FINRA Announces Grant to Establish Legal Clinics for Disadvantaged Investors

The Financial Industry Regulatory Authority (FINRA) has announced the award of $1 million in grants split among four law schools. Each $250,000 award will go towards launching legal clinics to provide aid to disadvantaged investors involved in securities disputes. Currently, many investors who file small claims find law firms unwilling or unable to represent them. However, even those that do find counsel sometimes hit with prohibitive hourly costs. The four new law clinics will work with such investors to fill this gap in legal services. Pepperdine University School of Law, a Los Angeles area school, is one such recipient of FINRA funds.

The four schools were chosen in part because of their willingness to not only launch this program, but to maintain the clinics past the three year grant period. Further, they have demonstrated a commitment to investor education and outreach in their respective communities. This is the third iteration of FINRA’s clinic grant program, the first recipient being Northwestern University School of Law in 2004 and the second recipient being an established clinic at Pace Law School in 2006.

To view the official press release, please click here.

Due Diligence on Medical Capital Notes at Issue in Massachusetts Case Against Securities America

In the Commonwealth of Massachusetts v. Securities America Inc, the United States is seeing the first instance of a state regulator bringing an enforcement case against a company over private placement deals.

The allegations contained in the initial complaint are partially based on the claim that Securities America failed to follow through with proper due diligence. A broker is required to perform due diligence on a product to ensure that it is a legitimate offering worthy of sale to clients. If there is evidence that the product, in this case Medical Capital private placement offerings, is fraudulent or otherwise unfit for would be investors, that product is abandoned.

The issue in the current case is that Securities America sold a private placement deal (Medical Capital Holdings Inc.) to hundreds of investors over multiple years despite incontrovertible evidence that the Medical Capital financial records were meritless.

Securities America clients were only one such group sold Medical Capital notes. Of the more than $1.7 billion worth of notes sold to investors, Securities America clients represent a capital investment of $697 million, or roughly 37% of the whole. It is worth noting that the enforcement case in Massachusetts is only applicable to residents of the Commonwealth who were sold Medical Capital notes through Securities America. However, given the damning evidence introduced by state regulators, the repercussions of this case will reach far beyond the 60 investors to which it applies.

Fraud Defendant Lands in Jail for Failure to Comply with Court Order

Earlier this week Trevor G. Cook, a onetime money manager charged with operating a foreign currency trading scheme, was jailed for being in contempt of court. A federal judge in Minnesota had been trying to enforce an order granted to the Securities and Exchange Commission (SEC) forcing Cook to hand over more than $35 million in assets when Cook’s unwillingness to comply landed him in jail.

At issue are offshore accounts which hold a reported $27 million, multiple luxury cars, a houseboat, a collection of Faberge eggs, $670,000 in cash…and a submarine…among other things. Merri Jo Gillete, director of the SEC’s Chicago Regional Office had this to say regarding Cook: “[He] has elected to disregard the court's orders and will now be a guest of the federal correctional system until he mends his ways.”

Cook was charged in November of last year for his part in an alleged foreign currency trading scheme involving $190 in investor assets. Also implicated was nationally syndicated radio host Patrick J. Kiley who pitched the scheme on his show, “Follow the Money.” Both are charged with selling unregistered securities products to investors through shell companies while claiming returns on 10% - 12% on capital.

Massachusetts Files Charges Against Securities America Regarding Medical Captial Holdings Inc.

Today, Massachusetts Secretary William Galvin brought the first state enforcement case against Ameriprise Financial’s (AMP) Securities America unit. State regulators are charging the broker/dealer with improper sales of risky promissory notes in (506) private placement deals. The claim alleges that Securities America knowingly marketed and sold notes issued by Medical Capital Holdings Inc, a now defunct Tustin, California based medical receivables company, as safe investment to everyday retail investors.

The reality is, private placement deals are meant only for institutional and well adept investors, and such products represent a high degree of risk. Galvin estimates that over 60 Massachusetts residents bought $7.2 million worth of the offering, this representing only a fraction of the total..

