Securities America

Ameriprise Advisor Michael Hainsworth Sanctioned Over Misleading REIT Sales

May 29, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Ameriprise Financial Services (Ameriprise) broker Michael Hainsworth (Hainsworth) concerning allegations that the broker made certain misrepresentations and unbalanced statements in the sale of non-traded real estate investment trusts (REITs) by sending emails to potential investors that failed to provide a sound basis for evaluating the facts.

Hainsworth has been a broker in the securities industry since 1994. From 2007 through June 2009 Hainsworth was associated with Prime Capital Services, Inc. Thereafter, he was associated with brokerage firm Securities America, Inc. from July 2009 through September 2011. Finally, he was associated with Ameriprise from May 2009, through April 2012. Thereafter, Ameriprise filed a Form U5 Uniform Termination Notice stating that Hainsworth had been terminated from Ameriprise.

FINRA alleged that between May and October 2010, Hainsworth sent emails regarding a REIT to four potential investors. FINRA found that the emails were misleading and failed to provide a sound basis for evaluating the facts of the investment. In one email, Hainsworth stated that “My recommendation is to take $50,000 out of the market in your Trust account and $50,000 out of your IRA and allocate it to the…REIT…This pays 6.25 and matures Dec 3lst, 2015.”

LPL Financial Fined by FINRA for Failing to Supervise Sales of Alternative Investments

April 25, 2014 | by Staff Attorney

On March 24, 2014, LPL Financial LLC, the fourth largest broker dealer, measured by number of salespersons, was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise the way that its brokers marketed and sold nontraditional investments. The fine is one of many that have recently been imposed on LPL and other “independent broker-dealers,” firms that provide products, marketing, and regulatory services to independent brokers who are not their full-time employees.

LPL Financial was alleged to have deficient supervision as it related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDC’s), hedge funds, managed futures, and other illiquid pass through investments. FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of theses alternative investments that violated concentration limits.

Investors often rely on professional advisors like LPL Financial, which help them to diversify their portfolio while minimizing risk. LPL, like many states, has limits in place, on the portion of a client’s portfolio that can be concentrated in these riskier, alternative investments. According to FINRA, however, LPL failed to ensure adherence to these limits. FINRA explained that between 2008 and 2012, LPL utilized a manual process that relied on outdated data to conduct suitability reviews. FINRA further stated that once LPL transitioned to a new automated review system, its database was built with faulty programming.

FINRA Fines Triad Advisors and Securities America for Failure to Supervise Issuance of Consolidated Reports

April 24, 2014 | by Staff Attorney

On March 12, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it sanctioned and fined Triad Advisors and Securities America, $650,000 and $625,000, respectively, for failing to supervise the use of consolidated reporting systems, after brokers from the firms inaccurately represented the value of some customer holdings, often inflating their overall worth.

Triad Advisors and Securities America, both registered broker dealers, had internal systems designed to generate consolidated reports—documents intended to combine most, if not all, of a customer’s financial holdings, regardless of where those assets or accounts are held. These reports do not replace account statements, but rather supplement the more traditional document. These two broker dealers, however, maintained consolidated report systems that allowed their respective brokers and representatives to manually create, rather than automatically generate, consolidated reports. In doing so, representatives from Triad and Securities America were able to customize the reports by manually inputting the data, entering asset values for accounts held away from the firm before providing the reports to customers.

According to FINRA, over the last few years, both firms regularly permitted their advisors to use these highly customizable reporting software systems, but in doing so, failed to maintain the proper supervisions. The lack of supervision, says FINRA, led to clients inadvertently, or in some cases intentionally, receiving inaccurate and misleading account information.

Pennsylvania Regulator Investigates Securities America and Landenburg Thalmann Non-Traded REIT Sales

April 17, 2014 | by Staff Attorney

The Pennsylvania Department of Banking and Securities requested that Securities America Inc. (Securities America) provide information concerning customer purchases of non-traded real estate investment trust (REIT) securities by Pennsylvania residents since 2007. This information was provided by an annual report of Ladenburg Thalmann & Co. Inc. (Ladenburg Thalmann), the company that owns Securities America as well as two other independent broker-dealers. According to Ladenburg Thalmann the company is unable to determine whether and the extent that the Pennsylvania Department of Banking and Securities may seek to discipline Securities America

A REIT is a corporation or trust that owns income-producing real estate properties. REITs pool the capital of numerous investors to purchase a portfolio of properties that may include office building, shopping centers, hotels, and apartment buildings that the average investor would not otherwise be able to purchase individually. Publicly traded REITs can be sold on an exchange and have the same liquidity as most stocks and bonds. However, non-traded REITs are sold only through broker-dealers and are illiquid. REITs are typically long term investments and investors should be prepared to hold onto non-traded REITs for up to 7 to 10 years and even longer under some circumstances.

