Largest nontraded REIT in SEC probe

Posted on May 10, 2012 by Klayman & Toskes

The following story appeared in Investment News on May 10, 2012:

The largest nontraded real estate investment trust in the industry, Inland American Real Estate Trust Inc., is under investigation by the Securities and Exchange Commission for potential violations of federal securities laws regarding its fees and administration.

Inland American, which has $11.2 billion in real estate assets, made the SEC investigation known Monday in its quarterly report. The SEC’s investigation centers on common criticisms around the nontraded-REIT industry, namely the details of its fees.

Inland American “has learned that the SEC is conducting a nonpublic, formal fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws,” the company said Monday in its quarterly report. Those potential violations are “regarding the business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT.”

“Inland American has not been accused of any wrongdoing and we are fully cooperating with the SEC,” said Nicole Spreck, a company spokeswoman. “Inland American does not believe it has done anything wrong and we continue to execute against our business plan and strategy. Beyond that we really can’t comment on the investigation itself because it is a confidential process at the request of the SEC and we plan to honor that request. “

The nontraded-REIT industry recently has seen a number of REITs cut their estimated values and has drawn increased scrutiny from securities regulators over the issue.

Inland American is one of five REITs that have been sponsored by The Inland American Real Estate Group of Companies Inc., according to that company’s website. At the end of last year, Inland American directly or indirectly owned 964 properties, representing 49 million square feet of retail industrial and office space. The REIT also owned 9,500 apartment units and 15,600 hotel rooms.

A related REIT, Retail Properties of America Inc., has also seen difficulties recently. Formerly known as Inland Western Retail Real Estate Trust Inc., Retail Properties of America had an initial public offering last month in which its shares were listed at an equivalent of $3.20 per share. Last June, that REIT’s management said its estimated value was $6.95 per share.

Investors who sustained losses in these REITs may be able to recover their losses by filing an claim or lawsuit againt the brokerage firm who sold them the product. Investors can contact Klayman & Toskes toll free at 888-997-9956 to exlore their legal options at no obligation.

Posted in Arbitration, REITs, SEC | Leave a comment

Daniel Spitzer Customers

Posted on May 10, 2012 by Klayman & Toskes

The Law Firm of Klayman & Toskes is investigating claims on behalf of investors who did business with Daniel Spitzer. The Securities and Exchange Commission has previously filed fraud charges and an emergency asset freeze against Spitzer based in the Virgin Islands who perpetrated a $105 million Ponzi scheme against investors.

The SEC alleges that Spitzer, a resident of St. Thomas, used several entities and sales agents to misrepresent to investors that their money would be invested in investment funds that, in turn, would be invested primarily in foreign currency. Investors were falsely told that Spitzer’s funds had never lost money and historically produced profitable annual returns that one year reached over 180 percent. Spitzer instead used money raised from new investors to pay earlier investors, and misappropriated investor funds to pay unrelated business expenses. He concealed his scheme by issuing phony documents to investors that led them to believe their investments were profiting.

According to the SEC’s complaint, filed in U.S. District Court for the Northern District of Illinois, Spitzer conducted his fraudulent scheme, which involved 400 investors, from at least 2004 to present. He only invested approximately $30 million of the more than $105 million he raised from investors. Of that amount, Spitzer used approximately $13.5 million to invest through an offshore entity via a bank account in the Netherlands Antilles. These investments, some of which were placed in a French financial institution, lost money and were subsequently liquidated. Spitzer used another $16 million to invest in money market funds that earned only a few thousand dollars. Spitzer liquidated these investments as well. After the investments were liquidated, the money was returned to Spitzer, and he used it to repay investors in Ponzi-like fashion. To cover up his scheme, Spitzer issued to his investors false Schedule K-1s that showed inflated returns and led them to believe that their investments were profitable.