The notes were sold over a period of time in which Securities America actively marketed the products, even after having received a warning from a top company official of potential issues at Medical Capital. The Securities and Exchange Commission (SEC) filed civil fraud charges against Medical Capital 2009 and is currently attempting to preserve company assets in an attempt to preserve at least some of the investors’ capital.

Regardless, many have turned to Financial Industry Regulatory Authority (FINRA) arbitration as a means to recoup their investment loss. The self regulatory agency (SRO) has increased enforcement on private placement deals in line with current SEC filings.

To view the Massachusetts complaint in addition to SEC filings, click here.

Securities America CEO Steps Down Amid Growing Arbitration Claims

Last week Securities America CEO Steve McWhorter announced his decision to retire after 22 years of service. His stated reason for leaving is that he wishes to spend time with his family, and he has stressed that there is no underlying reason for his departure. Despite this, some are questioning the timing of his announcement as a spate of client arbitration claims hit the Financial Industry Regulatory Authority (FINRA).

This string of complaints stem from multiple Securities America products ranging from the now defunct Medical Capital Holdings Inc., to Tenants In Common (TIC) products that have failed. Medical Capital is perhaps the most flagrant managerial failure for Securities America as a court appointed receiver has demonstrated overt fraud in court filings on the part of the medical receivables company. Clients of Securities America have lost millions as a result of this and other product failures.

Despite these recent failures, McWhorter is praised for the growth of Securities America during his time there. He is expected to remain in his current position until a willing replacement is found, and given the great deal of disgruntled clients and scrutinizing regulators, he may be waiting quite some time.

Black Diamond Minng Company

Black Diamond Mining Company LLC, which produces coal in Central Appalachia, said it filed a plan with a U.S. bankruptcy court to emerge from Chapter 11 and an earlier motion to convert its case to a Chapter 7 liquidation had been withdrawn.

The company also said it plans to conduct a bankruptcy-court-supervised auction for substantially all of its assets within the next two months.

Black Diamond's senior lenders will submit a bid for the assets, it said in a statement.

"If successful, the senior lenders would own a significant majority of the company's equity upon emergence," the company said in a statement.

Chief Executive Officer Larry Hull said, "I am optimistic that Black Diamond will exit bankruptcy as a going concern during the first half of 2009."

Black Diamond was forced into Chapter 11 bankruptcy by its creditors in February last year.

Bull Creek Coal Corp, Floyd County Resources Inc and Prater Creek Coal Corp had filed a motion last December asking for a court order converting the case into a Chapter 7 liquidation.

Alabama Man Sentenced to Five Years for Conspiracy to Commit Securities Fraud

On Thursday, David McFadden, a 62 year-old resident of Orange Beach, Alabama, was sentenced to five years in prison for his orchestration of a securities fraud scheme. The scheme resulted in over 150 of McFadden’s clients collectively losing millions of dollars. Sadly, many of those victims were those reaching retirement, their financial futures now in ruins.

McFadden’s sentence is the longest possible for his charge, conspiracy to commit securities fraud. Despite his guilty plea and a potential plea agreement which would have had him serve 18-24 months in prison, District Judge Carl Barbier demurred given the excessive damage done to the victims.

During his time as a registered representative for Securities America Inc., McFadden ran Diversified Financial Services, a financial services company based out of Baton Rouge. Most of his victims were solicited via seminars he held for longtime Exxon-Mobil employees. He advised them to make early withdraws from their retirement accounts and purchase equities. McFadden would make commissions on such risky purchases, all the time knowing that such equities were unsuitable for those approaching retirement.

In addition, it has been charged that McFadden advised many clients to retire prior to when it would be advisable for them to do so. As a result of this advice, some are now facing the prospect of having to return to the workforce. At his sentencing, McFadden faced his victims and offered an apology. "I know you all were literally watching your financial future evaporate before your eyes," he said. "I let you all down, and words cannot express how much I regret that.”