The non-traded REIT industry sales doubled last year to $20 billion, from 2012. Increased volatility in the stock market during the financial crisis led investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, the stability of non-traded REITs only exists because brokerage firms and issuers have control over the value how the value of the security is listed on an investor’s account statements and not because the security will actually sell at that value. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

Former Newport Securities and Securities America Broker fined by FINRA for Selling Away

April 2, 2014 | by Staff Attorney

On December 11, 2013, the Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael T. Ryan. Mr. Ryan was registered with FINRA brokerage firms from 1992 until November 1, 2013, including an eight-year stint with Securities America, Inc. (Securities America) and two years with Newport Coast Securities.

The basis for the underlying action brought against Mr. Ryan by FINRA, involved Ryan’s failure to accurately notify Securities America of his outside business activities. FINRA alleged that during a period spanning early 2009 through mid 2011, Ryan began working with an individual known as ZE, while Ryan was registered with Securities America. FINRA has alleged that Ryan began receiving compensation from and was an officer and board member of entities controlled by ZE, namely Kensington Leasing, Ltd, (Kensington) and a private entity known as WM were in direct violation of NASD Rule 3030 and FINRA Rule 3270. Throughout this time, FINRA alleged that Ryan did not submit proper notifications nor did he update the requisite information, in violation of NASD Rule 3030 and FINRA Rules 3270 and 2010.

Ryan also allegedly recommended that Securities America customers purchase restricted stock of two companies, Lenco Mobile, Inc. and Casablanca Mining Ltd. from ZE controlled entities. Ryan never notified Securities America of these private transactions in violation of NASD Rule 3040, which prohibits registered representatives from participating “in any manner in a private securities transaction,” unless the registered representative first notifies his or her member firm in writing.

National Planning Corporation Broker Matthew Westfall Sanctioned Over Outside Business Activities and Non-Traded REIT Sales

March 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Matthew Westfall (Westfall) concerning allegations that from June 2011, through December 2012, while associated with the National Planning Corporation (National Planning), Westfall engaged in business activities outside the scope of his employment with the Firm. FINRA found that Westfall solicited 18 customers to purchase lraqi Dinar currency as an investment without firm approval to engage in this outside business activity. In addition, FINRA found that National Planning had internal guidelines that limited the amount customers were permitted to invest in illiquid investments, such as non-traded Real Estate Investment Trusts (REITs). According to FINRA, Westfall submitted falsified documents that exaggerated the net worth for customers permitting investments in amounts that National Planning would have otherwise prohibited.

Westfall entered the securities industry in 1983. From 2003 until August 2010, Westfall was associated with Securities America, Inc. From September 2010 to December 2012, Westfall was associated with National Planning. Thereafter, in May 2013, Westfall became associated with Primex

FINRA found that Westfall engaged in an undisclosed outside business activity of selling Dinars to 18 National Planning customers. FINRA alleged that the 18 firm customers purchased $87,954 in Dinars through Wcstfall through a personal account that he had with an online company that sold Dinars. For these sales, Westfall received approximately $8,344 in compensation.

Securities Broker Christopher Orlando Suspended Over Sale of Diversified Lending Group Promissory Notes

January 8, 2014 | by Staff Attorney

Broker Christopher Orlando (Orlando) was suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Orlando participated in the sale of approximately $7,000,000 in private securities transactions of promissory notes linked to Diversified Lending Group (DLG) that were not made through his member firm PlanMember Securities Corporation (PlanMember).

FINRA alleged that between March 2007, and July 2008 Orlando marketed Secured Investment Notes in DLG (DLG Notes). According to Orlando’s public disclosures, the DLG notes were supposed to invest funds in distressed real estate and mortgage lending. Investors who filed complaints against Orlando and the brokerage firms that employed him have alleged that in reality the DLG Notes were Ponzi scheme type fraud.

Orlando marketed the DLG Notes to insurance agents and financial advisors who in tum sold the DLG Notes to investors. FINRA alleged that Orlando met with his marketing agents and provided them with information and materials about DLG Notes. In addition, Orlando referred at least eight insurance agents to DLG for training so that they would sell DLG Notes to investors. According to FINRA, Orlando was also directly involved in marketing the DLG Notes to potential investors by speaking at seminars about them.

Paul Renard of SII Investments Suspended Over Unsuitable Sales of Nontraditional ETFs

January 2, 2014 | by Staff Attorney

Paul Renard (Renard) a broker with SII Investments, Inc. (SII) was recently suspended for two years and fined $60,000 by The Financial Industry Regulatory Authority (FINRA) over allegations that Renard: (1) recommended that at least four customers buy and hold nontraditional ETFs without having reasonable grounds for believing that the recommended investments were suitable for those customers; (2) distributed at least nine independently prepared reprints to customers without Ameriprise’s review and approval; (3) used a personal email account, which Ameriprise did not monitor, to distribute the materials; and (4) failed to disclose two tax liens filed against him by the State of Wisconsin. In addition, at least 21 customer complaints have been filed against Renard.

