David Lerner Associates is the underwriter and soliciting broker for the Apple REITs which generated an estimated $600 million in fees and commissions for the brokerage firm representing 60%-70% of the firm revenues.  Recently, David Lerner Associates investors were stunned when they received their June 2011 account statements when their Apple REIT investments, which had been consistently priced at $11 per share, were told the investment was “not priced”.  Should Investors consider their investment recovery options besides the limited quarterly redemptions provided in the Apple REIT prospectuses?

David Lerner Associates is a named party in two class actions filed in June 2011 and the subject of a FINRA Complaint.  David Lerner Associates is obligated to give, and investors are entitled to rely upon them for unbiased, accurate information and suitable investment advice as the syndication underwriter for the Apple REITs.  According to FINRA, unsuitable investment advice, failure to supervise the activities of financial advisors and fraudulent misrepresentations and omissions of material facts are causes of action that are available to investors against their brokerage firms and financial advisors in an individual securities arbitration claim filed with FINRA.

Parties to a Life Settlement Transaction

Life settlement transactions have different parties involved in the transaction which include life settlement providers, brokers and investors.  Providers help facilitate the life settlement transaction between sellers and buyers of unwanted life insurance policies.  Providers help establish the price paid for the life insurance policy which is based on, among other factors, the life expectancy of the insured.  Life Partners Holdings, Inc. through its operating subsidiary, Life Partners, Inc. is a life settlement provider.  Brokers or financial advisors who recommend investments in life settlements are paid a commission based on the price paid for the life settlement transactions.  The advice and recommendations provided to investors by financial advisors requires that due diligence be conducted concerning all relevant information related to the life settlement transaction, including information about the life settlement provider.  Investors in life settlements are entitled to rely upon financial advisors and their brokerage firms who supervise them for competent, suitable investment advice concerning life settlements sold to investors by Life Partners Holdings.

Did Life Partners Use Unrealistic Life Expectancy Assumptions?

Investors interested in making life settlement investments enter into an agency agreement and special power of attorney with Life Partners which limits the life settlement provider to purchase life insurance policies issued by life insurance companies with an AM Best Rating of A- or better, to policies beyond the two-year contestable period and to policies with insureds with actuarially or medically determined life expectancies of no more than minimum specified periods.

Life Partners Holding represented investment in life settlements as a safe investment that was not subject to the risk of principal loss.  Return of investment was represented as a certain outcome.  Life Partners Holdings failed to disclose the risk to investors from underestimating life expectancies.   By underestimating the life expectancy of the insureds Life Partners Holdings artificially increase the expected returns and therefore the value of the life insurance policies.

Life Partners Holdings was the subject of a class action lawsuit (Case No. 11 CV 00027) filed on February 3, 2011 in the United States District Court, Western District of Texas – Waco Division.  The class action filed alleged, “Had the Company used accurate and appropriate estimated life spans, LPHI would not have been able to charge the same transaction fees for the insurance policies and would not have reaped the same level of financial results as it reported during the Class Period.”  Life Partners Holdings announced on May 9, 2011, the company received a “Wells Notice” from the Securities Exchange Commission (SEC) which disclosed the regulator would recommend a civil injunctive action against Life Partners Holdings and two directors and executive officers, Brian D. Pardo and R. Scott Peden for possible violations of securities laws.  The primary basis for the proposed civil action related to corporate knowledge and disclosure concerning the accuracy of the estimated life expectancies for the insureds of the life settlements it sold to investors.

Can Brokerage Firms Be Held Responsible for Life Partners Life Settlement Losses? Brokerage firms are required to supervise the activities of their financial advisors and investment losses from unsuitable investment recommendations might be attributed to the failure to adequately supervise their financial advisors.  Furthermore, brokerage firms are required to conduct adequate due diligence to determine the accuracy of information provided by Life Partners Holdings, including the life expectancy estimates and reported results of business operations.  According to the Financial Industry Regulatory Authority (FINRA), unsuitable investment advice, failure to supervise the activities of financial advisors and fraudulent misrepresentations and omissions of material facts are causes of action that are available to investors against their brokerage firms and financial advisors in an individual securities arbitration claim filed with FINRA.

The brokerage firms involved in the underwriting and solicitation of Puerto Rican residents to invest in Puerto Rico Conservation Trust Fund Secured Notes backed by R&G Capital Trust Preferred Securities were:

• R-G Investments Corporation,
• UBS Financial Services, Inc. of Puerto Rico,
• Santander Securities Corporation, and
• Popular Securities, Inc.