The SEC’s complaint alleges that Spitzer used offshore bank accounts to pay purported business expenses of his companies. Spitzer deposited investor funds into bank accounts at the National Bank of Anguilla and the First Bank of Puerto Rico, from which he paid more than $15 million in purported operating expenses and payments to himself and various sales agents. Spitzer also used more than $4.8 million to pay third-party business expenses. The SEC further alleges that Spitzer led an extravagant lifestyle and spent more than $900,000 at a Las Vegas casino.

According to the SEC’s complaint, Spitzer’s scheme is on the verge of collapse as he has attempted to delay and avoid paying investor redemptions. As recently as March 2010, Spitzer obtained $100,000 from an investor for an investment in one of his purportedly more conservative investment funds. Rather than invest the money, Spitzer used a portion of the money in April 2010 to pay other investors and third-party expenses.

At the SEC’s request for emergency relief for investors, the Hon. Harry D. Leinenweber of the U.S. District Court for the Northern District of Illinois issued an order freezing all assets of Spitzer and his companies. Among other things, the court order requires that the defendants repatriate to the U.S. all assets located overseas.

The SEC’s complaint charges Spitzer and the defendant entities with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges Spitzer and two of the asset management companies with violations of Section 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint also seeks a court order of permanent injunction against Spitzer and each of the defendant entities, as well as an order of disgorgement including prejudgment interest. The complaint also seeks financial penalties against Spitzer and five of the asset management companies.

If you invested money with Daniel Spitzer, contact Klayman & Toskes toll free at 888-997-9956 to discuss your legal options at no obligation. You may be eligible to file a claim or lawsuit to recover your losses.

Posted in Arbitration, FINRA, Ponzi Scheme, SEC | Leave a comment

The Securities Arbitration Law Firm of Klayman & Toskes Launches Investigation On Behalf of Arch Coal Shareholders With Large Concentrated Positions

Posted on May 7, 2012 by Klayman & Toskes

The Securities Arbitration Law Firm of Klayman & Toskes, P.A. (“K&T”), announced today that it is investigating claims on behalf of Arch Coal, Inc. (NYSE: ACI) shareholders who sustained investment losses due to an over-concentration of Arch Coal stock. Trading above $70 per share in June of 2008, Arch Coal has declined about 90% and is now trading around $8 per share. As a result, investors who held concentrated stock positions in Arch Coal during this time period have sustained significant losses.

Since 2000, K&T has pioneered the representation of High Net Worth (“HNW”) and Ultra-HNW clients who sustained investment losses as a result of holding concentrated positions in a single security or sector, in a full-service brokerage account. The clients we represented and continue to represent include founders of public companies and key employees from virtually every industry who received large grants of stock options or Rule 144 restricted stock. The claims, filed in the Financial Industry Regulatory Authority (“FINRA”) Arbitration Department f/k/a NASD and NYSE, focused on the mismanagement of the clients’ portfolios given the fact that there were risk management strategies that would have protected the value of the concentrated portfolio. Such risk management strategies include stop loss and limit orders, protective puts and collars. Stop loss orders, limit orders and protective puts provide an account with downside protection and an exit strategy should the stock decline in value. A hedge strategy, known as a “zero cost” collar, would have created a range of value that the portfolio would have maintained irrespective of the fluctuation and direction of the underlining stock price. The failure to use risk management strategies as well as the failure to “hedge” the value of a concentrated portfolio directly exposes an investor’s concentrated position to the fluctuations in the volatile securities markets.

If you wish to discuss this announcement or sustained losses of $750,000 or more as a result of holding a concentrated position in Arch Coal stock, please contact our law firm.

Posted in Arbitration, Concentration, FINRA, Risk Management Strategies, Suitability | Leave a comment

Andre Mari Gonzales Customers

Posted on May 7, 2012 by Klayman & Toskes

As published in the Financial Industry Regulatory Authority (“FINRA”) disiplinary report for April 2012, Andre Mari Gonzales of High Point, North Carolina was barred from association with any FINRA member in any capacity. The sanction was based on findings that Gonzales failed to respond to FINRA requests for information. The decision has been appealed to the NAC and the sanction is not in effect pending the appeal. According to Gonzales’ CRD report, Gonzales was discharged from SunTrust Investment Services for allegedly “copying and pasting client signatures on required bank documents.”