Renard was previously a registered representative of Ameriprise Financial Services, Inc (Ameriprise) from August 21, 2009, until June 22, 2011, when Ameriprise terminated his registration alleging that Renard failed to comply with company policies by soliciting prohibited securities, use of external email account, and failed to properly update his disclosures. Prior to Ameriprise Renard was registered with Securities America, Inc. from November 2009 through May 2011. Renard’s BrokerCheck discloses that he is also the president of First Tee of Green Bay, a managing director of Reedsville Granary LLC, and employed with PDI Financial.

FINRA alleged that Ameriprise implemented a policy prohibiting its representatives from recommending or soliciting nontraditional ETFs. Under the policy, customers could hold existing nontraditional ETF positions but any new purchases could only occur on an unsolicited basis. On September 2, 2009, Renard entered a solicited buy order for an inverse ETF in a customer’s account. Ameriprise’s compliance department informed Renard that Ameriprise did not allow its representatives to solicit nontraditional ETF purchases. Nonetheless, according to FINRA, Renard continued to solicit customers to purchase nontraditional ETFs.

Larry Dearman and Others charged by the SEC for Fraud

September 30, 2013 | by Staff Attorney

The Securities and Exchange Commission filed a complaint against Larry J. Dearman (Dearman), Sr. Marya Gray (Gray), Bartnet Wireless Internet Inc., The Property Shoppe, Inc., and Quench Buds Holding Company LLC. Dearman and Gray allegedly created an illegal scheme that fraudulently raised at least $4.7 million from thirty (30) of Deaman’s advisory clients. Dearman promised the clients that their money would be invested into lucrative investments. However, according to the SEC, Dearman and Gray squandered the funds by gambling, paying for personal expenses, and making payments to other businesses controlled by Gray.

Dearman is currently not registered as a broker with FINRA; however Dearman was registered with various brokerage firms from 2005 until 2012. From April 2002 until February 2005 Dearman was registered with the firm AXA Advisors, LLC. Upon leaving AXA Advisors, Dearman joined Brecek & Young Advisors, Inc. until January 2009. From January 2009 until February 2010 Dearman joined Securities America, Inc. Finally, Dearman was a broker with Cambridge Legacy Securities LLC from February 2010 until May 2012.

The SEC Complaint explains between December 2008 and August 2012 Dearman raised $1.7 million through the sale of promissory notes for Bartnet, a wireless internet service, whose majority shareholder was Gray. In addition, Dearman raised $2 million for a second Gray-controlled company, the Property Shoppe. Finally, in 2012 Dearman recommended his clients invest in Quench Buds, four convenient stores owned by Gray. Instead of investing the capital raised, Dearman and Gray allegedly allocated the funds to personal gambling expenses and payments to investors in the ponzi scheme.

Broker-Dealers Settle with Massachusetts Securities Division Over the Alleged Improper Sales of Non-traded REITs

August 25, 2013 | by Staff Attorney

The Massachusetts Securities Division reached a settlement of $9.6 million with five independent broker dealers concerning allegations that the firms improperly sold non-traded real estate investments trusts (REITs) to hundreds of investors within the state. The firm’s fined include Ameriprise Financial Services Inc., Commonwealth Financial Network, Royal Alliance Associates, Inc. Securities America, Inc., and Lincoln Financial Advisors Corp. The Secretary of the Commonwealth of Massachusetts William Galvin announced that a part of the settlement would be used to distribute $6.1 million to investors as restitution.

A REIT is a security that invests in real estate directly either through properties or mortgages. REITs can be publicly traded on a national exchange or privately held. Private REITs are often referred to as non-traded REITs. Non-traded REITs have become increasingly popular as increased volatility in the stock market has led many investors to look for investment products that offer more stable returns. However, non-traded REITs may not be as safe and stable as advertised. Because non-traded REITs do not trade publicly the REIT itself determines its own asset values and only publishes updated valuations sporadically. Thus, a REITs volatility includes not only real estate market volatility but also management decisions and potentially leverage positions that investors may simply not be informed about.

Massachusetts alleged that the firms engaged in a “pattern of impropriety” selling these “popular but risky investments.” Massachusetts alleged significant and widespread problems with the firms’ compliance policies, practices, and procedures in the sale of non-traded REITs. In addition, Massachusetts alleged that the firms failed to only sell non-traded REITs to qualifying investors. Massachusetts allegations concerning each firm are as follows: