All-public arbitration panels have proved to be a popular combination for investors who’ve filed securities-related complaints with the Financial Industry Regulatory Authority (FINRA).

From February 2011 to Jan. 26, 2012, more than 76% of investors have chosen the all-public option, says FINRA, the internal watchdog of Wall Street. Prior to that time, investor cases were heard by three-person arbitration panels containing two public arbitrators and one arbitrator associated with the financial industry.

FINRA has been evaluating and compiling data on the all-public pilot program following its launch on October 6, 2008.  As of Jan. 1, 2012, 12% of the cases in the pilot program were still pending. Accordingly, data-including award data-are not yet fully complete.

Based on the data available, of the 49 pilot program awards issued by all-public panels, investors were awarded damages in 26 of 40 cases, or 65% of the time.  Another 23 pilot program awards were issued by panels with one non-public arbitrator. Investors received financial relief 13 times, or a 62% win rate, in those instances.

As reported Jan. 29 by Investments News, win rates were lower in non-pilot cases. In 2009, arbitrators awarded damages to investors in 49% of cases; in 2010, the win rate was 48%.

At the time FINRA launched the all-public two-year pilot program in October 2008, the program included 14 firms that had voluntarily agreed to participate and applied only to investor cases that did not involve individual brokers. The creation behind the all-public program was in response to criticism that the presence of an industry representative on arbitration panels created bias, as well as sympathy for the defense in cases brought by investors.

In 2010, FINRA proposed making the all-public option permanent. In February 2011, the Securities and Exchange Commission (SEC) approved FINRA’s rule change for all customer cases in which a list of potential arbitrators had not yet been sent to the parties involved in the dispute.

College Illinois, the prepaid tuition program for Illinois residents, has suspended sales of new contracts amid reports that the $1 billion program is facing a 30% shortfall.

Earlier this year, an investigation by Crain’s Chicago Business revealed that the College Illinois Prepaid Tuition Program had the greatest deficit of any prepaid tuition program in the United States and that the fund was plowing money into unconventional – and risky – investments to close the gap. Moreover, many parents were shocked to learn that the program itself was not guaranteed by the state if it came up short on cash.

More than 30,000 Illinois families hold contracts in College Illinois. The plan allows parents to lock in tuition costs at public universities at today’s prices before their children actually go to college.

Kym Hubbard, chairman of the Illinois Student Assistance Commission, says the commission plans to make recommendations to the governor and lawmakers early next year on what can be done to fix College Illinois. Those recommendations are likely to include major changes to the 13-year-old program. Those changes could mean universities, parents or both would have to plug the gap between what the plan accumulates and actual tuitions, according to a Dec. 13 story by Investment News.

Elder financial abuse is a growing crime, with one in four seniors in the United States becoming a victim. In most cases, elderly victims are taken advantage of by someone them know – a family member, caregiver, neighbor, or financial advisor or broker.

A June 2011 study from MetLife Mature Market Institute shows that elderly financial abuse costs its victims nearly $3 billion a year. Women are twice as likely as men to become victims of elder financial abuse, according to the MetLife study, with most individuals between the ages of 80 and 89, living alone, and requiring some level of help with either health care or home maintenance.

Some of the warning signs of potential elder financial fraud and abuse include:

• Unexplained bank withdrawals.
• Unauthorized use of a credit or ATM card.
• Stolen or misplaced credit cards or a checkbook.
• Unexplained withdrawals from brokerage accounts.
• Checks written as “cash,” “loan” or “gift.”
• Abrupt changes in a will or other documents.
• Unexplained transfer of assets to a family member or someone outside the family.
• Disappearance of valuables.
• Sudden appearance of a previously uninvolved relative claiming a right to an elder’s affairs or possessions.
• New signers on accounts.

The bottom line: If you, a loved one or an elderly neighbor or friend has become a victim of financial abuse, it’s important to contact the authorities. Financial abusers count on silence of their victims to continue their crime.

Concerns about potential risks, lack of transparency, liquidity and possible fraud of self-directed individual retirement accounts will likely lead to tougher restrictions by regulators on broker/dealers that market and sell the products. On Sept. 23, both the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association issued an investor alert warning about investing through self-directed IRAs.

