Private-placement sales in Provident Royalties LLC have come back to haunt many once-successful broker/dealers. The Securities and Exchange Commission (SEC) charged Provident with civil fraud last summer, accusing the company and various top executives of operating a $485 million Ponzi scheme allegedly involving phony oil and gas securities.

Fifty broker/dealers that sold private placements in Provident are now being sued by Provident’s trustee, Milo H. Segner Jr. At the same time, hundreds of investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA).

As reported July 11 by Investment News, many broker/dealers facing Provident-related lawsuits appear to have dangerously low net-capital positions - a fact that could put them in peril if they eventually pay out large legal claims over soured Provident deals.

“Broker-dealers facing millions of dollars in lawsuits could be in a world of hurt,” said Carrie Wisniewski, president of B/D Compliance Associates, in the Investment News article. “It’s a big problem,” she said.

One of the broker/dealers named in the trustee’s June 21 lawsuit is Capital Financial Services. It had only $390,000 in excess net capital at the end of 2009. The firm also has at least nine pending arbitration claims against its president, Brian Boppre, totaling $10.8 million in damages.

Next Financial Group also is a big seller of Provident private placements. It had $3.1 million in excess net capital at the end of last year, including $1.1 million reserved to pay contingent legal liabilities, according to Investment News.

Violation of the SEC’s net-capital requirement can signal the end of a broker/dealer. The Provident case - and the resulting legal claims it produced - has pushed many broker/dealers to the breaking point. Okoboji Financial Services, the fifth-largest seller of the Provident private placements, said in May it was closing up shop. Okoboji reportedly had excess net capital of $32,048 at the end of 2009, but made no provisions for legal liabilities.

GunnAllen Financial got caught up in a similar situation. A leading seller of investment deals in Provident Royalties, the broker/dealer closed in March when its available capital fell below the amount needed to adhere to industry rules. At least 10 other firms that sold private placements in Provident Royalties, as well as in Medical Capital Holdings, have shuttered recently because of net-capital issues.

If you are a retail or institutional investor and sustained investment losses related to Provident Royalties, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

GunnAllen Financial. Cullum & Burks Securities. Okoboji Financial Services. Jesup & Lamont Securities. All are independent broker/dealers that have either faced net-capital violations or been shut down by regulators after their capital levels were deemed too inadequate to continue doing business.

Jesup & Lamont Securities is one of the latest broker/dealers facing a capital crunch. On June 18, FINRA ordered the company and its 300 reps to cease business operations other than liquidating transactions. According to a June 27 Investment News article, the problem may stem to pressure from the SEC regarding sales of $11 million in private shares of Jesup & Lamont’s stock.

Jesup & Lamont is not alone. As reported in the Investment News story, a number of broker/dealers are dealing with capital requirement issues these days as a result of the market downturn of 2008 and early 2009. Broker/dealers also share something else in common: Many are facing legal liabilities from private-placements deals that have gone bust. Two of the most prominent cases involve Medical Capital Holdings and Provident Royalties LLC.

Last summer, the Securities and Exchange Commission (SEC) brought a fraud lawsuit against Provident Royalties and its related business entities. In the complaint, the SEC charged Provident with selling fraudulent private-placement offerings from September 2006 through January 2009. According to SEC documents, Provident raised $495 million from at least 7,700 investors throughout the country.

That same summer the SEC also initiated a fraud lawsuit against Medical Capital Holdings. In its fraud complaint, the SEC alleges that Medical Capital had more than $543 million in phony receivables on its books and had lost more than $315 million on various loans. Meanwhile, the company reportedly collected $323 million in fees for managing the money-losing loans.

The SEC also accuses Medical Capital of running a Ponzi scheme operation. According to the SEC complaint, Medical Capital was selling receivables at a markup among the various funds it controlled and then using money from newer investors to pay investors in the older funds.

Broker/dealer GunnAllen Financial may be getting ready to file Chapter 11 bankruptcy protection, according to an April 21 story in Investment News. If that happens, hundreds of investors with pending arbitration claims against the embattled company will have to get in line for GunnAllen’s remaining assets, including any insurance policies.

