Did you lose money with Crown Capital Securities, stock broker Hugh Barndollar? According to FINRA Brokercheck, Barndollar has been registered with Crown Capital Securities, L.P., in Land O’ Lakes, Florida, since 2013. He has been the subject of 2 customer complaints between 2010 and 2019.
The most recent complaint disclosure is July 2019. “Claimant alleges negligence in the handling of their account and the recommendation of financial investments; breach of fiduciary duty and negligent supervision by crown capital in allowing it’s brokers to conduct inadequate due diligence.”
The investor is seeking $100,000 in damages, and the case is currently pending. The complaint was regarding direct investments. According to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Crown Capital Securities, L.P. may be liable for investment or other losses suffered by Barndollar’s customers.
Non-Traded Investments REITs and BDCs
Table of Contents
The reference to Direct Investments raises SUITABILITY AND SUPERVISION ISSUES and could involve SALES of DPPs, NON-TRADED REITs, or BDC’s. These investments are generally offered by financial advisors working at independent broker-dealer firms. There are different types of Direct Participation Programs (DPPs), including non-traded REITs and Business Development Companies (BDCs).
These securities investments are typically risky illiquid alternative investments that the United States Securities and Exchange Commission (SEC) define as “Reg D” offerings, also known as “private placement” investments. The reference to Reg D provides exemptions from the typical registration requirements of Section 5 of the Securities Act of 1933.
As discussed by the Financial Regulatory Authority (FINRA) Regulatory Notice 10-22, a brokerage firm selling a private placement still has to conduct a reasonable investigation of any securities it recommends.
The types of problems that FINRA found in the past about some private placements were significant and included outright fraud and sales practice abuse in Regulation D offerings. It is well-known that a broker-dealer firm selling a particular private placement must comply with suitability requirements of FINRA Rule 2111 (Suitability).
With private placements, the firm recommending the investment to a customer must also conduct a reasonable investigation into the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer, and the intended use of the offering.
Failure of a firm to adequately investigate a given private placement can result in a violation of antifraud provisions of federal securities law, as well as FINRA Rule 2010 (adherence to just and equitable principles of trade) and Rule 2020 (prohibiting manipulative and fraudulent devices).
In addition to various cases and enforcement actions cited in Regulatory Notice 10-22 (and its endnotes), another sweep by FINRA resulted in more crackdowns on firms (and individuals) that did not conduct a reasonable investigation before selling private placements to customers.
As discussed in Regulatory Notice 10-22, although there is a certain threshold of scrutiny that must be met by a broker-dealer firm recommending any private placement, there will be times that more is required for the investigation to be reasonable. For example, a broker-dealer firm’s duty to investigate may be heightened if a private placement’s promotional materials promise unusually high returns or other questionable representations.
Requirement to Supervise
Additionally, it is the obligation of a broker-dealer firm selling a private placement to conduct its adequate investigation regardless of whether others have investigated – reliance on someone else’s efforts are not an excuse for a shoddy investigation. Further, if the broker-dealer firm or salesman (financial advisor) recommending the private placement does not have essential information about the security, then that deficiency must be disclosed along with the risks that may exist due to the lack of information.
Also, with respect to private placement investments, firms still must supervise their brokers in the investigation and recommendation being made to the customer. In addition to the typical supervision duties that a broker-dealer firm has over its registered representatives, as required by FINRA Rule 3010, private placements necessitate additional supervisory procedures.
As reminded by FINRA Regulatory Notice 10-22, those additional supervisory procedures must be reasonably designed to ensure that a broker-dealer firm’s registered representatives: (1) engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory requirements; (2) perform the analysis required by FINRA Rule 2111 (formerly, NASD Rule 2310); (3) qualify their customers as eligible to purchase securities offered under Regulation D; and (4) do not violate the antifraud provisions of the federal securities laws or FINRA rules in connection with their preparation or distribution of offering documents or sales literature.
Importantly, each Reg. D offering must be adequately supervised “before it is marketed to other firms or sold directly to customers.
Non-traded Real Estate Investment Trust (REIT) and Non-Traded Business Development Companies (BDCs)
Non-traded Real Estate Investment Trust (REIT) and non-traded Business Development Companies (BDCs) are generally considered “high-risk” investments, and recommendations of these investments to seniors or retirees can often be problematic for financial advisors.
Based on the prospectuses and Subscription Agreements for the investments, it likely indicates they were not suitable investments for investors who required immediate liquidity, guaranteed income, or short-term investments, and they were only appropriate for those investors who can afford a complete loss of their investment.
If you are an investor who was sold these securities, but you were not looking for speculative, high-risk investments, and/or you were a senior or retiree at the time of your investment, it may be worth taking a closer look.
As noted above, FINRA Rule 2111 requires the firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy is suitable for the customer based on the information obtained via reasonable diligence on the part of the firm or associated person to ascertain the customer’s investment profile.
