdings prior to its September 2008 bankruptcy filing.

Principal-protected notes are considered fixed-income security structured products with a bond and an option component that promise a minimum return equal to an investor’s initial investment.

According to FINRA, as the credit crisis worsened during March to June 2008, UBS advertised – and some UBS financial advisors described – the structured notes as principal-protected investments while failing to emphasize they were actually unsecured obligations of Lehman Brothers.

In making its decision against UBS, FINRA found that the firm:

  • Failed to adequately disclose to some investors that the principal-protection feature of the Lehman-issued PPNs was subject to the credit risks of Lehman Brothers Holdings;
  • Did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman’s financial strength or provide them with proper guidance on using that information with clients;
  • Failed to establish an adequate supervisory system for the sale of Lehman-issued PPNs;
  • Failed to provide sufficient training and written supervisory policies and procedures;
  • Did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers; and
  • Created and used advertising materials that essentially misled some customers about specific characteristics of PPNs.

UBS neither admitted nor denied the charges levied by FINRA, but consented to the entry of the findings.

Mat/ASTA Case Brings $54 Million Award For Investors

A highly leveraged municipal arbitrage fund known as Mat/ASTA has come back to haunt its creator, Citigroup Global Markets. On April 11, a Denver, Colorado-based Financial Industry Regulatory Authority (FINRA) arbitration panel awarded more than $54 million to two clients represented by the laws firms of Aidikoff, Uhl & Bakhtiari and Maddox, Hargett & Caruso.

The award includes punitive damages of $17 million and $3 million in attorney fees. The arbitration panel also assessed the entire cost of the arbitration hearing against Citigroup Global Markets, ordering the firm to pay $33,500 in expert witness fees and $13,168 in court reporter costs.

“This award demonstrates that even the most sophisticated investors were misled by Citi in the marketing and sale of the Mat and ASTA leveraged municipal arbitrage product,” said Steven B. Caruso of Maddox, Hargett & Caruso.

“The fact that the arbitrators also awarded expert witness costs, court reporter costs and all FINRA forum fees is both unusual and important,” Caruso added.

The Mat/ASTA fund was sold through Smith Barney and Citigroup Private Bank to high net worth clients between 2002 and 2007. According to investors, the returns and risks of the funds were represented as “slightly greater” than a typical municipal-bond portfolio.

In reality, the Mat/ASTA funds were highly leveraged, borrowing approximately $8 for every $1 raised.

“Citi misrepresented the known risks of Mat/ASTA to retail investors such as the claimants in this case,” said Dr. Craig McCann of Securities Litigation and Consulting Group. McCann served as an expert witness for the claimants.

Maddox, Hargett & Caruso continues to investigate FINRA arbitration claims on behalf of investors who suffered financial losses in leveraged municipal arbitrage investments, including Mat/ASTA.

Private Placements Face New Scrutiny By Regulators

Broker/dealers involved in sales of private placements have been put on notice by the Financial Industry Regulatory Authority (FINRA). In the future, the regulator says it will be stepping up its oversight of private-placement deals.

Evidence of the new scrutiny became apparent last week, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.

As reported April 10 by Investment News, FINRA’s recent actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Private placements are high-commission products, yielding broker/dealers fees of 7% or 8%.

“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” said Brad Bennett, executive vice president and chief of enforcement for FINRA.

“FINRA will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers. Broker-dealers and the executives should have looked at the private-placement offerings much more closely,” Bennett said.

FINRA Fines, Disciplines Executives Over Private Placement Deals

Top executives of various broker/dealers that sold private placements in Medical Capital Holdings and Provident Royalties have been fined and sanctioned by the Financial Industry Regulatory Authority (FINRA).

Among the executives cited for failing to conduct a reasonable investigation of private placement sales offered by Medical Capital Holdings and/or Provident Royalties:

· Robert Vollbrecht, Workman Securities’ former President. Vollbrecht was barred in any principal capacity and fined $10,000.

· Timothy Cullum, former Chief Executive Officer, and Steven Burks, former President of Cullum & Burks Securities of Dallas, Texas, a now-defunct firm. Both men were each suspended in any principal capacity for six months and fined $10,000.

· Jeffrey Lindsey and Bradley Wells, two former executives with Capital Financial Services. Lindsey and Wells have been suspended for six months in any principal capacity and fined $10,000.

· Jay Lynn Thacker, former Chief Compliance Officer for Meadowbrook Securities, LLC (aka Investlinc Securities, LLC). Thacker was suspended for six months in any principal capacity and fined $10,000.

· David William Dube, former Owner, President, Chief Compliance Officer and Anti-Money Laundering (AML) Compliance Officer of (now-defunct) Peak Securities Corporation. Dube was barred for failing to conduct adequate due diligence, as well as a failure as AML Compliance Officer to detect, investigate and report numerous suspicious transactions in 10 customer accounts where “red flags” existed.

According to FINRA, without performing proper due diligence, the broker/dealers that sold the private placements could not identify and understand the inherent risks of the offerings. Moreover, the sanctioned principals did not have reasonable grounds to allow the firms’ registered representatives to continue selling the offerings despite the red flags that existed regarding the private placements.

SEC to Wells Fargo: Excessive CDO Markups Were Made by Wachovia Unit

Investment deals involving collateral-debt obligations (CDOs) have come back to haunt Wells Fargo & Co. Wells has agreed to pay $11.2 million to settle charges by the Securities and Exchange Commission (SEC) that its Wachovia Capital Markets LLC unit sold CDOs to a Zuni American Indian tribe and other investors at prices 70% higher than its own estimate of the mark-to-market value of the securities.

As reported April 6 by Investment News, the SEC’s complaint alleges that Wachovia failed to inform investors in another CDO that it had transferred 40 residential mortgage-backed securities from an affiliate at above-market prices to avoid losses on its own books.

“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules – don’t charge secret excessive markups and don’t use stale prices when telling buyers that assets are priced at fair market value,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement.

Wells Fargo, without admitting or denying the allegations, will pay restitution of $6.75 million and a $4.45 million penalty. A total of $7.4 million will be returned to investors who were harmed by the misconduct, according to the SEC.

Wells Fargo purchased Wachovia in 2008.


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