Skip to main content
Exchange-traded notes. 1861 Capital Management Funds. Rochester Municipal Bond Fund. LPL Financial. Morgan Keegan. Tim Durham. Those were just a few of the stories and scams behind the financial headlines in 2012.
In July, exchange-traded notes (ETNs) were the subject of an Investor Alert by the Financial Industry Regulatory Authority (FINRA). In the notice, FINRA warned investors about the dangers of ETNs, including illiquidity, early redemption at the issuer’s discretion, the possibility of trading at a higher price than their underlying index, and conflicts of interests.
July also saw investigations launched into investor losses tied to the 1861 Capital Management Funds and allegations that the funds were marketed and sold by UBS and various broker/dealers as safe, secure, and low-risk when in reality they were highly leveraged municipal arbitrage funds.
In August, investors in the Behringer Harvard Strategic Opportunity Fund I learned their investment was now underwater, with its debts now outweighing assets. As of the end of last year, the Strategic Opportunity Fund I had fallen by nearly 40% to $4.12 a share.
In September, legal issues exploded for the underwriters of Facebook’s initial public offering as more investors filed arbitration claims and civil lawsuits. The majority of investors aimed their legal action at Facebook’s main underwriter, Morgan Stanley, for failing to adequately warn them how mobile usage could negatively impact the company’s financials.
Also in September, a New York FINRA arbitration panel ordered Citigroup Global Markets, Inc. to pay compensatory damages of more than $1.4 million to an investor who suffered losses tied to Citi’s Rochester Municipal Bond Fund. The fund had been marketed as safe and secure but actually contained risky derivative securities.
In October, massive financial losses in a group of Morgan Keegan & Co. bond funds came to a head with thousands of investors, including former Chicago Bulls NBA star Horace Grant, filing arbitration claims against Morgan Keegan. Arbitrators had previously awarded Grant $1.46 million for his losses in the funds, but he continued to be mired in legal issues as he tried to halt Morgan Keegan’s attempts to overturn the ruling.
Non-traded REITs also made news in October and, in particular, bad news for David Lerner Associates. FINRA ordered the firm to pay $12 million in restitution to clients who bought shares of Apple REIT 10. In addition, FINRA fined Lerner more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.
In November, the long-awaited sentencing for disgraced Indianapolis businessman Tim Durham was finally decided. Judge Jane Magnus-Stinson sentenced Durham to 50 years in prison for his role in conning more than 5,000 Fair Finance investors out of $250 million. Durham’s cohorts – Jim Cochran and Rick Snow – received sentences of 25 and 10 years, respectively.
In December, Morgan Stanley, the lead underwriter of the Facebook IPO in May, was fined $5 million by Massachusetts Secretary of the Commonwealth William Galvin for violating securities laws governing how investment research can be distributed.
Massachusetts securities regulators also initiated a complaint against LPL Financial in December, charging the broker/dealer of failing to supervise registered reps who sold $28 million in non-traded REITs investments in violation of both state limitations and the company’s rules. LPL reps collected about $1.8 million in fees as a result of the sales, Galvin’s office alleges.