FINRA Arbitration Cases Boom in 2009

The Financial Industry Regulatory Authority (FINRA) has reported a significant increase in the amount of cases filed by investors over the past year as compared with years past. For the 2009 calendar year, 7,137 new arbitration cases were filed as opposed to 4,982 filed in 2008; this represents an increase of 43%. Investor claims are not only increasing, but turnaround time for cases has increased as well. The average time for a case that continues through to arbitration was 14 months in 2009 as opposed to 15.7 months in 2008, a 12% decrease in time. Simply put, more cases are going through arbitration and at a faster rate than in the past.

For a complete look at the available statistics, click here.

New Salvo in Debate Over Fidiciary Duty Reform

The debate over the inclusion of a single fiduciary standard in financial reform legislation is now being hit with a new lobbyist assault under the guise of legislator education. The insurance industry lobbyist machine, perhaps the most vehement opposition to sweeping fiduciary reform, now wishes for the Senate to authorize a study over the implications of passing a single fiduciary standard for both broker/dealers and Registered Independent Advisors (RIAs). Currently, RIAs have a fiduciary duty to their clients that amounts to greater liability in the event of a bad investment. This duty requires them to act in the best interest of their client when giving recommendations and advice.

The call for a new study is seen by many as a stalling technique with the goal of dissuading current supporters of a single fiduciary standard in the interim. What makes this tactic more transparent is the fact that a currently published study conducted by the Rand Corporation addresses the need for the legislation being considered.

Investment News reports that in response to the call for a new study which would be paid for with tax-payer dollars, a letter was sent by a laundry list of financial industry associations arguing that insurance groups have made up “myths” in an attempt to dissuade a single fiduciary standard. The January 7th letter was signed by:

- Fund Democracy Inc.

- The Certified Financial Planner Board of Standards Inc.

- The Consumer Federation of America

- The Financial Planning Association

- The Investment Adviser Association

- The National Association of Personal Financial Advisors

- The North American Securities Administrators Association Inc.

The letter, which was sent to Senator Chris Dodd (D-Conn) and Senator Richard Shelby (R-Ala), charges that the insurance industry is engaging in, “a particularly virulent attack on the legislation, aimed at eliminating entirely the provision requiring a fiduciary duty for financial professionals and replacing it with an unnecessary study at taxpayer expense.” It remains to be seen whether or not the study will be authorized, but it is clear that the debate over inclusion of a single fiduciary standard in the financial reform legislation is far from over.

Haiti: A Note of Caution When Considering a Donation

In the outpouring of private aid in response to the earthquake in Haiti last week, there are the inevitable scammers who seek to cash in on others’ generosity. In response to this eventuality, Investment News is reporting that advisers are recommending that their clients give to well known organizations. Further, advisers are asking clients to exercise caution when dealing with telemarketers soliciting a donation.

When it comes to your assets, checking into where your donation is going is equally advisable as checking into a potential broker to oversee your accounts; in either situation, you want to know where your money is going. Should you make a donation, remember to request documentation of your donation and have copies for tax purposes. If anything has been shown over the past two year, it is that when money changes hands there are those who are out to take advantage of good will and trust.

Behringer Harvard REITs Continue Trend in Non-Traded REIT Market

Investors who placed their money in unlisted REITs, including Behringer Harvard, have been awakened to the myriad of issues related to the nature of these products. Unlisted, or non-traded, REITS differ from listed REITs in that they are not traded on an open market. Rather, non-traded REITs are sold to investors who then hold the product until the end of an investment term.

Behringer Harvard and other non-traded REITs contain a fundamental flaw which is many times not evident at the time of purchase: their value is set by the very companies which sell them. To clarify, a listed, or public, REIT is valued daily based on the market in which it is traded whereas a non-traded REIT’s value is determined by the staff of the REIT, or sometimes by a third party consultant paid for by the REIT which it is supposed to objectively value. Obviously, a conflict of interest can easily develop in the standard valuation procedure of a non-traded REIT.

