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Andrew Parish and Brian Neville Discuss Firm Transitions
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SPACs & the Risks of Investing in Blank Check Companies
Wall Street’s fastest growing trend is investing in Special Purpose Acquisitions Companies (“SPACs”). SPACs are a way for private companies to go public without having to go through the traditional IPO process. SPACs have been around for decades but have recently gained popularity in companies seeking to go public in this period of high market volatility. Historically, SPACs were viewed as extremely risky investments. The recent rise in SPACs does not change the high risks associated with them. Some brokers and financial advisors ignore these risks and recommend customers invest in SPACs regardless of the customer’s investment profile and appetite for risk. RIK’s investment fraud lawyers have extensive experience handling these types of cases and recovering losses for customers.
SPACs, also known as blank check companies, are companies created and publicly traded for the sole purpose of buying or merging with a private company in the future, known as the target company. SPACs disclose criteria about the what kind of target company or companies it seeks. Despite these disclosures, which are usually very limited and loosely defined, investors of the SPAC have no idea what the eventual acquisition company will be. In other words, investors are going in blind.
In using SPACs to go public, private companies forego the process of registering an IPO with the SEC, meaning there is less oversight from the SEC. The SPAC process also permits private companies to go public in a substantially shorter time period than a conventional IPO. As one might suspect, the due diligence of the SPAC process is not as rigorous as a traditional IPO and no one is looking out for the best interests of investors. Even worse, SPAC managers are not incentivized to obtain the best possible deal for investors – their job is to get a merger deal, not get the best deal. Not surprisingly, this can lead to substantial harm to investors. For example, the SPAC company may be overpaying for the target company – meaning investors are losing on the deal.
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Lax & Neville LLP Wins a FINRA Arbitration Award Granting Expungement Relief to Two Former Merrill Lynch Financial Advisors
On March 11, 2021, a FINRA arbitrator awarded expungement relief to George D. Ewins Jr. and Richard J. Kowalski, former Merrill Lynch financial advisors. Ewins and Kowalski were represented by Robert J. Moses of Lax & Neville LLP. Ewins and Kowalski sought expungement of a customer complaint from their registration records maintained by the Central Registration Depository (“CRD”). CRD is the central licensing and registration system for the securities industry and its regulators, which contains information made available to the public via FINRA’s BrokerCheck. Pursuant to FINRA Rules 2080 and 13805, an arbitrator may grant an expungement of customer dispute information from a registered representative’s CRD record. In the underlying arbitration filed by the customers, the customers alleged that Ewins, Kowalski, Merrill Lynch and Bank of America (“BOA”) sold Merrill Lynch proprietary volatility indices linked to structured notes known as Strategic Return Notes which were unsuitable in light of their investment objectives. Merrill Lynch and Bank of America settled with the customers which resulted in the customers’ not having any out-of-pocket losses. Ewins and Kowalski did not contribute to the settlement.
Pursuant to FINRA Rule 13805 of the FINRA Code of Arbitration Procedure (“Code”), the FINRA arbitrator in the expungement proceeding made the following FINRA Rule 2080 affirmative finding of fact: “[t]he claim, allegation, or information is false.” According to the Award, the arbitrator reached this conclusion “based upon the fact that neither Ewins nor Kowalski was responsible for the failure of Merrill Lynch and BOA to make the requisite disclosures concerning the fixed costs associated with the Strategic Return Notes. Both Ewins and Kowalski testified credibly that they performed necessary due diligence before they recommended the Strategic Return Notes for the customers. There is no reason to conclude that either Ewins or Kowalski could have reasonably questioned the validity, accuracy and completeness of the Strategic Return Notes offering materials prior to the SEC and FINRA actions. One of the customers who filed the underlying arbitration submitted a detailed written response to Ewins and Kowalski’s request for expungement and testified at the expungement hearing that he “personally do[es] not have a problem with a potential expungement of the petitioner[s’] record[s] if they have met the burden for their record to be cleared,” and that he did not want Ewins and Kowalski to have adverse consequences from having the disclosures on their CRDs.
As noted by the arbitrator in the Award, Merrill Lynch agreed to pay a $10 million penalty to settle charges by the SEC that Merrill Lynch violated securities laws and was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index. Merrill Lynch also agreed to a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA in connection with the same disclosure violations.