If you held accounts with Andre Mari Gonzales and Wachovia Securities or SunTrust Investment Services and sustained investment losses, you can contact our firm for a free consultation, and to discuss your legal rights and options. A securities arbitration claim or lawsuit against these brokerage firms may help you recover some of your losses.

Posted in Arbitration, FINRA, Forgery, Fraud, Legal Rights and Options | Leave a comment

Nontraded REIT rules roiled by appraisal issue

Posted on May 7, 2012 by Klayman & Toskes

The following story appeared in Investment News on May 6, 2012:

The $84 billion nontraded-REIT industry is deeply divided about valuations as regulators prepare to codify rules on creating an estimated share value for the products.

That division was apparent in comment letters that industry players submitted last month to the Financial Industry Regulatory Authority Inc. Those letters offered arguments for and against Finra’s proposed changes to rules addressing the valuation of private real estate investment trusts and a wide variety of private, illiquid assets dubbed “unlisted direct-participation programs.”

In an indication of the complexity of the issue and the diversity of opinion surrounding it, this was the second time in six months that Finra asked securities firms for responses to its rule proposals about how valuations for such investments should appear on clients’ account statements.

A key sticking point is whether REITs and other private investments should use an independent third party to conduct appraisals.

For example, W.P. Carey & Co. LLC, a leading sponsor of a series of private REITs, with a global portfolio of $12 billion, said that product sponsors “should retain an independent third party to appraise an issuer’s assets at least once each year,” according to the firm’s letter to Finra.

“We believe that the involvement of a third party will enhance the credibility of per-share estimated [net asset values],” W.P. Carey wrote.

“We also think it would ameliorate the perceived and actual conflicts of interest that may exist between the sponsor and the issuer in determining valuations, and provide an independent check” for REITs and other investments that neither undergo an initial public offering or liquidate, the letter said.

FOES SKEWER APPRAISALS

Others disagreed, noting that the wide variety of private-investment products makes mandatory third-party appraisals inappropriate.

One of the private-investment industry’s leading trade groups, the Investment Program Association, for example, wrote: “The [pending Finra] rule should not dictate that the estimate be based on an “appraisal’ of the issuer’s assets and liabilities.”

The letter, signed by IPA chairman Martel Day, said: “Many non-listed REITs and DPPs use very common and highly accepted methodologies to estimate value. Many issuers have engaged third parties to estimate value, while others have engaged third parties merely to analyze the methods and reasonableness of the assumptions used and conclusion arrived at in estimating value.”

The IPA’s letter added that it is developing uniform valuation guidelines.

Finra rules mandate that sponsors of nontraded REITs establish an estimated per-share valuation within 18 months after the REIT stops raising money from investors. The Finra changes, proposed in March, would change the contents of client account statements.

Under the proposal, broker-dealers no longer would be required to provide a per-share estimated value, unless the issuer provided an estimate based upon an appraisal of assets and liabilities in a periodic or current report under the Securities and Exchange Act of 1934.

During the initial offering period, broker-dealers would have the option of using a modified net offering price or designating the securities as “not priced.”

DISCLOSURE

Additionally, Finra is seeking to expand and refine the disclosures regarding valuations on customer account statements.

“We were encouraged by comments on the notice to members, and we’re putting together a filing with the SEC,” said Finra senior vice president Joseph E. Price. “When the commission gets our proposal, a third round of comments will follow.”

The goal of the proposed rule change is to have more transparency about valuations of private REITs and other DPPs so that investors have a better understanding of the process and that a value based on an appraisal is established sooner, Mr. Price said.

The important issue is how “granular” Finra eventually requires the appraisal of the product’s valuation to be, he said.

