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Robert W Pearce
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Mr. Pearce has tried, arbitrated and mediated numerous disputes involving complex securities, commodities, administrative, contract, commercial, business tort and employment law issues for over 30 years. He has represented hundreds of clients in Federal and state courts (trial and appellate) as... More
My company:
The Law Offices of Robert Wayne Pearce, P.A.
My blog:
The Investor's Rights Law Blog

    Kansas City, Missouri-based Sunset Financial Services, Inc. submitted a Letter of Acceptance, Waiver, and Consent in which the firm consented to, but did not admit to or deny, the described sanctions and the entry of the Financial Industry Regulatory Authority's (FINRA) findings that it sold private placements as an unaffiliated broker-dealer without performing adequate due diligence. FINRA found that a third-party diligence report on one private placement alerted the firm of an increased default rate for the loan portfolio, but the firm failed to adequately follow up on this red flag and did not re-evaluate the appropriateness of retaining the fund in its approved private placement fund. FINRA further found, the firm failed to follow up on another red flag when the fund suspended fund redemptions and stopped accepting new investors due to financial difficulties. The firm received approximately $1,140,000 from the sale of the fund.

    In addition, FINRA found that the firm lacked a supervisory system reasonably designed to monitor its due diligence on approved private placements. FINRA said the firm delegated nearly all responsibilities relating to private placements to its vice president but did not have any procedures to follow up on whether he was properly performing his responsibilities. Further, the system of supervising suitability was deficient because the vice president simultaneously recommended private placements to customers through his discussions with registered representatives, while at the same time reviewing the suitability of these recommendations. FINRA also found that the firm did not create sales materials for any private placements but relied on its registered representatives to forward sponsor-created sales materials to the firm's compliance department for prior review. As a result of all this, the firm was censured, fined $200,000, and ordered to disgorge ill-gotten gains of gross dealer concessions and due diligence fees in the amount of $84,253.03 plus interest as partial restitution to customers.

    Broker-dealers must establish, maintain, and enforce a supervisory system reasonably designed to ensure adequate due diligence is performed for private placements at inception and on a continuing basis whenever negative information or other red flags occur. If broker-dealers do not establish and implement such policies and procedures, they may be liable to investors for investment losses. Therefore, investors who have suffered losses stemming from the lack an adequate supervisory system can bring forth claims to recover damages against broker-dealers like Sunset Financial Services.

    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. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.

    Dec 16 11:52 AM | Link | Comment!

    We learned yesterday that UBS Puerto Rico has offered to repurchase some shares of its Puerto Rico closed-end bond funds in an effort to reduce the damages of some investors. The offer is limited to investors its advisors put at peril by borrowing funds from UBS Bank USA to purchase the already leveraged bond funds. When the Puerto Rico municipal bond market began to collapse this summer many of UBS Puerto Rico's best clients suffered margin calls. The margin calls forced liquidations of other securities in their portfolios because there were no buyers for the closed-end bond funds. UBS Puerto Rico had secretly pulled its market support for the closed-end bond funds and they dropped in value like stones in the water. The UBS Puerto Rico advisors recommendation that customers use of non-purpose bank loans to purchase the funds was unlawful and in violation of UBS Puerto Rico policies and procedures.

    According to Karina Byrne, a spokeswoman for Switzerland's largest bank, the bank has told advisors to contact clients who took out bank loans and purchased the Puerto Rico closed-end bond funds managed by UBS Puerto Rico affiliates about a limited buyback program. UBS is not giving these investors any special consideration other than an opportunity to sell closed-end bond funds at current net asset value or less to the company. The offers are not being extended to every investor in the funds. Nor are the offers being extended with respect to every closed-end bond fund. The funds are capped to prevent the repurchase of more than 25% of the outstanding shares of the fund and some funds are closer to that limit than others.