Another issue with non-traded REITs is that if one chooses to sell their shares, it must do so in conformity with the procedures of the REIT. The usual procedure is to sell shares through a redemption program; however, many such programs have been suspended due to adverse financial conditions when many investors attempt to redeem their shares at once. The consequence to investors is that they are stuck in the investment until the redemption program is reinstated.

When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product. Some have posited that it might have something to do with the somewhat common 15% commission given to the selling party, or the broker. Though regrettable, many investors may be able to recover losses in such products, including Behringer Harvard, through arbitration. For a more detailed analysis of REITs, click here.

SEC to Roll Out New Tools Aimed at Boosting Insider Cooperation

This week the Securities and Exchange Commission (SEC) announced a new set of tools at its disposal in its effort to increase enforcement. These measures pertain to whistleblowers and the like and are aimed at coercing the exchange of insider information in an attempt to strengthen the prosecution’s argument. In a sign of the times, the SEC is taking these tools from the Justice Department. Similar tools have been used in criminal investigations and prosecutions. The three main tools are:

1. - Cooperation Agreements

2. - Deferred Prosecution Agreements

3. - Non-Prosecution Agreements

All three amount to a form of protection for insiders who give information to government prosecutors, be it credit for help given in an active case (Cooperation Agreements), a temporary reprieve from prosecution (Deferred Prosecution Agreements), or a waiver of government prosecution in the matter at hand (Non-Prosecution Agreements).

The SEC under Mary Shapiro has enacted many changes in response to the subprime mortgage crisis and the great amount of fraud that has been unearthed in the past year. These three tools are only part of the package of changes that was announced. To see the official announcement regarding the new tools and tactics of the SEC to increase insider cooperation, click here.

Oppenheimer Bond Fund Losses

OppenheimerFunds‘ bond funds had a brutal year in 2008. As you can see in the table at the bottom of this post, their performance, in a word, was abysmal. But as distressing as the funds’ losses were, perhaps even more disappointing was Oppenheimer’s lack of candor in communicating to their fund shareholders just what sort of strategies they were using — strategies that led directly to the staggering losses the funds endured.

Oppenheimer’s Core Bond fund — presumably suited to serve as an investor’s core bond holding — lost nearly 36 percent last year. But that return looks stellar compared to their high yield Champion Income fund, which was off more than 78 percent.

Together, Oppenheimer’s taxable bond funds lost 24 percent in 2008, earning them an average rank in the bottom quartile of their Morningstar categories. Their municipal bond funds did even worse, falling by an average of 32 percent for the year.

Aidikoff, Uhl & Bakhtiari Announces Investigation of Losses in Highland Capital Floating Rate Funds

Aidikoff, Uhl & Bakhtiari is investigating the sales practices of brokerage firms that recomended the Highland Capital Floating Rate Fund to it's customers as a safe, consercative, preservation of capital investment.

The Highland Capital Floating Rate Fund had anappettite for structured vehicles such as CLOs and floating rate bank loans. The floating rate bank loans often carry substantial credit risk. Accrording to Morninstar analyst, the fund was plagued by problems and corrective action had not yet created a sufficient recovery.

For more information or to discuss your investment in the fund, please contact us.

SEC Files Charges Against Bank of America For Merrill Lynch Purchase

The Securities and Exchange Commission today charged Bank of America with violating the federal proxy rules by failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder vote that Merrill Lynch had incurred a net loss of $4.5 billion in October 2008 and estimated billions of dollars of additional losses in November. Bank of America erroneously and unreasonably concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. Bank of America’s failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.

Last August, the Commission filed a separate action charging Bank of America with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. Today’s filing follows yesterday’s ruling by the Honorable Jed S. Rakoff that the SEC’s proposed charges relating to the Merrill losses should be filed separately rather than being consolidated with the current complaint challenging the bonus disclosure. That case is currently set for trial to begin on March 1, 2010 before Judge Rakoff.