“It’s not whether there is an appraisal, but what standards” sponsors use in arriving at an estimated value, Mr. Price said, acknowledging that there likely will be some flexibility in the rule because it covers a broad range of programs.

Several major nontraded REITs have seen the value of their shares slashed over the past year, shaking advisers’ and investors’ faith in the sponsors of those products.

“Inland Western Retail Real Estate Trust Inc. last June established an estimated per-share value of $6.95 per share. No independent appraisals were obtained,” the company said in a filing with the SEC, adding that the estimate of the REIT’s real estate holdings “was determined by the company’s management.”

Rechristening itself Retail Properties of America Inc., the company had an IPO last month and, after a reverse stock split, it initially was listed at a price equivalent of about $3.20 a share. Its market capitalization is close to $1.8 billion, but the IPO was for a limited number of the REIT’s investors.

A spokesman for Retail Properties of America, Joel Cunningham, said that the REIT would not comment about its valuation.

“The whole concept of internal evaluations [by management] needs to go away,” said Tony Chereso, chief executive of FactRight LLC, a consultant for alternative-investment firms. “I think everyone is in general agreement about that.”

ENTERPRISE VALUE

Meanwhile, Dividend Capital Total Realty Trust Inc. in March added to its estimated per-share value by including $212 million of “enterprise value” in its valuation methodology. That translated into $1.09 a share, bringing the estimated per-share value to $8.45, according to the REIT’s annual report.

The REIT has more than $3.1 billion in invested assets.

Other major REITs such as KBS Real Estate Investment Trust and Wells REIT II said that they don’t use enterprise value in the valuations.

The president of Dividend Capital Total Realty Trust, Guy Arnold, didn’t respond to phone calls last week seeking comment about the REIT’s use of this metric in its valuation.

Enterprise value stands for “the brand behind the operator,” Mr. Chereso said.

Asked about Dividend Capital Total’s decision to use it in its estimated value, he said: “I was surprised to hear that they included it.”

“Our opinion is that enterprise value should not be included as part of valuations,” Mr. Chereso said.

“We’re not seeing more REITs use enterprise value,” he said. “Most are saying it’s not a component of the underlying assets.”

Posted in Arbitration, Due Diligence, FINRA, REITs, Valuation | Leave a comment

Investigation On Behalf of David Zeng and Merrill Lynch Customers

Posted on May 2, 2012 by Klayman & Toskes

Our law firm is investigating potential claims against Merrill Lynch on behalf of customers of David Zeng. Customers of Zeng have reported that they sustained substantial losses as a result of maintianing concentrated stock positions, particularly in stocks from China and Canada. These include, MGM Resorts, Teck Resources, Delcath Systems, Goldcorp, Silver Wheaton Corp., Focus Media Holding and Sina Corp. 

Customers of David Zeng who have sustained substantial investment losses can contact our law firm to discuss their legal rights and options. You may be able to recover your losses by filing a claim or lawsuit with FINRA’s arbitration department.

Posted in Arbitration, Lawsuit, Legal Rights and Options, Merrill Lynch | Leave a comment

The Securities Arbitration Law Firm of Klayman & Toskes Investigates Claims on Behalf Of UBS Puerto Rico Customers Who Purchased Closed End Funds Between 2008 and 2009

Posted on May 2, 2012 by Klayman & Toskes

The Securities Arbitration Law Firm of Klayman & Toskes, P.A. (“K&T”) announced today that it is investigating the sales practices and supervision by UBS Puerto Rico (“UBS PR”), a subsidiary of UBS Financial Services (NYSE: UBS), in connection with the sales of the following closed end funds:

  • Puerto Rico Fixed Income Funds I – VI;
  • Puerto Rico Mortgage Backed & US Govt. Fund;
  • Tax-Free Puerto Rico Funds I and II;
  • Tax-Free Puerto Rico Target Maturity Fund;
  • Puerto Rico AAA Portfolio Target Maturity Fund;
  • Puerto Rico AAA Portfolio Bond Funds I and II;
  • Puerto Rico GNMA & U.S. Gov. Target Maturity Fund;
  • Puerto Rico Investor’s Tax-Free Funds I – VI,
  • Puerto Rico Tax-Free Target Maturity Fund I and II; and
  • Puerto Rico Investors Bond Fund I.  

