Investor Fraud

Ex- Stratton Oakmont Broker Accused of Churning

January 27, 2014 | by Staff Attorney

Christopher Veale, a broker who worked at Stratton Oakmont Inc., was accused by Massachusetts securities regulators of excessive trading in the account of an 81-year-old person from 2010 to 2012.

The regulators said today in a statement that they’re seeking to bar Veale from the securities business in Massachusetts, along with his former colleague, Ali Habib Mayar, and their firm Brookville Capital Partners LLC, the brokerage where they worked at the time.

Martin Scorsese depicted Stratton Oakmont, Inc. in the film The Wolf of Wall Street. Prosecutors said that Stratton Oakmont generated millions of dollars in illicit profits by aggressively selling penny stocks and manipulating their prices from its offices in Lake Success, New York, before being shut down by regulators in 1996.

HFP Capital Markets’ Employees Sanctioned Over Metals Millings and Mining Private Placement Offering

December 18, 2013 | by Staff Attorney

Advisor Thomas Mikolasko, (Mikolasko) of HFP Capital Markets LLC (HFP) was recently suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Mikolasko engaged in the sale of $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (MMM) in a private placement offering. The MMM Notes defaulted and investors were not repaid either principal or the 100 percent return promised. FINRA found that Mikolasko negligently caused material misrepresentations and omissions of material facts to be made in connection with the sale of MMM. FINRA also alleged that Mikolasko facilitated the offering even though he knew or should have known that HFP had conducted inadequate due diligence concerning the offering and that the limited due diligence the firm had conducted identified significant “red flags.”

Metals Millings and Mining LLC was an entity created in 2009 with HFP’s assistance. MMM was formed as a vehicle to aggregate and process certain ore materials. The investment’s sponsor had presented to HFP a plan to extract precious metals from the ore concentrate through a process known as “plasmafication.” HFP’s former chief executive, Vincent J. Puma was primary responsibility for HFP’s involvement in the MMM offering. From December 2009 to February 201l, HFP sold approximately $3 million of MMM Notes to 58 HFP customers. The MMM notes provided for the repayment of principal in one year together with the ownership of ore concentrate.

Pursuant to a repurchase agreement, MMM was then obligated repurchase the ore from the investors at an agreed price so that they would receive a 100 percent return on their investment in addition to the return of principal. There was no private placement memorandum for the transaction and investors were provided only with limited disclosures as forth in a subscription agreement. The MMM notes have defaulted and investors have not been repaid either principal or the promised 100 percent return.

Mark F. Spangler Convicted of Fraud and Money Laundering

November 20, 2013 | by Staff Attorney

A well-known investment adviser, Mark F. Spangler (“Spangler”), was convicted by a federal jury of 32 criminal counts of wire fraud, money laundering and investment advisor fraud. He defrauded friends and family by diverting their investments into two-risky startup companies. U.S. Attorney Mark Durkan stated, “This defendant used his position of trust as a tool to cheat his clients out of money for their mortgages, their children and grandchildren’s education, their retirement and plans for charitable giving.”

Spangler’s illicit activity was uncovered after a FBI raid of his house in September 2011. While investors faced insurmountable losses, Spangler used their money to investment in startup companies and to live a life of luxury. At trial the evidence and witness testimony established that Spangler repeatedly violated his fiduciary duty as an investment adviser by misleading investors about where their money was invested. Spangler supplied investors with false quarterly statements with inflated values for their accounts. He told clients that their assets were valued at $73 million; however the actual value recovered was approximately $28 million. By falsifying account statements to clients, investors suffered a substantial loss of $45 million.

In certain situations, when an investor requested to liquidate accounts, Spangler paid out these investors with capital raised by new investors. The Ponzi scheme began to unravel as the private fund was unable to satisfy redemption requests. Eventually, the Spangler Group filed for receivership proceedings. Receivership occurs when a company cannot meet its financial obligations or enters into bankruptcy. The filing for receivership in state court by the Spangler Group was a red flag for the SEC and the U.S. Attorney’s Office.

SEC Charges A Subsidiary of Royal Bank of Scotland with Misleading Investors in Subprime RMBS Offering

November 14, 2013 | by Staff Attorney

On November 7, 2013, the Securities and Exchange Commission (SEC) today charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering. RBS agreed to settle the matter and pay more than $150 million, which the SEC will use to compensate investors for harm suffered as a result of RBS’s conduct.

According to the SEC, RBS told investors that the loans backing the offering “generally” met the lender’s underwriting guidelines even though more than 25% did not comport with the stated guidelines and should have been entirely excluded form the offering. RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction, the SEC said in a complaint filed in federal court in Connecticut.

“In its rush to meet a deadline set by the seller of these loans, RBS cut corners and failed to complete adequate due diligence, with predictable results,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Today’s action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.”

What are Tenants-in-Common Securities?

October 30, 2013 | by Staff Attorney

Tenants-in-common real estate investments (“TIC”) are a more than $1-billion a year industry. However, with all innovative investment products, TIC investments receive their share of complaints from unhappy investors who bought them through a private placement. In FINRA arbitration, these complaints materialize as suitability claims and allegations of negligent misrepresentation. Usually, one or more of the following claims are made:

Investing in a TIC was not appropriate for me because of my needs, experience, or risk tolerance.
My broker did not perform adequate due diligence on the,offering materials of the TIC, appraisals of the underlying properties, persons promoting the TIC.

