Securities Fraud Lawyer Blog

The law contains a number of provisions aimed at encouraging job growth by making it easier and less costly for startups to raise capital and eventually go public. There are three major components to the law. One section establishes a new category of companies called “emerging growth companies” that have less than $1 billion in annual revenues at the time they register with the SEC. These companies would face fewer regulatory barriers when raising funds.  Another section of the law increases the number of shareholders before triggering when companies have to start public reporting. The third component is the most controversial, and deals with a capital-raising strategy known as “crowd funding” that would let investors take small stakes in private start-ups sold over the Internet.
 

Montana Commissioner of Securities and Insurance, Monica J. Lindeen, and KMS Financial Services, Inc., a Seattle-based securities firm, have entered into a settlement agreement that provides restitution to the victims identified in the Commissioner’s action against Arthur Heffelfinger, a former KMS stock broker.† In an effort to be responsive to the victims affected by Heffelfinger’s illegal activities and to the communities in which KMS Financial Services does business, the firm has agreed to pay the victims just over $975,000 in restitution.† The firm was also agreed to pay a total of $50,000 in fines and investigative costs to the State of Montana.

“Nationally, it is very unusual for victims of a Ponzi scheme to ever be given their money back from the scam,” said Lindeen. “This settlement allows the victims of this Ponzi scheme to recover the money they lost.”

“Ponzi schemes work on the ‘rob Peter to pay Paul’ principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses,” said Lindeen. “Because in the end there is generally no money, the later investors become the victims and typically get nothing back. If KMS Financial Services hadn’t agreed to pay restitution, these victims would likely have no chance of recovering their losses.”

FINRA Orders SunTrust Investment Services to Pay $1.44 Million for Unsuitable UIT, Closed-End Fund and Mutual Fund Transactions
Sanction Includes $540,000 in Restitution to Disadvantaged Customers; Broker Barred in Separate Action, Former Branch Manager Suspended

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered SunTrust Investment Services, Inc. of Atlanta, GA, to pay $1.44 million to resolve charges related to unsuitable unit investment trust (UIT), closed-end fund (CEF) and mutual fund transactions. Of that amount, $900,000 is a fine that includes nearly $224,000 in disgorgement of commissions earned on the unsuitable trades. The remaining $540,000 represents restitution to 17 customers who incurred losses.

As part of this settlement, SunTrust must also review all UIT purchases and provide remediation to all eligible customers who did not receive the maximum sales charge discount.

Oklahoma City///// On June 24, 2010, Oklahoma County District Court Judge Vicki Robertson issued a temporary restraining order against Firstar Financial Group of Central Oklahoma, LLC, John Joseph Hamilton, and Robin L. Peck. The judge’s action was based on an emergency request by the Oklahoma Department of Securities. The Department of Securities filed a civil action against the defendants alleging the fraudulent sale of unregistered investment interests and the sale of capital appreciation bonds.

 The Court has ordered the defendants to stop all offers and sales of the securities.

The Department initiated its investigation based on newspaper advertisements run by Firstar Financial Group of Central Oklahoma, LLC. The advertisements promote certificates of deposit issued by FDIC-insured banks that purportedly offer the highest certificate of deposit rates in the country. To achieve the yield advertised, Firstar Financial must contribute additional cash on behalf of the investor.

Arthur Heffelfinger Pleads Guilty to Operating a $1.7 million Ponzi Scheme and Theft

Monica J. Lindeen, Commissioner of Securities and Insurance (CSI), announced today that Arthur Leroy Heffelfinger has pled guilty in Lewis & Clark County District Court to Operating a Pyramid Promotional Scheme (Ponzi Scheme), a felony, and Theft (Common Scheme), also a felony. Heffelfinger was charged in January 2010 with three felonies – operating a ponzi scheme, theft, and exploitation of an older person. His trial for the charge of exploiting an older person will be set for sometime this Fall.

After an extensive investigation beginning in September 2009, Heffelfinger, a former stockbroker for KMS Financial Services, a firm located in Seattle, was charged with operating a ponzi scheme for a period of at least 8 years, for theft, and for exploiting an older person. The charging documents alleged that Heffelfinger diverted funds from at least twenty KMS clients from February 2001 through September 2009, using approximately $739,724 for his own personal use, approximately $917,777 for the purpose of conducting the ponzi scheme, and approximately $364,044 when exploiting the older person, for a collective total of $2,021,546. Heffelfinger sold the victims bogus real estate investment trusts.

INVESTOR ALERT

CONSIDERING AN INVESTMENT IN THE BP GULF OF MEXICO
OIL SPILL CLEAN-UP?

If you are considering an investment associated with the clean-up of the BP oil spill in the Gulf of Mexico or have already made such an investment, please contact our office at (225) 925-4660. This is especially important if you are experiencing any problems with the investment.