As reported Oct. 2 by Investment News, self-directed IRAs are different from traditional IRAs because they allow owners of the products to invest their retirement savings in a variety of unusual investment vehicles. Those vehicles can include real estate, promissory notes, tax lien certificates, and private-placement securities. Investors in traditional IRAs are generally limited to stocks, bonds and mutual funds.

Private placements in particular have become a cause of concern for investors recently. In 2009, the SEC filed fraud charges against two issuers of failed private placements: Medical Capital Holdings and Provident Royalties LLC. Investors who held private placements in the two entities lost hundreds of millions of dollars. Meanwhile, the placements were allowed to be recommended into IRAs.

According to NASAA, there has been a noted recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature. State securities regulators also are investigating numerous cases where a self-directed IRA was used in an attempt to lend credibility to a fraudulent scheme.

Similarly, the SEC has brought numerous cases in which promoters of fraudulent schemes steered investors to self-directed IRAs.

While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self-directed IRA. The SEC says fraudsters often exploit self-directed IRAs because owners are allowed to hold unregistered securities in them, and custodians often fail to performed adequate due diligence on the offerings.

Moreover, because there is a penalty for making early withdrawals from an IRA, investors caught in a scheme might actually be encouraged to keep the money in the account even longer.

Many big broker/dealers have already imposed restrictions or increased their due diligence on investments made through self-directed IRAs. A number of smaller and midsize firms have yet to follow suit, according to the Investment News article.

The reason is because of the higher profit margins that typically come with riskier product offerings.

A number of non-traded real estate investment trusts (REITs) have turned sour for investors in the past year. Among them: Behringer Harvard REIT, Desert Capital, Inland American, Cornerstone Growth & Income, Cole Credit Property, as well as others.

These and other non-traded REITs are considered public companies, but their shares are not listed on a stock exchange. This lack of transparency, along with inaccurate valuation estimates, excessive broker fees, complex redemption policies and illiquidity has come back to haunt many non-traded REIT investors. Cases in point: Behringer Harvard REIT, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust and Desert Capital.

In May 2011, facing creditor claims of more $43 million, Desert Capital was forced into involuntary Chapter 11 bankruptcy. Similar cash-flow issues have plagued Inland Western. In 2009, Inland Western defaulted on several property loans, as well as pushed back maturity dates of others. As of May 2009, Inland Western subsidiaries defaulted on six mortgage loans – totaling $54.9 million – according to a quarterly report filed with the Securities and Exchange Commission (SEC).

As a result, Inland Western slashed its dividend by 70% in 2009. It also suspended its share-repurchase program, putting shareholders who wanted to sell their investment in limbo.

Investors in Behringer Harvard REIT I are in similar financial turmoil. This particular non-traded REIT has never generated profit for investors and is now completely illiquid.

Many investors in non-traded REITs thought they were buying a conservative, relatively low-risk investment. Their assumption was based on the recommendations and information they received from their brokers. Instead, many of these investors are facing suspended redemption policies and an illiquid investment.

If you’ve suffered investment losses in non-traded REITs, contact us to tell us your story.

Investors are suing David Lerner Associates, claiming the company acted negligently in the sale and underwriting of more than $6.8 billion in shares of Apple Real Estate Investment Trusts.

According to the complaint, Lerner allegedly misstated the business model of the REITs in question and misrepresented the value of shares and returns to investors.

As reported June 20 by Bloomberg, David Lerner has collected more than $600 million in fees and commissions over the past seven years while five Apple REITs have made more than $6 billion in proceeds. According to the story, the firm marketed the REITs as appropriate for conservative investors, stating they had never lost money by investing in hotels.

In reality, however, investors who acquired interests in the Apple REITs incurred substantial unrealized losses because their interests are now worth far less than the price paid to acquire them.

This isn’t the first time David Lerner Associates has faced legal issues. Last month, the Financial Industry Regulatory Authority (FINRA) accused the company of overcharging customers regarding sales of municipal bonds and mortgage securities. In 2004, Lerner was fined by the National Association of Securities Dealers over sales contests that promoted proprietary mutual funds and certain variable annuity and variable life insurance products.

Then, a year later, Lerner was fined for airing advertisements that exaggerated the brokerage’s investing record.

In 2006, Lerner was fined $400,000 for violating disclosure rules in the sale of variable life insurance and annuities. In each of the settlements, David Lerner neither admitted or denied any wrongdoing.