In late March, the Financial Industry Regulatory Authority (FINRA) closed the doors on GunnAllen because the company had fallen below minimum capital rules set by federal regulators. GunnAllen’s financial troubles, however, have been ongoing for some time because of lawsuits from investors who say they were defrauded by various GunnAllen brokers.

Many of the lawsuits concern former GunnAllen broker Frank Bluestein, who allegedly operated a multimillion-dollar Ponzi scheme.

GunnAllen also faces lawsuits tied to sales of private placements in Provident Royalties LLC. In March, FINRA expelled Provident Asset Management, LLC for allegedly marketing a series of fraudulent private placements offered by Provident Royalties in a massive Ponzi scheme.

As reported in the Investment News article, if GunnAllen does, in fact, file for Chapter 11 bankruptcy, the value of its insurance policies will be critical to any investor suing the broker/dealer.

If you are a client of GunnAllen, tell us about your situation by leaving a message in the Comment Box below or via the Contact Us form.

The Financial Industry Regulatory Authority (FINRA) has closed the doors on GunnAllen Financial. FINRA apparently informed the financially troubled broker/dealer late last week that if it fell below mandatory net capital requirements it would be forced to close its operations.

GunnAllen’s financial issues stem to the increasing number of lawsuits being filed by investors against the firm. As reported March 22 by Investment News, investors are seeking as much as $50 million in damages, with many of the claims tied to former GunnAllen broker Frank Bluestein.

The Securities and Exchange Commission (SEC) filed fraud charges against Bluestein in September 2009 on allegations that he lured elderly investors into refinancing their home mortgages so he could fund investments in a $250 million Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M).

GunnAllen also is facing a slew of lawsuits by investors over sales of private placements in Provident Royalties LLC.

Independent broker/dealers and their financial advisers who sold investors private securities tied to Provident Asset Management LLC and Medical Capital Holdings - each of which faces securities fraud charges by the Securities and Exchange Commission (SEC) - could soon find themselves in the hot seat, as well, in the form of investor lawsuits and arbitration claims. Among the firms that reportedly sold either one or both of the investments in Provident and Medical Capital: Securities America, GunnAllen Financial American Portfolios Financial Services, Capwest Securities, J.P. Turner & Co. LLC, National Securities Corp. and Next Financial Group.

As reported July 26, 2009, by Investment News, private placement deals are a lucrative business, garnering brokers big commissions of anywhere from 7% to 10%. The firms themselves typically also receive a fee when their representatives sell the offerings.

Broker/dealers that offer their representatives extremely high payouts, in the range of 95%, are more likely to allow brokers to sell the deals because of the lucrative fees that the firm could gain, the article said.

On July 16, the SEC charged Medical Capital Holdings of Tustin, California, with securities fraud in the sale of $77 million of private securities in the form of notes.

On July 7, the SEC charged Provident Asset Management LLC of Dallas, Texas, of operating a fraud and a Ponzi scheme involving sales of $485 million of preferred stock and limited partnership offerings in oil and gas deals.

The Financial Industry Regulatory Authority (FINRA) already has increased its scrutiny of broker/dealers for sales of Medical Capital Holdings offerings to investors, requesting information from firms that sold the investments to clients on July 16 - the same day the SEC charged Medical Capital with securities fraud.

If you are a client of Securities America, GunnAllen Financial, Next Financial Group, American Portfolios Financial Services, Capwest Securities, J.P. Turner & Co. LLC or National Securities Corp. and were sold limited partnership interests and/or preferred stock in Provident Asset Management LLC or Medical Capital Holdings, we want to hear your story. Tell us about your situation by leaving a message in the Comment Box below or via the Contact Us form.

Kapil Shashikant Shah (CRD #4409290) was fined $10,000 by the Financial Industry Regulatory Authority (FINRA) in September and suspended from association with any FINRA member in any capacity for 20 business days.

Without admitting or denying the allegations, Shah consented to FINRA’s sanctions (FINRA Case No. 2006003684703), which related to a complaint alleging that he misrepresented or omitted material facts in conversations with customers. According to the complaint, Shah promised unrealistic returns on customers’ investments and made an improper price prediction concerning a stock to a customer.