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Lax & Neville is Investigating Claims Against Broker-Dealers and Financial Advisors who Sold GPB Capital Investments to Investors
On February 4, 2021, the Securities and Exchange Commission (“SEC”) charged three individuals and affiliated entities with running “a Ponzi-like scheme” that raised over $1.7 billion by selling unregistered, high commission private placements issued by GPB Capital Holdings, an alternative asset management firm. The SEC alleges that David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make the annual distribution payments to investors. According to the Complaint filed by the SEC in the U.S. District Court, Eastern District of New York, GPB Capital actually used money raised from investors to pay portions of the annualized 8% distribution payments due on private placements sold to earlier investors. The SEC complaint alleges that GPB Capital, Mr. Gentile, and former GPB Capital managing partner, Jeffrey Lash, manipulated the financial statements of certain funds managed by GPB Capital to give the false appearance that the funds’ income was sufficient to cover the distribution payments – when in fact it was not.
In addition, the SEC complaint alleges that GPB Capital allegedly violated whistleblower protection laws by including language in separation agreements that forbade individuals from coming forward to the SEC, and by retaliating against whistleblowers.
Financial advisors sold GPB Capital private placement investments to their customers, including retirees and unsophisticated investors. The 8% annual distribution payment appealed to investors. Those payments, however, stopped in 2018. In 2019, GPB’s chief financial officer was indicted and GPB Capital reported sharp losses across its funds. Following the announcement, some broker-dealers allegedly instructed their broker-dealer clients to remove GPB issued private placements from their platforms within 90 days. Investors of the GPB private placement investments paid as much as 12% of the money they invested to broker-dealers in the form of fees and commissions. Brokers and financial advisors allegedly touted and pushed these investments onto their clients, thousands of which are retirees and unsophisticated, and in some instances over concentrated their portfolios in GPB Capital. Private placement investments are risky investments only suitable for sophisticated, accredited investors who understand the risks and can afford to lose their investment. Financial advisors and brokers have duties to recommend investments that are suitable to their clients and perform due diligence on the investment products they recommend and sell to investors. If your financial advisor sold GPB Capital investments to you, you may have a claim to recover your investment losses.
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Can Investors Recover for Losses from NYC REIT?
Yes, many investors have filed claims to recover losses sustained as a result of their investments in NYC REIT, a real estate investment trust that purports to own “a portfolio of high-quality” commercial real estate located within the five boroughs of New York City. This REIT began as a non-traded REIT, meaning it was not traded on an open exchange, making it is highly illiquid. Not only was it difficult for investors to get out of their positions, share prices have dropped substantially since its initial private stock offering. Investors were led to believe returns on the investment would exceed 10% on an annualized basis, but in reality, NYC REIT turned out atrocious for investors. The securities lawyers at Rich, Intelisano & Katz (RIK) have been highly successful in recovering losses for investors who had positions in non-traded REIT investments.
NYC REIT is not a high-quality investment with annual returns exceeding 10%. On the contrary, this REIT, like all REITs, is high risk and only suitable for a limited pool of investors – savvy investors who are wealthy and sophisticated with a long-term investment horizon. First, NYC REIT is a non-traded REIT, which means it is significantly less liquid than REITs that trade on an open exchange. As such, when investors want to sell their position, they are forced to sell their shares at a heavily discounted price. Thus, non-traded REITs are rarely a suitable investment for most investors. Second, NYC REIT owns only 8 mixed-use office and retail condominium buildings (which is miniscule compared to other REITS). The limited portfolio creates an inherent high risk, such as limited diversification, less exposure to potential tenants, and the lack of ability to spread costs over a larger portfolio. Unfortunately, NYC REIT severely underperformed and the risk associated with it became realized for many investors.
The NYC REIT was disastrous from the beginning. The initial private stock offering price of the REIT was $25 per share. By 2018, the price per share plummeted over 50%. The board then decided to suspend future distributions – hurting investor cash flow. Then, the board authorized a reverse stock split, an action that consolidates the number of existing shares of stock into fewer, proportionally more valuable shares (generally, a move to boost the company’s image if the stock price has dropped dramatically). Then, when the REIT went public in August 2020, it was a complete failure. NYC REIT, now trading on the New York Stock Exchange (“NYSE”) under the symbol “NYC,” dropped in value approximately 40% on the first day. This abrupt decrease in share price left investors with significant losses.
