Robert Wayne Pe...'s  Instablog

Many investors have purchased CIP Leveraged Fund Advisors, LLC ("CLFA") through an independent broker-dealer, Equity Services, Inc. CLFA was supposed to be a manager of Real Estate Investment Trusts (REITs), but failed miserably. Equity Services is an independent broker-dealer in the United States who offered and sold CLFA to its best clients. Equity Services is headquartered in Montpelier, Vermont and reportedly has registered representatives across the United States operating in one or two person offices.

Equity Services, like all broker-dealers engaging in a Regulation D securities offering such as CLFA, was responsible under the Financial Industry Regulatory Authority ("FINRA") rules to conduct "due diligence," that is, conduct a reasonable investigation of the CLFA securities offering and the issuer's representations about itself, the offering, its management, and business prospects, including any targeted returns on the investment to investors and determining the "suitability" of this investment for any and all of its clients.

Independent Due Diligence of CLFA by Equity Services was Mandatory

Equity Services and other broker-dealers could not simply rely upon an issuer of securities like CLFA, the issuer's attorneys or the lead broker-dealer Pacific Cornerstone Capital, Inc. ("PCCI") to conduct the investigation for it particularly where that lead broker-dealer has a relationship with the issuer, which is an inherent "conflict of interest."

Under FINRA Rules, all broker-dealers are responsible for discovering and investigating any information that could be considered a "red flag" and alerting a prudent person to conduct further inquiry. All broker-dealers have a responsibility to conduct a reasonable investigation and are obligated to follow up on any "red flags" that it encounters during its inquiry as well as to investigate any substantial adverse information about the issuer and its management. When presented with "red flags," the broker-dealer must do more than simply rely upon representations by issuer's management, the disclosure and an offering document or even a due diligence report of issuer's counsel or some third party expert.

It is reported that your CLFA investment is now worthless. PCCI and it's principal, Terry Roussel, were fined and/or suspended by FINRA for making misleading statements to investors in connection with the CLFA offering.

Thus far, two other broker-dealers have been investigated and sanctioned by FINRA for violations relating to their own failure to conduct due diligence on CLFA prior to recommending it to their best clients, namely, Investors Capital Corp. and Workman Securities Corporation. FINRA has reported that one or more of these broker-dealers failed to conduct any reasonable due diligence investigation on CLFA prior to selling CLFA securities. Further, they did not seek independent third party due diligence reports, meet with or ask questions of management about certain disclosures in the PPM relating to projections and targets or even review unaudited CLFA financial statements, which violated the rules. It has also been reported that they reviewed third party reports that did not include an analysis of how investors in CLFA would recover their principal investment and whether the projected 18.75% yield was realistic.

All of this begs the question: Did Equity Services perform an independent due diligence analysis before it recommended the investment to its best clients? What analysis, if any, did Equity Services perform of how investors would recover their principal investment and whether the projected 18.75% yield was realistic? FINRA investigations are confidential and although FINRA has not reportedly taken any action against Equity Services to date, the failure of any broker-dealer to conduct those types of inquiries could constitute a violation of FINRA rules and entitle you to recovery of your investment losses from that brokerage firm.

Equity Services was Obligated to Perform a Suitability Analysis

Equity Services was also required to have reasonable grounds to believe that a recommendation to purchase a security is suitable for the customer. This analysis has two principal components. First, the "reasonable basis" suitability analysis requires the broker-dealer to have a reasonable basis to believe, based on a reasonable investigation, that the recommendation is suitable for at least some investors. If there is no reasonable basis for any of the targeted returns, then the securities offered are not suitable for any investor. Second, the "customer specific suitability" analysis requires the broker-dealer to determine whether the security is suitable for the customer to whom it would be recommended. This second suitability analysis is dependent upon the investor's stated investment objectives, risk tolerance and financial condition. Any recommendation by a broker that does not satisfactorily comply with either component can be a violation of FINRA rules.

For most investors, liquidity, income and risk tolerance are a concern, but if you are elderly and retired, they are paramount! If you have limited resources and no ability to generate income from other sources to meet your liquidity and income needs then CLFA was an unsuitable investment. Likewise, if you cannot afford a total risk of loss, then the speculative CLFA investment was unsuitable. The suitability problem is compounded when any investors' portfolio is concentrated in CLFA. A rule of thumb is that no more than 10% of anyone's investment portfolio should be concentrated in any illiquid real estate investments, and that percentage should be far less as a person reaches retirement and advances in age, perhaps zero!

Know Your Rights and Get Your Questions Answered!

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about CLFA and this blog post and/or any related matter.

