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Home > Blog > Category Archives: SEC Investigation

Category Archives: SEC Investigation

Securities America: Arbitration Claims vs. Class Actions

Private-placement deals pushed by Securities America in Medical Capital Holdings and Provident Royalties have left investors stranded on a financial limb. Now, they have a new worry – and that is whether to resolve their complaints through arbitration or roll their claims into two existing class-action lawsuits again Securities America.

Ewald Groetsch is one of those investors facing such a dilemma. As reported March 4 by the New York Times, Groetsch lost $500,000 after investing in Medical Capital Holdings which, like Provident Royalties, was charged with fraud by the Securities and Exchange Commission (SEC) in 2009.

According to the New York Times story, Groetsch – who suffers from dementia – became lonely after his wife died in 2003 and struck up a relationship with a broker from Securities America. Groetsch eventually put the majority of his portfolio into a risky security – i.e. Medical Capital.

As for the Securities America broker, he portrayed the investment as “safe and secure.” That wasn’t the case, however, and Groetsch ultimately lost his entire investment.

Groetsch has since filed an arbitration claim with the Financial Industry Regulatory Authority (FINRA).

The lawyers in the class-action case involving Medical Capital and Provident Royalties contend that investors’ arbitration claims could threaten the financial position of Securities America and its ability to pay for a proposed settlement. The plaintiffs’ lawyers disagree, stating that such reasoning is misleading.

Earlier this year, arbitration proved successful for at least one investor who sued Securities America. In January, FINRA awarded Josephine Wayman nearly $1.2 million for her claim against the broker/dealer.

All-Public Arb Panel To Impact Broker/Dealer Disputes

Arbitration claims connected to Medical Capital Holdings and Provident Royalties and other risky deals – including those involving non-traded REITs – could grow much bigger in number following a recent regulatory decision by the Securities and Exchange Commission (SEC).

The new regulation gives investors the option of choosing an all-public arbitration panel to have their disputes with brokers reviewed. In other words, investors can select a panel composed entirely of individuals who have no connection to the securities industry. Typically, the three-person panel is made up of two public arbitrators and one industry professional.

As reported Feb. 6 by Investment News, the SEC’s ruling comes on the heels of a pilot program by the Financial Industry Regulatory Authority (FINRA) that allowed certain investors the choice of substituting an industry arbitrator with a public panelist.

The rule change does not affect disputes among brokerage firms or between brokers and their firms.

“This is a tremendous step in the right direction,” said Peter Mougey, president of the Public Investors Arbitration Bar Association, which represents plaintiff’s attorneys, in the Investment News article.

If you have a concern about your investments with your independent broker/dealer, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

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.

Ex-Wachovia Brokers Accused Of Defrauding Elderly Clients

Two former Wachovia Securities brokers – William Harrison and Eddie Sawyers – are accused of misleading dozens of elderly clients into investing in what they called a sure thing. Instead, investors lost approximately $8 million, according to a lawsuit filed Dec. 15 by the Securities and Exchange Commission (SEC).

The SEC complaint alleges that Harrison and Sawyers misrepresented the investment strategies they were selling to at least 42 clients in 2007 and 2008. Among their promises: A guarantee of 35% returns without any risk to investors’ principal investment. In reality, the brokers were using investors’ money to trade securities in risky online deals.

The SEC said that in July 2008, Harrison and Sawyers withdrew $234,000 from three client accounts as compensation for their management services. They split the amount.

As reported Dec. 16 by Bloomberg, the SEC accuses the duo of recruiting Wachovia investors to a new business venture called Harrison/Sawyers Financial Services.

According to the complaint, Harrison and Sawyers touted their venture as “an essentially foolproof investment plan guaranteed to make money regardless of market conditions.”

Instead, investors – all of whom the SEC says were “unsophisticated investors” – lost big.

In one instance, Harrison and Sawyers reportedly told a husband and wife who had invested $100,000 that their money had “maxed out” by achieving a 35% return. In truth, the couple’s investment had lost nearly $84,000.