According to the SEC’s complaint filed today, the actual and estimated losses at Merrill Lynch for the fourth quarter of 2008 together represented approximately one-third of the value of the merger at the time of the shareholder vote and more than 60 percent of the aggregate losses that the firm sustained in the preceding three quarters combined. The SEC’s complaint further alleges that Merrill’s deteriorating performance represented a fundamental change to the financial information that Bank of America provided shareholders in the proxy statement used to solicit votes for approval of the merger. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.

The SEC’s complaint charges Bank of America with violating Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote.

Main Street Natural Gas Bonds

The Main Street Natural Gas, Inc. (“Main Street”) Gas Project Revenue Bonds, Series 2008A, which were “investment grade” rated when purchased, appear subject to the bankruptcy of Lehman Brothers Holdings, Inc. (“LBHI”). While LBHI did not guarantee these bonds, it did guarantee certain payment obligations of the gas supplier, Lehman Brothers Commodity Services, Inc. (“LBCS”), in the event of failure to deliver gas to Main Street for sale to the City of Tallahassee or the Municipal Gas Authority of Georgia, which failure has occurred according to published reports.

Institutional bondholders holding a substantial amount of these bonds have filed, in the Bankruptcy Court, a limited objection and reservation of rights as to the sale of assets of LBHI to Barclays Capital, Inc. (“Barclays”), asserting that the documents related to the sale fail to adequately identify whether the assets of LBCS are included or implicated by the sale to Barclays, and thus leave unclear the impact the sale may have on LBHI’s ability to satisfy its obligations under its gas contract with Main Street.

It has also been reported, in a publication by Bankruptcy Creditors’ Service Inc., that Main Street has expressed concern whether its gas contract with LBHI is among those contracts that would be assumed and assigned to Barclays, because the documents which have been filed with the Bankruptcy Court do not “adequately identify” which assets are among those to be sold.

The Main Street bond issue referred to above has the following identification:

Main Street Natural Gas, Inc.
Gas Project Revenue Bonds, Series 2008A

Issue Maturity CUSIP
7/15/17 56036YED3
7/15/22 56036YEE1
7/15/28 56036YEF8
7/15/33 56036YEG6
7/15/38 56036YEH4

Beverly Hills Hedge Fund Manager Gets 10 Years for Operating Ponzi Scheme

Bradley Ruderman, the founder and manager of Ruderman Capital located in Beverly Hills, California, has been sentenced to 121 months in federal prison following his guilty plea in a fraud case against him. Ruderman was charged with running a Ponzi scheme that targeted family members and close friends. In total, the combined loss of all clients was more than $25 million.

Ruderman Capital operated two hedge funds, Ruderman Capital Partners and Ruderman Capital Partners A, which together collected more than $44 million from investors. Of this, Ruderman spent at least $8.7 million on personal expenses including a summer house in Malibu, sporting events, and almost $1 million in credit card charges. On multiple occasions he falsified client statements to mask that his failing venture and he grossly exaggerated the amount of money under his management.

In addition to his prison sentence, Ruderman was ordered to pay over $27 million in restitution to victims.

Death of Danny Pang Ruled Suicide

The death of financier Danny Pang, who was found dead in September while facing U.S. Securities and Exchange Commission charges of running a massive Ponzi scheme, has been ruled a suicide, coroner's officials said on Monday.

"We did determine that the cause of death was suicide due to the combined effects of multiple drugs," a spokeswoman for the Orange County Coroner's Office told Reuters.

She said the drugs found in Pang's system included the painkillers oxycodone, oxymorphone and hydrocodone, among others.

Police had earlier said there was no sign of foul play and had called the financier's death a probable suicide.

Pang, 42, was found unconscious in his home on Sept 12 and pronounced dead later that day at Hoag Memorial Hospital in Newport Beach. An autopsy was conducted at the time but the cause of death was held pending toxicology tests.

Pang was accused by the SEC of operating a Ponzi scheme on mainly Taiwanese investors through his Private Equity Management Group LLC and Private Equity Management Group Inc, or PEMGroup.