The above mentioned brokerage firms may have violated securities laws when they solicited and recommended the tax free fixed income investment.  As underwriters they are required to conduct adequate due diligence to assure the complete disclosure all material information related to the registration statement concerning the secured notes.  The failure to supervise brokerage account activity, unsuitable investment advice or fraudulent misrepresentations and omission of material facts are causes of action that may be available to investors against their full-service brokerage firm in an individual securities arbitration claim filed with the Financial Industry Regulatory Authority, FINRA.

R&G Financial Corporation provided principal guarantees which are now worthless after their bankruptcy filing.  Investors can seek to recover investment losses from FINRA members who were Underwriters of the securities offering for failure to conduct adequate due diligence and misrepresentations of material facts concerning the recommended investment.

To discuss the recovery of your investment losses with a Spanish-speaking securities lawyer located in Coral Gables, Florida at (800) 578-0137.

The brokerage firms involved in the underwriting and solicitation of Puerto Rican residents to invest in Puerto Rico Conservation Trust Fund Secured Notes backed by R&G Capital Trust Preferred Securities were:

• R-G Investments Corporation,
• UBS Financial Services, Inc. of Puerto Rico,
• Santander Securities Corporation, and
• Popular Securities, Inc.

The above mentioned brokerage firms may have violated securities laws when they solicited and recommended the tax free fixed income investment.  As underwriters they are required to conduct adequate due diligence to assure the complete disclosure all material information related to the registration statement concerning the secured notes.  The failure to supervise brokerage account activity, unsuitable investment advice or fraudulent misrepresentations and omission of material facts are causes of action that may be available to investors against their full-service brokerage firm in an individual securities arbitration claim filed with the Financial Industry Regulatory Authority, FINRA.

R&G Financial Corporation provided principal guarantees which are now worthless after their bankruptcy filing.  Investors can seek to recover investment losses from FINRA members who were Underwriters of the Offering for failure to conduct adequate due diligence and misrepresentations of material facts concerning the recommended investment.

To discuss the recovery of your investment losses with a Spanish-speaking securities lawyer located in Coral Gables, Florida at (800) 578-0137.

Know Your Customer Rule (FINRA 2090)

The “know-your-customer” rule begins with the opening of the customer account and the requirement to ascertain through “reasonable due diligence” the determination of all “essential facts” concerning every customer of the brokerage firm.  The essential facts are those required to:

• effectively service a customer’s account;
• act in accordance with special instructions;
• authority of individual acting upon behalf of customer;
• comply with industry laws, rules and regulations.

The “know-your-customer” obligation does not depend on whether a financial advisor has made a recommendation.

Suitability Rule (FINRA 2111)

The “suitability” rule requires that a financial advisor and his brokerage firm have a “reasonable basis” to believe that a recommended investment or investment strategy is suitable based on a customer’s investment profile.  The rule requires “reasonable diligence” to ascertain information concerning a customer’s investment profile, including:

• age;
• other investments;
• employment status;
• financial situation and needs;
• tax status;
• investment objectives;
• investment experience;
• investment time horizon;
• liquidity needs;
• risk tolerance; and
• any other information disclosed by customer in connection with recommendation.

The new rule relies upon a financial advisor’s investment recommendation as the triggering event for application of the rule.  The rule applies a flexible approach to the “facts and circumstance” of a particular customer recommendation.  A recommendation does not rely upon a transaction or the generation of compensation for its existence.  A recommendation can result from financial advisor communication directed to facilitate a transaction or refrain from any transactions regarding a security or investment strategy in a customer account.  The financial advisor must have a firm understanding of both the investment and the customer.  Failure to understand both aspects is considered a violation of the rule.

The customer information profile includes an expanded list of types of information required for consideration when a suitability determination is made about an investment recommendation.  To strengthen the rules that require the suitability analysis, financial advisors and brokerage firms are required with “specificity” the reasonable basis for why a particular customer information profile factor is not relevant, in order to be relieved of the obligation to seek the required information.

You are probably asking yourself whether unsuitable investment advice was the direct cause of your investment losses.  Ask a competent securities lawyer.

Beware of want you ask for, you might not like what you get.  Leave it up to Wall Street to take a good thing and let the zeal for profits create unforeseen pitfalls for unwary investors and an unprepared securities industry.  The latest generation of ETFs has given us investments that are leveraged and inversely correlated which do not track indexes over time and commodity investments subject to the risk of “contango.”  The investing public is at risk without a financial adviser who can provide advice about these new financial products.