Yesterday, the Securities & Exchange Commission (“SEC”) charged UBS PR and two of its executives with “making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.” The SEC also stated that in 2008, UBS PR promoted the closed-end funds’ “extraordinary ‘market returns’ and low risk and volatility, but failed to disclose that share prices and liquidity were increasingly dependant on UBS PR’s support of the [closed-end funds’] secondary market.” During 2008 alone, UBS PR’s non-exchange traded closed-end fund business produced $94.5 million in revenue for the firm.

Investors who sustained substantial losses in closed end funds in their UBS PR accounts can contact K&T to explore their legal rights and options. This includes filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (“FINRA”) against UBS PR. UBS PR is a member firm of FINRA which has jurisdiction over the broker-dealer in the arbitration process. While UBS PR paid $26.6 million to settle the SEC’s charges, which will be placed in a “fair fund” for injured investors, UBS PR has agreed that “in any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any part of [UBS’] payment of a civil penalty in this action.”

If you lost $100,000 or more in closed end funds purchased in your UBS PR accounts, please contact our firm.

Posted in Arbitration, Closed End Funds, Enforcement, Lawsuit, Legal Rights and Options, UBS, Unsuitability | Leave a comment

SEC Charges UBS Puerto Rico and Two Executives with Defrauding Fund Customers

Posted on May 1, 2012 by Klayman & Toskes

The Securities and Exchange Commission today charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.

UBS Puerto Rico agreed to settle the SEC’s charges by paying $26.6 million that will be placed into a fund for harmed investors.

According to the SEC’s order instituting settled administrative proceedings against UBS Puerto Rico, the firm knew about a significant “supply and demand imbalance” and discussed the “weak secondary market” internally. However, UBS Puerto Rico misled investors and failed to disclose that it controlled the secondary market, where investors sought to sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, UBS Puerto Rico later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors.

The SEC instituted contested administrative proceedings against UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz.

“UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law – accurate price and liquidity information, and a trading desk that did not advantage UBS’s trades over those of its customers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We will aggressively prosecute firms that use conflicts of interest for their own financial gain.”

According to the SEC’s order, starting in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance and continuously high premiums to net asset value (up to 45 percent) as the result of supply and demand in a competitive and liquid secondary market. When investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Despite a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business. Throughout this period, UBS Puerto Rico failed to disclose the true state of the market to investors.

According to the SEC’s order, UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . . [so] prices transparently develop based on supply and demand.” To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing” in one document, which included:

  • Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidate UBS Puerto Rico’s inventory first, preventing customers from selling their shares.
  • Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
  • Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

UBS Puerto Rico also increased solicitation efforts to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support.

According to the SEC’s order against Ferrer and Ortiz, Ferrer made misrepresentations and did not disclose numerous material facts about the closed-end funds. For example, although Ferrer was well aware of the supply and demand imbalance and privately discussed UBS Puerto Rico’s growing inventory and support of the market, he caused UBS Puerto Rico to conduct new primary closed-end fund offerings while directing financial advisors to represent to customers that the market was experiencing “low volatility” and providing “superior returns.” Ferrer also repeatedly made misleading statements about closed-end fund market prices and touted that the funds would always trade at high premiums to net asset value, even while UBS Puerto Rico was substantially reducing its inventory and causing huge investor losses.