He was charged in April of 2009 with trying to hide about $300,000 (185,000 pounds) in U.S. bank transactions from government currency reporting requirements and was free on $1 million bail at the time of his death.

Some of Pang's personal assets had been frozen and his Irvine-based companies were being run by a court-appointed receiver as the result of an SEC civil lawsuit.

He had faced up to 10 years in prison in the criminal case.

SEC Charges Father-Son Investment Advisers for Hedge Fund Fraud

The Securities and Exchange Commission today charged two Sarasota, Fla.-based investment advisers with securities fraud for misleading investors about the financial condition of three hedge funds they managed, and misrepresenting that they controlled the funds' investment and trading activities when in fact they were being handled by Arthur G. Nadel.

The SEC alleges that Neil V. Moody and his son, Christopher D. Moody, distributed offering materials, account statements, and newsletters to investors that misrepresented the hedge funds' historical investment returns and overstated their asset values by as much as $160 million. The Moodys based their materials on grossly overstated performance numbers that Nadel created and provided to them. The Moodys failed to independently verify the accuracy of the figures despite multiple red flags, and relied exclusively on Nadel’s inaccurate information when communicating with investors.

The SEC charged Nadel with fraud last year and obtained an emergency court order to freeze his assets.

"The Moodys led investors to believe that they were faithfully managing funds invested with them," said Glenn S. Gordon, Associate Director of the SEC’s Miami Regional Office. "Instead, they abdicated their responsibilities to investors and ignored warning signs that should have alerted them to the fraud that was occurring all around them."

According to the SEC's complaint, filed in federal court in Tampa, Fla., Neil and Christopher Moody disseminated misleading materials to investors about their hedge funds Valhalla Investment Partners L.P., Viking IRA Fund LLC, and Viking Fund LLC from at least 2003 through December 2008.

Senator Dodd on Fiduciary Duty: Can He Withstand the Lobbyists?

After Senator Christopher Dodd’s surprise announcement last week declaring he would not seek reelection, many have begun to wonder about the policy ramifications this development will have on the remainder of his term in office. Financial reform is one such area of policy reform that the senator is tackling with much speculation over his resolve concerning fiduciary duty reform.

The two bodies of thought that have emerged on both sides of the aisle favor either a strong or a weak fiduciary duty provision. The strong provision would clearly put broker-dealers under the current fiduciary duty requirements levied on registered independent advisors (RIAs) by requiring such brokers to register as RIAs. The weak provision would require brokers to be registered as RIAs, however, the Securities and Exchange Commission (SEC) would be given more authority to write the new fiduciary duty at some time in the future. This position is adamantly supported by the banking industry as it is far less definitive than the strong provision and is more likely to result in little change to the business model of broker-dealers than the alternative.

Dodd currently supports the so-called strong provision, this being in contravention of the House approved language in the Wall Street Reform and Consumer Protection Act of 2009. Many who advocate for the strong provision are hoping that by announcing his decision to relinquish his seat, Dodd will be freed from listening to the lobbyists of the banking industry and therefore will more steadfastly pursue the strong provision before his time in the Senate comes to a close.

Even if Dodd’s resolve remains unfazed by lobbyists' attempts to change his position, it remains to be seen if other members of the Senate will act likewise.

SEC Halts Fraudulent Scheme Targeting Iranian-American Community

The Securities and Exchange Commission today announced that it has charged Beverly Hills, Calif.-based NewPoint Financial Services, Inc. and its co-owners and controller for conducting an unregistered offering fraud aimed at Iranian-Americans in the Los Angeles area. The SEC obtained an emergency court order to freeze their assets and preserve remaining funds that were collected from investors.

The SEC’s complaint, filed in U.S. District Court for the Central District of California, alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting New Point on a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and misled more than 100 investors into purchasing more than $20 million worth of debentures that they falsely told them were low-risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, government bonds, or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). The SEC alleges that most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

“They lured victims with false promises of investment safety while secretly enriching themselves and diverting investor funds for their personal use,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint further alleges that investor funds were used to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009. Since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint, saying that their money is safe and that they are guaranteed to get the entirety of their investment back. According to the SEC’s complaint, NewPoint lacks sufficient funds to make all investors whole, and John Farahi has been paying back some investors on a selective basis while failing to return money to other investors asking for a return of their investment.

Elder Abuse Cited in Recent Arbitration Award

A recently decided Financial Industry Regulatory Authority (FINRA) arbitration case has caused commotion in the financial industry over its invocation of elder abuse in its arbitration decision. Though often used in claimant complaints, elder abuse is rarely cited by arbitrators when awarding damages. The complaint, filed against StockCross of Beverly Hills, California by a 95-year old client, charged the firm with breach of fiduciary duty and elder abuse, among others.

By sustaining elder abuse in a decision, arbitrators can award treble damages, allowing the sum of the damage amount to be tripled and added to the original damage amount. In this case, the arbitrators elected to invoke that privilege, citing the Financial Elderly Abuse Act: California Welfare & Institutions Code15600, et seq. The award therefore went from around $300, 000 to more than $1.2 million.

Unsurprisingly, StockCross has already filed a motion to vacate in an effort to avoid paying the award amount. Such motions, however, are often ineffective in reversing the binding arbitration decision.

Main Street Natural Gas Bond Losses

The natural gas that cooks the food on Main Street USA was one of the many things that Wall Street bought and sold with borrowed money. The gas deal went belly-up in September, costing investors $700 million when Lehman Bros. failed. Now, it will cost more for Disney to light the flame to roast the chicken to feed the children at the Crystal Palace.

Wall Street's financial crisis flows to Main Street in unexpected and sometimes imperceptible ways. The same bum deal that will raise Disney's natural-gas costs will make it more expensive to buy electricity for residents on Main Street in Tallahassee.

It also cut the value of a dozen mutual funds that lent the money for the deal. And it put a team of bankruptcy lawyers to work in New York and Atlanta.

The tale of Main Street Natural Gas — the sponsor of the obscure financial deal that failed — reveals how risky investments flourished in an era of easy credit and how everyday people are now paying the price.

It's a story of how $700 million was vaporized in just a few months, and of how the deal's investment bankers got paid while investors and consumers got stiffed.

"I feel badly about the investors who lost money and about losing a cheap supply of natural gas," says Arthur Corbin, chief executive of Main Street Natural Gas of Kennesaw, Ga.

The financial system is staggering under the weight of Wall Street-manufactured debt that cannot be repaid.

Main Street Natural Gas' $700 million is a small but revealing part of that problem. Losses on home mortgages alone will reach $1.4 trillion, the International Monetary Fund estimates. Financial institutions are suffering additional losses on home equity loans, student loans, credit cards and other debt.

The details can seem complex when buried in the language of finance — leverage, derivatives, credit default swaps.

Yet, at the core, the deals were simple: Banks and investors borrowed trillions of dollars and bet the money — on home values, natural-gas prices, the probability of bond defaults.

Main Street Natural Gas was typical. It put none of its own money into the $700 million deal. Every penny was borrowed, even the millions paid to the investment bankers. Main Street Natural Gas will lose nothing in the failed transaction.

Instead, the lenders — mutual funds, insurance companies, individual investors — will take the hit.

Long-term promises

Main Street Natural Gas is part of the Municipal Gas Authority of Georgia, a government agency established by the Georgia Legislature 20 years ago to buy natural gas for city-owned utilities that now serve 243,000 customers.

A few years ago, investment bankers from several Wall Street firms approached the authority with a plan to help the agency lock in cheap supplies of natural gas for decades.

The idea: Borrow money at low, tax-exempt interest rates available to government and give the money to the investment banks. The banks would use this inexpensive debt to invest for a profit and, in return, supply natural gas at a below-market price.

In November 2006, the Municipal Gas Authority of Georgia set up Main Street Natural Gas as a non-profit corporation to do the Wall Street deals.