According to a recent Cornerstone Research report, eleven class action lawsuits were filed against issuers of ETFs for the failure to track the underlying index performance.  Upon closer examination of the prospectuses, the leveraged and inverse ETFs are designed to track the performance of the underlying index, on a daily basis.  These ETFs were designed for short term strategies to hedge a position or profit from arbitrage for a trading session, not the long run.  This fact was not lost on the class action attorneys when they argue misrepresentation and inadequate disclosure of material facts in the prospectuses.  The real problem, they argued, was that the marketing and sales literature did not spell out scenarios when the ETF would not track the underlying index.  Their point is investors need protection from a prospectus’ “fine print” that could lead to financial ruin.  What is clear is the securities industry did not step in with pronouncements from FINRA, NYSE and the SEC that warned investors about the pitfalls of these securities until the damage had already been done.

When energy and commodity prices climaxed in late 2009, investors piled into ETFs as a way to participate in the rising markets they never had been able to participate.  Energy and commodity investments once considered for speculators, was now considered accessible to the average investor through an investment in ETFs.  The ETFs invest in futures contracts to track the performance of the underlying commodity.  The strategy assumes futures prices for the underlying commodity will be above the spot price.  When the commodity markets experience “contango”, futures contracts that are about to expire must be sold at unexpected lower prices to avoid physical delivery of the underlying commodity.  The lower than anticipated proceeds are “rolled over” into new more expensive contracts.  The result, a portion of the seed is lost, and the ETFs trail the returns of the underlying commodity over time.

What did investor losses from ETFs teach us about the financial engineering associated with this new and growing financial vehicle? It has taught us the true value of a financial adviser who can provide direction about how such a financial product works and when is it suitable based on our investment objectives and risk tolerance.

In the year 2009, the securities industry experienced the fallout from private placement investments in CDs issued by Stanford International Bank Ltd, Oil and Gas Limited Partnerships issued by Provident Royalties, LLC and Secured Notes issued by Medical Capital Notes that resulted in billions in investor losses.  Investor claims from losses sustained in these private placements has forced many broker dealers out of business which limited an investor’s ability to recover their losses.   So what has been the regulatory response to the deficiencies of private placements which has led to such disastrous outcomes for investors?

In April 2010, FINRA set forth standards which obligate broker dealers to conduct reasonable investigations concerning the facts pertaining to the issuance of Regulation D Offerings known as private placements.  Sounds reasonable that there would be standards to protect even “accredited investors” because no matter how smart someone is if they are “lied to”, they will still make a bad investment decision.  Regulators have made the following pronouncements.  First, a broker dealer must make a reasonable investigation of the security and issuer because their investment recommendations are based on such investigations.  Second, suitability obligations require more than proof that the income and net worth test (home value excluded) have been met.  They must ascertain whether the customer fully understands the risks involved and whether they are able to assume them.  Third, any “red flags” should alert a prudent person, including a broker dealer to conduct further inquiries.

In the instances above, broker dealers failed to investigate “red flags” which existed at the time investors were solicited to invest in the private placements.  After a review of the private placement issuers, regulators found some executives had disciplinary records, flagrant misuse of funds raised in the Offerings and unaudited financial statements.  A      lack of proper due diligence was cited as one of the major problems with the Regulation D Offerings.  In fact, these private placements have now been characterized by regulators as ponzi schemes.

With the toll of failed broker dealers mounting, those firms that shirked their due diligence responsibilities ahead of the Private Placement Offerings now find that they are now stuck with the much higher cost of making investors whole for their losses.

Faced with numerous investment options investors rely heavily upon their broker-dealer to advise them which investment is suitable, consistent with their risk tolerance and investment objectives. A fiduciary relationship exists whenever confidence on one side results in superiority and influence on the other side, such as with a financial advisory relationship with a broker-dealer.  This simple axiom is at odds with a system of compensation where investors do not always receive such advisement.  Full Disclosure will provide the support needed to augment the enforcement efforts in a securities market which has shaken the entire fabric of our society.

The regulatory reform proposal is to establish a uniform fiduciary standard which will remove any confusion an investor faces when weighing broker-dealers advice. With a uniform fiduciary standard all advice provided by the broker-dealer would have to place the investor’s interest above that of the broker-dealer. Should the advice provided not conform to the fiduciary standard, the investor would have a cause of action against the advising party for losses incurred as a result.

In refusing to uphold a bright-line rule that precludes the establishment of a fiduciary standard between the broker-dealer and investor, the courts have upheld a cause of action for breach of a fiduciary duty in disputes between investors and their broker-dealer resolved in arbitration. To impose the fiduciary standard, arbitration panels have looked to case specific facts such as, the investors trust in the broker, the investor’s investment knowledge, the sophistication of the investor, and the control exerted by the broker-dealer over the account.  A uniform fiduciary standard between investors and their broker-dealers will eliminate the case by case analysis utilized today.  Nonetheless, full disclosure will help support the fiduciary relationship, irrespective of the changes in securities industry regulation.