Jefferson City, MO – Missouri Secretary of State Robin Carnahan today announced that $574,000 will be returned to more than 100 investors, many of them seniors, who suffered losses after their savings were mishandled by a former Bankers Life and Casualty Company insurance agent, James Otto.

According to the cease and desist order, Otto, of Overland Park, Kan., provided brokerage services for customers of Bankers Life and gave advice on how to manage their securities investments held at other firms. Otto was not registered to sell securities or give investment advice, as required by Missouri law, but that did not stop him from promoting these services to his fellow agents at the insurance company.

In a complex scheme, Otto allegedly liquidated more than $7,100,000 in securities investments from 180 customer accounts and moved most of these funds into fixed or equity indexed annuities sold by Bankers Life. To do this, Otto set up new accounts for clients at discount brokerage firms, gave himself power of attorney, and transferred the investments to these brokerages. He immediately liquidated the accounts and moved the investments into annuity products that earned commissions for Otto and his coworkers.

RALEIGH – A former Harnett County man accused of luring investors into a fraudulent daytrading scheme pleaded guilty July 20 in US District Court in Raleigh, following an investigation by the North Carolina Secretary of State’s Securities Division. Ronnie D. Rainey, 43, pleaded guilty to federal mail fraud. He is scheduled to be sentenced on November 1. The Secretary of State’s Office conducted the investigation, and the mail fraud charge was brought by the US Attorney’s Office.

Rainey – a day trader and former Harnett County school teacher – solicited investors in North Carolina and other states to invest their money with him from 2003 until 2005 through four LLC’s that he created, Par 5 Investors, LLC; Birdie Investors, LLC; Eagle Investors, LLC; and Double Eagle Investors, LLC. Rainey was never registered to sell securities in North Carolina. He created multiple accounts with E*Trade and Ameritrade and drew in investors with claims that they would get monthly returns of 10-percent if they invested with him. Rainey is accused of defrauding 60 investors – including 12 North Carolina investors – of nearly $3 Million between 2003 and 2005.

When Rainey’s investments began losing money, he manufactured false monthly and quarterly statements for investors indicating their investments were turning a profit. Investigators allege Rainey shuffled funds between accounts and converted much of investors’ money to his personal use.

The article below is from the Orange County Register. Brookstreet has now closed and many unanswered questions remain: Why were retail client accounts approved for so much margin? Why wasn’t the illiquid nature of the CMOs taken into consideration for margin purposes? What was NFS involvement? Stay tuned

By JOHN GITTELSOHN
The Orange County Register
Agents with the U.S. Securities and Exchange Commission spent Friday monitoring the last day of business at the Irvine offices of Brookstreet Securities, which closed to retail customers this month after failing to meet margin calls on complex mortgage-based investments.
Stanley Brooks, Brookstreet’s founder and president, said SEC officials were posted at his office all week to ensure records were properly stored and secured. Asked if the SEC was there to investigate possible securities violations, he replied: “Not that I’m aware of.”
Andrew Petillon, an SEC spokesman, said he could not confirm or deny the existence of any inspection or investigation.
Several Brookstreet clients told the Orange County Register this week that they did not understand the risks involved in the investments that led to the company’s collapse.
Brooks said his company had $17 million in cash on hand at the end of May. But by June 20, after the clearing firm that handled Brookstreet’s accounts demanded cash to meet margin calls, Brookstreet was left with debts of $14 million.
The securities, called Collateralized Mortgage Obligations, are backed by pools of residential mortgages. Most CMOs are safe, paying investors principal and interest drawn from thousands of mortgages.
But 30 Brookstreet CMOs reviewed by the Register were more complex than most CMOs. Their structures expose investors to losing or gaining money following tiny fluctuations in interest rates. As such, they are difficult to value. Most are “interest-only strips,” which pay investors the interest stream but no principal from mortgages.
Brooks said the accounts collapsed because the clearing firm, a subsidiary of Fidelity Investments, used what are called “notional values” to price the CMOs. Those values plummeted as confidence plunged in mortgage-backed securities to subprime home loans.
“We never had a performance issue,” Brooks said of the CMOs. “We had a notional pricing disparity.”
Brooks said clients who paid the full price for their CMOs – and other financial products – still have money in their accounts, which will accompany his former brokers to whatever new jobs they get. SEC filings said Brookstreet managed $571 million for 3,644 clients.
Although he served as Brookstreet’s president, Brooks said Friday he was not responsible for overseeing the company’s trades, which relied on a network of 650 independent brokers nationwide.
In March 2005, the National Association of Securities Dealers suspended Brooks’ securities license for two years for inadequate supervision of trades. Last week, Brooks’ license was suspended again, this time for 60 days, because of failures in record keeping.
Contact the writer: 714-796-7969 or jgittelsohn@ocregister.com