Main Street's sole purpose was to borrow money to buy natural-gas derivatives — contracts that bet on the future price of natural gas.

"A bond lawyer suggested naming the company after 'Main Street' because that's who we were serving," says Corbin, who is also chief executive of the Municipal Gas Authority.

The goal was to secure an inexpensive, long-term natural-gas supply for 73 municipal-owned utilities, including the government district that serves Disney World.

In April, Main Street borrowed $700 million and gave it to the Lehman investment bank. In return, Lehman promised to arrange delivery of 160 billion cubic feet of natural gas over 30 years at a below-market price.

That's like a taxi driver borrowing $7,000 and giving it to a man who promises to supply gasoline for the next 30 years at 50 cents per gallon less than the market price.

The long-term savings would be huge — if the fellow who got the cash doesn't go out of business.

Lehman filed for bankruptcy Sept. 15, having delivered less than 1% of the promised gas.

FINRA Issues Regulatory Notice Aimed at Principal Protected Notes

FINRA has issued a regulatory notice this month that stresses the need for brokerage firms to disclose the risk to investors in so-called Principal-Protected Notes. The notice, which may be viewed here, cautions firms from overstating the level of protection inherent in this structured product.

When marketing this product, firms may overstress the principal protection feature of the product without adequately disclosing the fact that such a feature is contingent on the continued credit worthiness of the guarantor. Principal protection is often rendered moot in cases where the guarantor files for bankruptcy - case in point: Lehman Brothers.

Many investors were sold Lehman Principal Protected Notes through their respective brokerage firms. When Lehman Brothers filed for bankruptcy, these notes were effectively rendered worthless. This came as a surprise to many investors who thought they had purchased a product which guaranteed capital preservation.

A number of Financial Industry Regulatory Authority (FINRA) arbitration claims have been filed against brokerage firms who marketed and sold Lehman PPNs. One such arbitration claim has resulted in a favorable award an investor sold Lehman PPNs by their broker, UBS. Such an award provides hope that future claims may prove equally equitable for investors.

SEC Charges Kurt Barton and Triton Financial LLC In Fraud Scheme

The Securities and Exchange Commission today filed securities fraud charges against an Austin, Texas investment adviser and two businesses he controls for operating a multi-million dollar scam that used former professional football players to promote its offerings.

The SEC alleges that Kurt B. Barton and Triton Financial LLC raised more than $8.4 million from approximately 90 investors by selling "investor units" in an affiliate, Triton Insurance, and telling investors that their funds would be used to purchase an insurance company. The SEC alleges that these representations were false and investor proceeds were instead misused to pay day-to-day expenses at Triton and its affiliate.

According to the SEC's complaint, filed in federal court in Austin, Barton and Triton used former football players as well as stockbrokers and other salesmen to promote Triton securities to potential investors. Barton and Triton have consented to court orders freezing their assets. Triton has been registered with the Texas State Securities Board (TSSB) as an investment adviser since June 2006.

"By associating with former football stars, they were able to build a facade of legitimacy and gain investor trust," said Rose Romero, Director of the SEC's Fort Worth Regional Office.

Triton was the subject of a March 2009 Sports Illustrated article that prompted the TSSB to examine Triton's business. The article described Triton's use of former Heisman Trophy winners and NFL players to promote its investments to potential investors, including other football players. The article noted one particular mass e-mail, sent by a former NFL quarterback to numerous NFL alumni, that discussed Triton's activities and touted Triton's returns on its investments. According to the SEC's complaint, the defendants provided the TSSB with altered and fabricated documents during the examination that followed the article's publication.

The SEC has charged each defendant with securities fraud and seeks permanent injunctions, disgorgement of illegal gains and financial penalties. The SEC also seeks an asset freeze and a receiver over defendants' assets and operations.

FINRA Summary Arbitration Statistics November 2009

Summary Arbitration Statistics November 2009

New Case Filings through November:

2007 - 2,986
2008 - 4,413
2009 - 6,601

2009 Vs 2008 - 50%