Most of the investors involved in the scheme were more than 50 years of age. Some were retired and living on fixed incomes, the SEC says.

In addition to allegations of misrepresentation, the lawsuit says that the two brokers set up online brokerage accounts in some clients’ names, while pooling the investment money from other clients into accounts set up in the name of Harrison’s wife and in a joint account held by the Harrisons.

If you’ve suffered losses while doing business with William Harrison and Eddie Sawyers, please contact our securities fraud team. We will evaluate your situation to determine if you have a claim.

Private Placements A Financial Disaster For Some Investors

Private placements – from Medical Capital to Provident Royalties – have made a name for themselves this year, producing massive financial losses for unsuspecting investors. Unsuspecting because, in many instances, investors were unaware of the untold risks associated with these largely unregulated investments.

Take Tracy Nye, a 50-year-old Idaho restaurant owner who was forced to come out of retirement after losing $1.5 million on private placements in Medical Capital Holdings and in Shale Royalties, an affiliate of Provident Royalties LLC. Both entities were sued for fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

In total, investors lost more than $1 billion in private placements issued by Tustin, California-based Medical Capital and some $485 million from Dallas-based Provident Royalties, an oil and gas investment firm.

According to the SEC, both Medical Capital and Provident misrepresented their investments, as well as misappropriated investors’ money.

Meanwhile, investors like Nye are paying the price. Many have witnessed their life savings vanish overnight, while others say their money for retirement and children’s college education are now a thing of the past.

As reported in a Nov. 19 article by Bloomberg, private placements were initially marketed and sold to institutional investors and financially savvy individuals. However, because the SEC hasn’t changed the majority of its net-worth requirements for private placements since 1982, the products are being sold to investors even though many may not thoroughly understand what they’re actually getting into. In particular, retirees are a favored target of issuers of private placements because they have access to retirement accounts and equity in their homes.

According to the Financial Industry Regulatory Authority (FINRA), complaints about private placements have increased 35% in this year alone and more than 50% in 2009. Earlier this year, FINRA issued a notice to brokers regarding private placements; it also has launched an investigation into an undisclosed number of broker/dealers regarding sales practices of the products.

If you sustained financial losses related to Medical Capital, Provident Royalties or another private placement investment, contact our securities fraud team. We will evaluate your situation to determine if you have a claim.

Goldman Sachs Fraud Case Update

The admission of guilt came on July 15 as Goldman Sachs settled civil fraud charges with the Securities and Exchange Commission (SEC) over its marketing of a collateralized debt obligations (CDO) package known as Abacus 2007-ACI.

In settling the matter, Goldman agreed to pay a $550 million fine. It is biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” says Robert Khuzami, Director of SEC Enforcement.

Goldman’s troubles began back in April, when the SEC accused the investment bank of failing to disclose that one of its clients, Paulson & Co, had helped select the securities contained in the Abacus mortgage portfolio and which was later sold to investors.

According to the SEC, Goldman did not reveal that Paulson, one of the world’s largest hedge funds, had, in fact, bet that the value of the securities would fall.

Following the collapse of the housing market, the securities in that mortgage portfolio – i.e. Abacus – lost more than $1 billion.

Despite the settlement with the SEC, Goldman is far from being out of legal hot water. One of the investors in Abacus was the Royal Bank of Scotland PLC (RBS), which lost $841 million as a result of the deal. Of Goldman’s $550 million settlement with the SEC, approximately $100 million will be paid to RBS. However, the RBS may be considering a civil suit against Goldman Sachs Group to recoup additional financial losses it sustained in Abacus, according to a July 16 article in the Wall Street Journal.

Meanwhile, Fabrice Tourre, who is the only Goldman Sachs executive named as a defendant in the SEC’s fraud lawsuit, has yet to settle with the regulator.

Tourre, the creator of Abacus, has repeatedly denied the SEC’s charges that he misled investors. A number of potentially damaging emails seem to refute Tourre’s claims, however. In one email, Tourre comments on the state of the housing market and the inevitable demise of Abacus:

“More and more leverage in the system. The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implication of those monstrosities!!!”

Stock Broker Fraud Case Involving Martin Wegener Offers Lesson For Investors

The alleged stock broker fraud case involving Martin Wegener offers insight into what investors can do to avoid becoming victims of investment scams. On June 14, the Securities and Exchange Commission (SEC) charged Wegener and his companies – Wealth Resources, Inc. and Wealth Resources, LLC – with defrauding investors out of at least $6.5 million.

According to the SEC, Wegener was not a registered broker or investment adviser yet told his clients he would invest their money through Wealth Resources. He would then provide investors with purported “brokerage account” statements from Wealth Resources – statements that falsely represented a variety of investments courtesy of Wegener’s “financial acumen.”

Wegener never used his customers’ money for those investments, however. Instead, the SEC says he took clients’ money for his personal use, paid business expenses and made investments on his own behalf in entities where he had an ownership interest. Those companies included WU Ventures, LLC, Secura Technology, LLC, and Trailblazer Learning, Inc., as well as Wealth Resources. Investors’ funds also were transferred to Wegener’s former wife, Kristin Wegener.

The SEC further says that during the course of the alleged scam, Wegener used money from investors to make Ponzi-like payments to clients who wanted a portion or all of their investment returned.

The Wegener case offers several lessons for investors. First, before investing money with any financial professional, take time to verify that the person is a registered stock broker or financial advisor. Is the individual a member of the Financial Industry Regulatory Authority (FINRA)? Does the person have any customer complaints, disciplinary actions, fines, suspensions or other sanctions by FINRA, the SEC or other federal or state regulatory agencies listed on FINRA’s BrokerCheck Web site?

In addition, be leery of sales pitches that make exaggerated claims about the expected profitability of an investment, such as it will double in value in six months. The bottom line, if it sounds too good to be true, it usually is.

Provident Royalties Private Placements Bury 12 Broker/Dealers

At least 12 broker/dealers that sold private placements issued by Provident Royalties LLC are now either out of business or no longer sanctioned by the Financial Industry Regulatory Authority (FINRA). As reported June 30 by Investment News, the 12 firms in question sold $56.7 million of Provident offerings.

In July 2009, the Securities and Exchange Commission filed a lawsuit against Provident Royalties, charging the company and its founders with fraud. From 2006 to 2009, Provident sold $485 million of private placements through a number of broker/dealers throughout the country.

Those same broker/dealers are now facing a slew of arbitration claims and lawsuits from investors who lost millions of dollars on the Provident deals, as well as on other private-placement offerings, including those from Medical Capital Holdings.

Last month, the trustee in the Provident case, Milo H. Segner Jr., filed a complaint against 49 broker/dealers, alleging they “failed miserably in upholding their fiduciary obligations” when selling a series of Provident Royalties private placements. In total, the lawsuit lists 61 firms that sold investment offerings in Provident.

Investment News provided a list of broker/dealers with problems connected to sales of Provident private placements. Among the broker/dealers on the list:

  • AFA Financial Group LLC – AFA sold $2.5 million of Provident private placements; in April, the broker/dealer said it was closing its business due to overwhelming legal and insurance costs.
  • Barron Moore Inc. – The Financial Industry Regulatory Authority (FINRA) expelled Barron Moore in June 2008 over penny stock sales. The company sold $205,000 in Provident private placements.
  • Community Bankers Securities LLC – Community Bankers ceased its affiliation with FINRA in December 2009. It sold $2.8 million in Provident private placements.
  • Empire Financial Group Inc. – FINRA expelled Empire in March 2009 for failing to pay unknown fines and/or costs. Empire sold $2.8 million in Provident placements.
  • Empire Securities Corp. – FINRA suspended Empire Securities in May 2010 for failing to pay arbitration fees. Empire Securities sold $205,000 in Provident private placements.
  • ePlanning Securities Inc. – The company withdrew from FINRA in February 2009. It sold $3.8 million in Provident placements.
  • GunnAllen Financial Inc. – GunnAllen was shut down in March 2010 when it failed to meet FINRA’s net-capital requirements. It sold $22.3 million in Provident private placements.
  • Jesup & Lamont Securities Corp. – The broker/dealer closed its doors in June 2010 after failing to meet FINRA’s net-capital requirements. It sold $100,000 in Provident private placements.
  • Main Street Securities LLC – The firm withdrew its registration from FINRA in November 2009. It sold $205,000 in Provident private placements to investors.
  • Okoboji Financial Services – In May 2010, Okoboji filed forms with both FINRA and the SEC to withdraw its registration as a broker/dealer. Okoboji sold $21.9 million in Provident private placements.
  • Private Asset Group Inc. – FINRA suspended Private Asset Group in May 2010 for failing to pay arbitration fees of $2 million.
  • Provident Asset Management – On March 18, FINRA expelled Dallas-based Provident Asset Management for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, in a massive Ponzi scheme. Provident Asset sold $50,000 in Provident private placements.