How To Guide: Tips on Avoiding Investment Scams

September 28, 2013 | by Staff Attorney

You read about investment scams, but you never think it can happen to someone like you.

We have all read about the Bernie Madoffs and Allen Stanfords of the world. Unsuspecting investors duped into some of the largest ponzi schemes in the world. You think to yourself that it can never happen to you or anyone you know – that you are too smart. You may be right, but a lot of victims are smart and sophisticated investors. The lure of safe investments with high returns is appealing to everyone. Don’t get caught chasing returns in investments you do not understand.

High Yield and No Risk

FINRA Publishes Fraud Susceptibility in the United States Study

September 25, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently released a report detailing the American public’s susceptibility to financial fraud. The Financial Fraud Research Center estimated that fraud costs the American people over $50 billion a year without including the cost of efforts to prevent and prosecute fraud.

The report entitled, Financial Fraud and Fraud Susceptibility in the United States made two summary claims. The first claim is that ever present fraud solicitations coupled with the inability of people to recognize the signs of fraud place a large number of Americans at risk, especially older Americans. Second, policy maker’s inability to obtain an accurate measure of financial fraud frustrates our understanding of its prevalence and our ability to prevent fraud.

The study highlighted that many Americans cannot identify classic “red flags” of fraud. For instance, the study cited that many Americans lack an understanding of what a reasonable rate of return on a investment would be. The study found that over 4 in 10 people participating in the study found promises of a annual return of 110% or a “fully guaranteed” investment appealing. Participants found such promises appealing even though returns of over 100% are highly improbable and virtually no investment is guaranteed. This lack of understanding leaves many Americans susceptible to fraudulent sales pitches. The study also found that older Americans, age 65 and older, are more likely to be targeted by fraudsters and 34% more likely to lose money than people in their forties.

UBS Preliminarlily Settles Lehman Principal Prtoected Note Cases – Should You Hold Out?

September 14, 2013 | by Staff Attorney

On August 8, 2013, UBS agreed to pay $120,000,000 to settle claims related to the Lehman Principal Protected Note cases. According to Reuters, this is UBS’ second settlement in less than three weeks.

According to counsel, the $120,00,000 settlement represents a recovery of 13.4% of the total face value of the structured notes. The parties have stipulated to certify the case for the purpose of settlement. If the class action is approved it will resolve over $898 million in claims against UBS for the Lehman Securities sold by UBS from March 2007 through September 15, 2008 when Lehman filed for bankruptcy in the Southern District of New York.

The question for investors is whether they should take the settlement after approval by the court or reject the settlement and bring a claim individually against UBS. In an individual arbitration, the chances of getting more than a 13.4% recovery is fairly substantial. Many of the UBS Lehman Principal Protected Note cases that went to arbitration since 2009 have resulted in large awards for investors and many have settled before hearing.

Jason T. Knapp Accused of Selling Away Violations

September 4, 2013 | by Staff Attorney

At least one action has been initiated against Jason T. Knapp (Knapp) accusing the broker of running a Ponzi scheme. Knapp is a former broker of Dawson James Securities, Inc. (Dawson James) and operated under the company name Steeple Chase Group, LLC (Steeple Chase). Steeple Chase holds itself out as a real estate, financial lending, consulting, and investment related company.

From 2006 through September 2008 Knapp was a registered representative of Chicago Investment Group, LLC. From September 2008 through June 2012 Knapp was registered with Dawson James. Dawson James terminated Knapp citing that Knapp had falsified documents and solicited clients to purchase investments, presumably in Steeple Chase, that were not approved by the firm. In addition, an allegation was made by another client that Knapp engaged in an unauthorized transaction that Knapp could not provide the firm with a satisfactory explanation for.

In total two customer actions have been initiated against Knapp and Dawson James Securities for failing to supervise Knapp’s business activities. In March 2013, FINRA barred Knapp from the securities industry when he failed to respond to the agency’s request for additional information concerning the customer complaints and the circumstances of his termination.

The Dangers of Low-Priced (Penny Stocks) Securities

September 3, 2013 | by Staff Attorney

A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a very small company, micro-cap or less than $100 million in market capitalization, and trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or OTC Link LLC. However, not all penny stocks trade over-the-counter and many trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can also include private companies with no active trading market.

Penny stocks are inherently risky due to several contributing factors. First, penny stocks may trade infrequently, meaning that it may become difficult to liquidate penny stock holdings once acquired. Second, it may be difficult to find accurate quotes for certain penny stocks. Therefore, it may be difficult or even impossible to accurately price certain penny stocks. Due to these risks, penny stock investors may lose their whole investment. When penny stock investing is combined with margin borrowing the results can be catastrophic for the investor.

If the inherent risks of penny stocks were not great enough, penny stocks are often used and manipulated for fraudulent purposes. One common scheme is the “pump and dump” scheme. The idea behind a pump and dump scheme is to create unfounded hype for a penny stock the pumper already owns. As the pumper’s victims buy into the hype additional purchases drive up the price of the stock artificially. The pumper then sells his shares for a large profit while those the pumper recommended the penny stock to quickly lose their money as the stock’s value decreases precipitously.