    Obviously UBS Puerto Rico does not see a recovery in a net asset value of these funds anytime in the near future and fears further forced liquidations. UBS Puerto Rico knows the forced liquidations and severe losses in clients' portfolios as a result of these closed-end funds market decline will undoubtedly lead to more lawsuits and arbitrations and rightfully so. UBS Puerto Rico's offer to repurchase some shares is an attempt at damage control for the firm, not its investors.

    Investors are not going to receive any premiums on the sale of shares of these funds back to the company, but a sale today may yield more than a sale in the next 6 months when the Fitch rating agency is expected to downgrade the Puerto Rico municipal bond market to junk bond status. Some of these funds already have net asset values that are severely depressed. For example the Puerto Rico Fixed Income Fund, one of the banks closed-end offerings, had a net asset value of $3.65 on November 20, 2013, the last published valuation on UBS Puerto Rico's website. This fund is down from it's initial offering price of $10 per share; i.e., over 60 percent. All of the funds are down significantly in the last several months with no likelihood of recovery in the near future in light of the recent rating agencies actions. The most recent valuations of these funds from the UBS Puerto Rico website are below:

    Name of the Fund - NAV

    • Tax-Free Puerto Rico Fund: 5.122
    • Tax-Free Puerto Rico Fund II: 4.596
    • Tax-Free Puerto Rico Target Maturity Fund: 4.488
    • Puerto Rico AAA Portfolio Target Maturity Fund: 7.629
    • Puerto Rico AAA Portfolio Bond Fund: 7.179
    • Puerto Rico AAA Portfolio Bond Fund II: 8.121
    • Puerto Rico GNMA & US Govmt. Target Maturity Fund: 8.042
    • P.R. Mortgage-Backed & US Govmt. Securities Fund: 6.176
    • Puerto Rico Fixed Income Fund: 3.654
    • Puerto Rico Fixed Income Fund II: 4.273
    • Puerto Rico Fixed Income Fund III: 4.057
    • Puerto Rico Fixed Income Fund IV: 5.181
    • Puerto Rico Fixed Income Fund V: 4.659
    • Puerto Rico Fixed Income Fund VI: 5.533

    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. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.

    Dec 13 12:48 PM | Link | Comment!

    The Financial Industry Regulatory Authority (FINRA) issued a new investor alert leading up to the lifting of the general-solicitation ban on private-placement investments. FINRA cautions that investing in private placements, or an offering of a company's securities that is not registered with the Securities and Exchange Commission (SEC), is "risky and can tie up your money for a long time." The general-solicitation ban for private placements, eliminated by a statute in the Jumpstart Our Business Startups Act (JOBS Act), was what kept unregistered equity offerings out of reach of inexperienced investors, with only "accredited investors" allowed to invest unless a company was granted an exemption. Though the average investor will be more easily accessible to companies offering private placements, broker-dealers are still bound by SEC rules concerning investment suitability and due diligence before recommending private-placement investments. However, experienced as well as accredited investors should still remain on guard.

    A private placement is a company's securities offering that is not registered with SEC and is not offered to the general public. To invest in a private placement, you generally must be an "accredited investor," which means that you must have a net worth (excluding your primary residence) of over $1 million - either alone or with a spouse - or have income exceeding $200,000 over each of the last two years - $300,000 with a spouse - along with a reasonable expectation that you will earn the same amount during the current year. Many private placements are offered pursuant to Regulation D of the Securities Act of 1933, which specifies the amount of money that can be raised and the type of investor that can be solicited to participate in the offering. The offering document, or a private placement memorandum or term sheet, will likely contain limited information on the company's business. However, since many private placement securities are issued by companies that are not required to file financial reports, investors may have problems gauging how the private placement is performing or is likely to perform over time.

    Prior to investing, FINRA recommends that investors get a second opinion on a private placement investment from a licensed broker, perform independent research on the offering company, and consider personal liquidity needs. Investors also should learn whether the private placement has any attached conditions or contingencies, which affect how the issuer spends the money it raises. Information on the companies will be made available in their offering document and Form D, which is filed with the SEC, and possibly also from state securities regulators.

    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. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.

    Dec 13 12:08 PM | Link | Comment!
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