According to the SEC’s order, Ortiz falsely represented that closed-end fund shares were priced based on supply and demand while in reality he and the firm concealed the inventory increases and rarely changed prices, allowing UBS Puerto Rico to promote the façade of a liquid, stable market. As UBS Puerto Rico was reducing its inventory in 2009, Ortiz touted increased closed-end fund secondary market liquidity and superior price performance to investors at a UBS investor conference. At the same time, Ortiz was executing UBS Puerto Rico’s inventory reduction scheme that involved “eliminat[ing]” marketable customer sell orders to dump UBS Puerto Rico’s inventory first, putting UBS Puerto Rico’s interests ahead of their customers’ orders.

UBS Puerto Rico agreed to settle the SEC’s charges, without admitting or denying the findings, that it violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order requires UBS Puerto Rico to pay $11.5 million in disgorgement, $1.1 million in prejudgment interest, and a penalty of $14 million. In addition to the monetary relief, the SEC’s order censures UBS Puerto Rico, directs it to cease-and-desist from committing or causing any further violations of the provisions charged, and orders the firm to comply with its undertaking to retain an independent consultant at UBS Puerto Rico’s expense.

Among other things, the independent consultant will review the adequacy of UBS Puerto Rico’s closed-end fund disclosures and trading and pricing policies, procedures, and practices. UBS Puerto Rico shall abide by the determinations of the consultant and adopt and implement all recommendations.

The Order against UBS can be found by clicking here.

Posted in Enforcement, Fraud, SEC | Leave a comment

FINRA Sanctions Four Firms $9.1 Million for Sales of Leveraged and Inverse Exchange-Traded Funds

Posted on May 1, 2012 by Klayman & Toskes

The Financial Industry Regulatory Authority (“FINRA”) annouced announced that it has sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

FINRA sanctioned the following firms:

  • Wells Fargo – $2.1 million fine and $641,489 in restitution
  • Citigroup – $2 million fine and $146,431 in restitution
  • Morgan Stanley – $1.75 million fine and $604,584 in restitution
  • UBS – $1.5 million fine and $431,488 in restitution

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Leveraged and inverse ETFs have certain risks not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. Accordingly, investors were subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark when held for longer periods of time, particularly in the volatile markets that existed during January 2008 through June 2009. Despite the risks associated with holding leveraged and inverse ETFs for longer periods in volatile markets, certain customers of these firms held leveraged and inverse ETFs for extended time periods during January 2008 through June 2009.

In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Posted in Citigroup, Enforcement, ETFs, FINRA, Morgan Stanley, Suitability, Supervision, UBS, Wells Fargo | Leave a comment

Regulator warns investors against pre-IPO fraud

Posted on April 25, 2012 by Klayman & Toskes

The following story appeared on Reuters on April 24, 2012:

The U.S. securities regulator warned investors on Tuesday to beware of scams offering shares of hot tech companies such as Twitter and Facebook that have not yet gone public.

The alert, posted on the Securities and Exchange Commission’s website, said that, while legitimate offerings of pre-IPO shares are not uncommon, they generally are limited to sophisticated investors.

The SEC said it is “aware of a number of complaints and inquiries about these types of frauds, which may be promoted on social media and internet sites, by telephone, email, in person, or by other means.”

The SEC pointed to pre-IPO schemes in recent years as reason for concern.

Earlier this month, the U.S. District Court for the Southern District of Florida in Miami issued an order in a bid to halt an allegedly fraudulent sale of securities of an investment vehicle that purportedly held pre-IPO shares of Facebook.

The SEC’s warning also comes just weeks after President Barack Obama signed into a law a bill making it easier for firms to raise capital and solicit investors.

Some SEC officials, Democrats, and industry watchdogs have sharply criticized the law for rolling back critical shields that protect unsophisticated investors from securities fraud.

The law, which was held up as a job-creation bill, will make it easier for companies to solicit private investors and relaxes filing requirements associated with initial public offerings.

It also allows startup companies to engage in crowdfunding, in which investors take small stakes in companies over the Internet.

Posted in Enforcement, Fraud, IPO, SEC | Leave a comment