Group Of Broker/Dealers Face Lawsuit Over Provident Royalties Private Placements

Forty-nine broker/dealers have been named in a lawsuit involving sales of Provident Royalties private placements. The lawsuit, which was filed June 21 by the trustee now overseeing Provident – Milo H. Segner Jr. – charges the broker/dealers of failing to uphold their fiduciary obligations when selling a series of Provident Royalties LLC private placements.

The lawsuit hopes to recover $285 million in claims and commissions from the firms named in the lawsuit. As reported June 29 by Investment News, the leading sellers of the private placements in Provident Royalties were Capital Financial Services, with $33.7 million in sales; Next Financial Group, with $33.5 million; and QA3 Financial Corp., with $32.6 million.

Investment News provides a complete list of the broker/dealers named in the lawsuit, as well as the commissions they collected.

“The commissions, fees and payments received from Provident Royalties encouraged and played a substantial role in the negligent and/or grossly negligent conduct of the broker-dealers,” according to the lawsuit.

In July 2009, the Securities and Exchange Commission (SEC) filed a fraud lawsuit against Provident Royalties and several high-ranking executives for running an alleged $485 million Ponzi scheme tied to fake oil-and-gas investments. From June 2006 to January 2009, many independent broker/dealers sold private placements in Provident to some 7,700 investors.

Merrill Lynch & The ‘Sophisticated Investor’ Defense

A June 11 blog by the Wall Street Journal illustrates a growing trend on Wall Street – the sophisticated investor defense. The premise is simple: If the complex financial products that Wall Street markets and sells go south, it’s the investor’s problem. After all, the products are geared to those who are financially savvy. They should have therefore known the risks involved.

In reality, even the most sophisticated investor may be unaware of the complexities and risks surrounding some of today’s investments. Moreover, even the “average” investor gets burned in these deals, usually through pension funds that participate in the investments.

A recent case involving Merrill Lynch and collateralized debt obligations (CDOs) is a perfect example. Merrill Lynch’s CDO deals were sold to institutional and retail investors. In other words, so-called sophisticated and less-than-sophisticated investors were part of the sales pitch. It also apparently was common fare for Merrill Lynch to sell retail investors the lowest-rated CDO slices of the deals.

Investors like the Slomacks ultimately paid the price, according to the WSJ article. The Slomacks invested $2.65 million in several Merrill-issued CDOs, losing all but $16,500. They have since filed an arbitration claim against Merrill Lynch with the Financial Industry Regulatory Authority (FINRA).

Another investment firm looking to employ the “sophisticated investor” defense over CDO deals gone bad is Goldman Sachs. For more than a year, Goldman has faced intense questioning by the U.S. Senate Permanent Subcommittee on Investigations about its CDO dealings, while investors contend Goldman used deceptive sales practices to market billions of dollars’ worth of the products. To date, the probes have cost Goldman $25 billion in market capitalization, according to a June 14 article by Reuters.

In April, the Securities and Exchange Commission (SEC) filed a civil fraud lawsuit against Goldman Sachs over a CDO called Abacus 2007. The Abacus transactions were synthetic collateralized debt obligations – financial products that many financial analysts say were largely responsible for the worst collapse in financial markets since the Great Depression.


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