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Amarin – A Highly Risky Speculative Biotech Stock Sold to Investors
Lax & Neville LLP is investigating claims involving Amarin, a speculative biotech stock recommended and sold to investors by financial advisors. Amarin is a biopharmaceutical company with one significant commercial product, Vascepa, a fish oil drug designed to reduce cardiovascular risk among patients with elevated risks of cardiovascular events and elevated triglyceride levels. Amarin’s stock skyrocketed from $3 a share to $18 a share in a single day following the release of positive clinical data in September 2018, (and traded in that range, including in the mid to low $20s during the next 18 months), but declined to low single digits in March 2020 after losing a key patent litigation decision. See Amarin Pharma v. Hikma Pharmaceuticals USA Inc., Case No. 2:16-cv-02525-MMD-NJK (D. Nev. 2016). The patent litigation was a known risk to the stock, and eventually caused a collapse in Amarin’s share price.
Upon information and belief, financial advisors at Morgan Stanley and other brokerage firms solicited and concentrated customer accounts in Amarin, even while the company was defending its patent on Vascepa in litigation. This litigation was a material risk in any Amarin investment. If generic versions of Vascepa could enter the market, Amarin’s sales would be substantially reduced, and even if the introduction of generic versions did not start right away, the perception that their development would create could also materially impact Amarin’s value and stock price.
Upon information and belief, financial advisors failed to adequately disclose the risks of investing in Amarin and in having concentrated positions in one stock. Financial advisors have duties, including a fiduciary duty, to provide customers with full and fair disclosure of all material facts, such as the risks of litigation, the ongoing risks of overconcentration; and to diversify an investor’s portfolio. Financial advisors also have a duty to continually update “buy,” “hold,” and “sell” recommendations for any security. Financial advisors must develop a suitable plan for customers’ investments, and to recommend transactions and investment strategies only where they have a reasonable basis to believe that their recommendations are suitable for the customer based on the customer’s financial needs, investment objectives, investment experience, risk tolerance, and other information that they know and have obtained about the customer. An investment in Amarin, particularly in concentrated positions is risky and not suitable for all investors. The failure by a financial advisor to provide suitable investment advice with fair and balanced risk disclosures is a violation of his or her fiduciary duties and other duties.
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Omnibus Accounts Create an Increased Risk of Fraud
Over the past several years, there has be an increasing number of registered investment advisors and financial advisors using omnibus accounts. In short, an omnibus account allows an advisor to trade the same securities on behalf of multiple clients, while typically identifying in advance which trades are intended for which client accounts. However, in some cases, trades are allocated after they are made. This creates an increased risk of fraud since some firms’ supervisory failures have allowed advisors to “cherry-pick” which accounts get the winning trades, and which accounts suffer losses. The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) won multiple claims against broker-dealers for allowing third parties to engage in this misconduct.
An omnibus account is intended to facilitate large purchase blocks of securities for multiple client accounts. The idea of aggregating or bunching purchases in a single transaction is to obtain more favorable prices, lower brokerage commissions, and create more efficient execution. After the trades are made, the advisor is supposed to allocate the trades to client accounts in accordance with the previously approved allocations. The allocations of trades then should be reviewed by compliance and/or risk management periodically to ensure that accounts are not systematically disadvantaged by this policy.
Unfortunately, some advisors use this policy to scam their clients. Sometimes allocation instructions are submitted after trades are executed, when the adviser has had the opportunity to view the performance of the trade over the course of the day. By reviewing trade performance first, the advisor knows which trades are profitable and which are unprofitable, then can “cherry-pick” – that is to allocate the profitable trades to favored accounts and allocate losing trades to other disfavored accounts.
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MASSACHUSETTS SUPERIOR COURT CONFIRMS ADVISORS’ $2.094 MILLION ARBITRATION AWARD AGAINST CREDIT SUISSE, INCLUDING INTEREST AND ATTORNEYS’ FEES, FOR ITS UNLAWFUL WITHHOLDING OF DEFERRED COMPENSATION
On August 31, 2020, the Massachusetts Superior Court confirmed a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award against Credit Suisse for more than $2 million owed to four former Credit Suisse advisors represented by Lax & Neville LLP, including approximately $1.6 million in unlawfully withheld deferred compensation, more than $83,000 in costs and more than $411,000 in attorneys’ fees.
The former Credit Suisse advisors sued Credit Suisse for, among other things, violations of the Massachusetts Wage Act, breach of contract, breach of the implied covenant of good faith and fair dealing and unjust enrichment after it closed its U.S. wealth management business on October 20, 2015 and unlawfully cancelled their earned deferred compensation. On February 14, 2020, a three-member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $1,602,609.95 plus costs, interest and attorneys’ fees.