IMS Securities, a Houston, Texas based brokerage firm, has consented to Financial Industry Regulatory Authority (FINRA) findings that it registered a number of wholesale representatives, but did not shape its supervisory system to address its new wholesale business in a way that was reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules. FINRA's findings stated that although supervising wholesale representatives was different than supervising retail representatives, the firm did not revise its written supervisory procedures (WSPs) or implement any procedures tailored to supervising the wholesale representatives until almost four years after hiring them. Also, FINRA's findings stated that the firm sold a wide range of securities products, including privately-traded real estate investment trusts (REITs) and direct participation plans (DPPs), but the firm did not have sufficient WSPs outlining its procedures for assessing them.

A REIT is a company that owns, and in many cases, operates income-producing real estate. REITs own properties ranging from office and apartment buildings to warehouses, hospitals, shopping centers, and hotels. Some REITs also engage in financing real estate. REITs were designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.

A DPP is an investment opportunity that allows investors to participate in the profits and tax avoidance of some underlying business. Generally speaking, DPPs invest in real estate or energy products. The concept is to allow investors to participate in certain tax benefits usually available only to corporations, such as depreciation deductions. However, the United States government has curtailed many of the tax benefits available to DPPs. The investment will made up of shares of a partnership, an S corporation, a limited liability company, or any other entity that files an informational return with the IRS but does not itself have any taxable income or deductible losses.

In addition, FINRA's findings mentioned that IMS Securities failed to conduct annual audits at two of its OSJ branch offices one year. FINRA also found that the firm's wholesale representatives used external email addresses to send communications related to its securities business, and the firm failed to store these emails. Moreover, FINRA stated that for nearly two years, the firm failed to adequately maintain purchase/sales blotters and checks received/forwarded blotters, which lacked certain required information. Therefore, the firm failed to maintain blotters reporting a daily record of all purchases and sales of securities, all receipts and disbursements of cash, and all other debits and credits.

Have you suffered losses in your IMS Securities brokerage account? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against IMS Securities stockbrokers who may have engaged in misconduct and caused investors losses.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

Crown Capital Securities LP (Crown Capital) is a small independent broker-dealer whose business model is akin to a franchise operation. Crown Capital is headquartered in Orange, California and reportedly has over 300 registered representatives across the state operating in one or two person offices. Its growth in recent years can largely be attributed to layoffs at the major wire houses due to the most recent financial market meltdown. Most of Crown Capitals registered representatives' gross production of revenues is less than $300,000 per year. Its branch offices are largely comprised of small producers earning commissions at higher pay out rates than the major full-service brokerage firms, a recipe for disaster when it comes to protecting investors' rights.

Independent broker-dealers are notorious for their lax supervisory practices and procedures. The business model of these franchise type operations is to open many offices nationwide for steady growth of fixed monthly revenues without the costs attendant to a full-service branch office with on-site manager, compliance officer and operation personnel. The registered representatives of these independent broker-dealers generally operate as separately incorporated businesses. They are not employees of the broker-dealer and therefore not controlled in the same manner as full-service brokerage firm representatives. The registered representatives control their structure and costs to maximize profits and often leave the protection of investors' rights and interests as their lowest priority.

The typical supervisory organization of independent broker-dealer operations is to have other independent contractors operate Offices of Supervisory Jurisdiction (OSJs) to monitor the registered representatives from geographically remote offices and then report to the main franchisor's compliance office at national headquarters. The supervisors at the OSJs are not employees of the franchisor and often run their own brokerage, insurance and other businesses. They are not devoted full-time supervisors of the smaller branch offices. Consequently, OSJ managers cannot and do not supervise the day-to-day operations of the registered representatives of these Independent broker-dealers.

Generally, there is no immediate review of new accounts opened, securities transactions, business records, cash or securities receipts and deliveries, correspondence and business activities unrelated to the securities brokerage operation at these independent brokerage firms. The lax supervision leaves investors who have transferred their accounts to the smaller independent broker-dealer vulnerable to sales of securities that have not been reviewed or authorized by anyone other than the sales representative earning a commission. There may be no one onsite to detect forgeries of clients' signatures on documents, the placement of inaccurate information about a client's investment objectives and financial condition to document the suitability of a particular investment recommendation. Oftentimes there is no daily review of sales literature and client correspondence to protect against misrepresentations and misleading statements being made to investors. In fact, it is not unusual for there to be only one compliance audit visit per year at many of these offices. These Independent brokerage business operations are worrisome to the North American Securities Administrators Association (NASAA), which has documented more instances of sales abuse and consequently investor losses at these firms.

Have you suffered losses in your Crown Capital brokerage account? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against Crown Capital stockbrokers who engaged in stock brokerage misconduct and caused investors losses.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.