In its first securities fraud case against a state, the Securities and Exchange Commission (SEC) has accused the state of New Jersey of misleading investors by hiding the underfunding of its two biggest pension plans. The situation in New Jersey is far from isolated, and many legal analysts believe similar lawsuits against other states will soon be forthcoming.

New Jersey settled the SEC’s claims without admitting or denying any wrongdoing.

As reported Aug. 18 by Bloomberg, New Jersey is the third-most-indebted state in the country, behind California and New York, with $37.7 billion in gross tax-supported debt outstanding. Its $66.9 billion pension system includes seven funds, which were underfunded by $46 billion as of June 30, 2009.

Nationwide, state pension systems were underfunded by at least $500 billion in 2008, according to a report by the Pew Center on the States. The report, The Trillion Dollar Gap, says that in 2000, slightly more than half of the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim.

The consequences of severely underfunded public sector retirement benefit systems translate into lower bond ratings, higher taxes and less money available for essential public services.

The one upside to the underfunding issue is the attention being generated for new reforms. Many states are now taking action to change how retirement benefits are set, how they are funded and how costs are managed.

The Martin Wegener fraud investigation is now the subject of a civil injunction action by the Securities and Exchange Commission (SEC). According to the June 14 complaint, the Grand Rapids stock broker defrauded investors of at least $6.4 million from March 2007 to March 2010.

Wegener’s office in Walker, Michigan, has been closed since April following a raid by law enforcement officials. So far, at least two of Wegener’s former clients are suing New England Securities, the company Wegener represented.

In its 13-page civil complaint, the SEC contends Wegener ran his alleged scheme by investing clients’ money in a variety of bogus securities, as well as in two companies of which he had ownership, Wealth Resources, Inc. and Wealth Resources, LLC.

In reality, however, Wegener was keeping investors’ money for himself, while sending out fake brokerage statements to clients.

The SEC also accuses Wegener of using investors’ money to make Ponzi-like payments to other customers who requested a return of all or a portion of their investment.

Maddox Hargett & Caruso P.C. currently is investigating both Martin Wegener and New England Securities on behalf of investors who sustained investment losses. If you have a story to tell related to this matter, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Suitability, misrepresentation and issues involving variable annuities and mutual funds topped the list of enforcement actions levied by the Financial Industry Regulatory Authority (FINRA) in 2009. In total, the regulator imposed $50 million in fines and resolved 1,090 disciplinary actions. By comparison, FINRA saw $28 million in fines from 1,007 actions in 2008.

As reported July 9 by Investment News, about two-thirds of the 2009 fines for advertising violations came from auction-rate securities cases. Actions against FINRA members for sales of convertible notes and private placements also were more prevalent in 2009 and into 2010.

Moving forward, analysts predict the industry to see a growing number of fines from cases connected to sales seniors, alternative investments and private placements. Already, two significant cases involving private placements – Medical Capital Holdings and Provident Royalties – are the subject of multiple lawsuits and arbitration claims.

Investment deals involving Magnetar Capital are garnering renewed interest from the Securities and Exchange Commission (SEC), as the regulator steps up its investigation into how hedge funds like Magnetar made huge profits on instruments that produced billions of dollars in losses for investors.

The investments in question are mortgage-related collateralized debt obligations (CDOs). As reported June 19 by the Wall Street Journal, the hedge fund known as Magnetar played a key role in the CDO market, keeping sales growing even as cracks began to appear in the housing market.

Magnetar also worked with most of Wall Street’s top banks in its deals, including Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

Magnetar bought the riskiest portion of CDOs, while simultaneously placing bets that portions of its own deals would fail. Along the way, Magnetar allegedly did something to enhance the chances of that happening. According to an April 10 article by ProPublica, Magnetar pressed to include riskier assets in its CDOs so as to make the investments even more prone to failure.

Apparently Magnetar acknowledges that it bet against its own deals but says the majority of those short positions involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

The bottom line is Magnetar ended up making big profits when the CDOs collapsed. Meanwhile, investors in the supposedly safer parts of the CDO suffered big losses.

Now the SEC wants to know how the assets that were put into the CDOs were valued at the time, the terms of the deal, what triggers were put in place to determine whether investors would incur losses and at what point did the banks that were involved in the deal bet against the assets in the CDO.