Another interesting point about Shah is his employment record and, specifically, the brevity of his tenure at numerous brokerage firms. From 2002 to present, FINRA lists nine independent broker/dealers for which Shah has worked. The average time Shah remained employed with those firms is often less than a year. The firms include: GunnAllen Financial, Joseph Gunnar Financial, Clayton Dunning and Company, Chadbourn Securities, Brookstreet Securities, Wunderlich Securities, Continental Broker Dealer Corp., Investors Capital Corp., and Grant Bettingen.

Tell us about your situation with Kapil Shashikant Shah by leaving a message in the Comment Box below or via the Contact Us form. We want to consult with you about possible legal options.

Frank Bluestein, a Detroit-area financial adviser, has been charged by the Securities and Exchange Commission (SEC) of luring elderly investors into refinancing their home mortgages in order to fund investments in a $250 million Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). Bluestein’s latest run-in with authorities isn’t “new” news, however. More than two years ago, Michigan state securities regulators and the SEC were investigating Bluestein for the very crime he now is alleged to have committed. Bluestein denied similar allegations in a 2008 class-action lawsuit filed by investors who allege Bluestein bilked them out of millions of dollars. That case is still pending.

According to the SEC’s Sept. 28 complaint, regulators allege that Bluestein acted as the single largest salesperson in May’s Ponzi scheme and that Bluestein’s “role” was to specifically target retirees and elderly investors into attending so-called “investment seminars” held in Michigan and California. The purpose of the seminars was to lure potential investors into putting their money into May’s company, E-M.

“Bluestein convinced elderly investors to refinance their homes to invest in securities that he falsely claimed were safe,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “His lies, false assurances, and unscrupulous tactics put many investors at risk of losing not only their life savings, but also their homes.”

Bluestein’s past gets even more sordid. A Nov. 27, 2007, article by Registered Rep reports that after Bluestein was fired from the brokerage firm GunnAllen Financial in October for reportedly selling unregistered securities, Bluestein set up shop down the street and began working under a new name, “Frank Julian,” as part of a so-called “research team” at a company called Freedom Road. (The name listed now, however, on Freedom Road’s Web site is, in fact, Frank Bluestein.) According to the Web site, Freedom Road provides stock selection and market education to individuals. Its advertising moniker is: Luck is not an investment strategy.

Information posted by Freedom Road on its Web site touts Bluestein as “picking hot stocks for over 40 years,” with a “unique approach [to finding] big opportunities in both dividend paying stocks and growth stocks with limited risk.” “After many years as one of the nation’s leading financial advisors, Frank is now sharing his million dollar secrets exclusively with members of Freedom Road. Frank’s vision is to share his hard earned experience and success with investors on a global scale.”

It’s what Freedom Road didn’t say about Frank Bluestein that has come back to haunt investors. Bluestein isn’t even registered with the Financial Industry Regulatory Authority (FINRA). According to the Registered Rep article, Bluestein’s CRD report shows that in October 2007, 10 customer disputes had been logged against him totaling some $1.6 million in alleged damages. On Oct. 12, the Michigan Office of Financial Regulation notified GunnAllen, Bluestein’s former employer, that Bluestein was under investigation. Shortly thereafter, Bluestein was fired from GunnAllen.

Fast forward to Sept. 28, 2009. The SEC charges Bluestein of civil fraud, sale of unregistered securities and other violations in connection to helping orchestrate a multimillion-dollar Ponzi scheme. Specifically, the SEC alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.

Based on the SEC’s complaint, Bluestein, 59, allegedly misrepresented to investors that the investments he pitched were low-risk and falsely claimed he had conducted adequate due diligence about the investments. He also apparently left out one other key detail: Bluestein received at least $2.4 million in commissions from May and E-M, in addition to the $1.4 million in disclosed compensation he received from investor funds.

Tell us about your relationship with E-M Management Company. We want to hear your story. Please fill out the Contact Us form, or leave a comment below. We can consult with you regarding your options.