Credit Suisse petitioned the Court to vacate in part or modify the Award, challenging the Panel’s authority to award attorneys’ fees on the basis that the advisors had no contractual right to attorneys’ fees and that Credit Suisse did not agree to submit the issue of attorneys’ fees to the Panel. In rejecting Credit Suisse’s petition and refusing to modify or vacate the Award, the Court held that Credit Suisse itself had originally submitted a request for attorneys’ fees against its four former advisers, giving the Panel the authority it needed to award attorneys’ fees. Under New York law, which governed the parties’ agreements, a mutual request for attorneys’ fees forms a binding contract between the parties and authorizes a Panel to award attorneys’ fees. The Court further noted that given Credit Suisse’s many losses in the Credit Suisse Deferred Compensation Arbitrations, its surprise at, and defense to, the Panel’s award of attorneys’ fees when both parties had requested them was unreasonable, stating that the “theory should have come as no surprise to Credit Suisse, which had already been required to pay the attorney’s [sic] fee of the prevailing party in another arbitration,” referencing the $585,307 in compensatory damages, $131,694 in interest and $146,326 in attorneys’ fees awarded to Brian Chilton, another former Credit Suisse financial advisor represented by Lax & Neville LLP. Another $1.34 million in attorneys’ fees were also awarded to former Credit Suisse advisors Joseph Lerner and Anna Winderbaum and Richard DellaRusso and Mark Sullivan, all of whom were represented by Lax & Neville LLP, as well as Christian Cram, Andrew Firstman and Mark Horncastle.
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RIK Files $3 Million Claim Related to the UBS Yield Enhancement Strategy (“YES”)
Rich, Intelisano & Katz, LLP (RIK) filed a $3 million FINRA arbitration this month on behalf of clients that invested in UBS Financial Services, Inc.’s Yield Enhancement Strategy (YES). UBS claimed the YES Program had minimal risk, but unbeknownst to its customers, the risks of this options trading strategy significantly outweighed any potential gain. Unfortunately, investors around the world lost hundreds of millions of dollars investing in YES.
Although UBS and its brokers claimed the YES Program had limited risk of loss, in actuality, this was a high-risk strategy. UBS implemented the YES Program beginning in 2016 after it recruited a high-profile team of brokers from Credit Suisse with massive up front bonuses. To entice customers to invest, UBS represented that the YES Program was a low-risk way to generate incremental income of 3% to 6% annually (before the deduction of fees). UBS further stated that the Program used protective options trading combinations to create a market-neutral strategy, meaning the Program’s performance would have little correlation to the markets, thereby protecting investors from significant losses. These low-risk and loss protection statements made by UBS contradict the actual risks associated with the Program.
The fact is that the YES Program was a high-risk, complex options strategy that subjected UBS customers to significant market exposure and risk of loss. This complex options strategy involved hundreds of combinations of puts and calls. The complexity of the program and the lack of adequate risk controls exposed YES investors to significant risk of loss – loss that was far beyond the alleged risk protection. Specifically, YES investors were exposed to 15% to 40% of losses depending on their holding period, even though their expected annual income was only 3% to 6%. In sum, YES was not the low-risk, market neutral, downside protection strategy that UBS had stressed to its customers.
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Merrill Lynch and At Least One of its Top Brokers Face Investigation Over Alleged $200 Million Losses Due To Churning After Paying a Record $40 Million Settlement in a FINRA Arbitration
The New Hampshire Bureau of Securities Regulation is reportedly investigating Merrill Lynch and Charles Kenahan, one of its top-producing brokers, over customer complaints alleging “churning” in their accounts that resulted in damages of approximately $200 million. Churning, or excessive trading, occurs when a broker or financial advisor trades securities in a customer’s account at high frequency in order to generate commissions rather than advance the customer’s best interests. According to multiple sources familiar with the New Hampshire securities regulator’s investigation, the churning claims that alerted the regulator stem from two arbitrations filed before the Financial Industry Regulatory Authority (“FINRA”), one by former New Hampshire Governor Craig Benson and the other from Benson’s long-time friend and business partner, Robert Levine.
According to CNBC, which obtained documents from the FINRA arbitrations, Benson’s claim, currently pending before FINRA, names Merrill Lynch, Kenahan, and another Merrill Lynch advisor Dermod Cavanaugh and alleges damages in excess of $100 million due to churning and unauthorized trading. Levine’s arbitration claim sought approximately $100 million in damages based on allegations of churning, unsuitable investment recommendations and misrepresentation.
According to news outlets, Benson and Levine originally met Kenahan through Cavanaugh, who had been the accountant for Cabletron Systems – a company Levine and Benson co-founded out of Levine’s garage. Levine and Benson said they thought they could trust and that Cavanaugh and Kenahan would act in their best financial interests, so they decided to move their individual investment accounts into the care of the two men.