These alternative investments are sometimes recommended or sold based upon the promised income stream, or based upon incomplete, inaccurate (and sometimes non-existent) risk disclosures to investors.
The explanation is often under the guise of providing more income, adding more yield, or providing additional diversification. So it seems innocent enough on the surface, especially when equity valuations appear high and interest rates appear low by comparison. Still, everything is not always as it seems with these investments.
The income stream is typically not a dividend, nor is it like a bond paying interest, and it is a distribution from the issuer or sponsor. Quite often, it is only after the fact that investors realize these distributions were a return (in whole or in part) of their investment principle, not a return on their investment principle. Worse yet, some investors who purchased these investments based on income needs did not realize the risks involved or the possibility that their distributions could be stopped.
What appears to be attractive distributions are investments not listed on any national exchange, just private placements of unregistered securities that are generally considered risky, complex, and illiquid – not precisely what any elderly, retired, or near-retired investor is looking to add to their account. The market for non-traded real estate investment trust (REIT) securities is rumored to have nearly doubled in 2019 to $10 billion.
This is likely not because older investors are clamoring for more risky investments with little or no liquidity, but rather because more financial advisors and broker-dealer firms are looking to sell more high-commission, high revenue-producing products to investor clients.
The investments are often complicated, and some financial advisors may not fully comprehend the intricacies, the conflicts, the product, and investment risks. This market segment can be a magnet for an unscrupulous financial advisor looking to generate higher fees and commissions, and where better to find those opportunities than with older investors who trust them to make recommendations that are in their best interests.
Last year, unregistered securities were a top source of regulator enforcement actions involving senior investors, according to the North American Securities Administrators Association (NASAA, an organization that includes the individual state securities regulators).
Financial Regulatory Authority (FINRA) Notices on Private Placement Investments
Also, the Financial Regulatory Authority (FINRA) has identified these types of investment products and transactions as part of its annual regulatory priorities.
For investors who are “accredited” meaning annual income over $200,000 or net worth over $1 million, some unscrupulous financial advisors are quick to declare open season on those investors, or worse, and they may “fudge” the paperwork which falls short of such requirements but convince an unsuspecting client to sign the paperwork. For clients, they trust the financial advisor, assume there are no ulterior motives, and sign whatever is presented to them.
While this purported effort to expand investment opportunities such as private placements to more investor clients, these investments often do more harm than good for the investor clients, and only serve to increase the commission and fee revenues of the financial advisors making the recommendations.
From the beginning, the deck appears stacked against the investor in most of these investments. There are conflicts of interest, high commissions, high distribution rates, and to overcome those hurdles. It could require a 10-15-20% return just for the investor to get back to even. All the while, the only pricing available is coming from the sponsor itself, as there are no national exchanges providing pricing, never mind liquidity for investors.
For investors seeking to liquidate, there may be a repurchase window available. For financial advisors, they may reference that repurchase opportunity as though it is a source of consistent liquidity for investors.
In reality, those repurchase opportunities are typically very small windows available only quarterly and with very limited real opportunities for investors.
If investor circumstances change, or a market dislocation leads to immediate needs for liquidity, investors may find they have very limited options available. Unfortunately, the limitations are only discovered around the same time that investors realize that distribution levels are being reduced or suspended (temporarily or permanently), which only adds to their dissatisfaction.
Some investors are also surprised to find out later that the underlying investment strategy or business strategy is much riskier than what had been initially represented at the time of the recommendation and sale.
They also learn that the business or strategy involves leverage or borrowed funds, and when unsuccessful, it can serve to accelerate losses. More often than not, investors learn later that the financial advisor recommendation of these products was severely flawed. Whether it is a non-traded REIT, non-traded BDC, or similar investment, there were lower cost, non-conflicted, publicly-traded options available that not only allowed for liquidity but also better opportunities for diversification, if the investor indeed was interested in exposure to a particular market or sector.
According to a Cohen and Steers report, only approximately 25% of non-traded REITs between 1990 and 2018 outperformed listed REIT investments. With these kinds of statistics, risks, and expenses, a full, fair, balanced disclosure by a financial advisor better offer a lot more than merely an opportunity to add some diversification – especially when that recommendation typically involves a concentrated position in a single sponsor, single investment with a unique strategy in a single market sector.
The unfortunate tangled web of inadequate disclosure, complexity, and unscrupulous sales practices catches up with too many investors. If these investments include funds you cannot afford to lose, or the answers you are getting are at best fuzzy or sound too good to be true, investors should stay away, or risk wishing they had later on down the road.
To the extent there is any purported goal being served or perceived problem being solved by a financial advisor recommending these investments, there are ample opportunities available in the public markets.
Seek Compensation for Your Investment Losses
If you are an investor that purchased DPPs, non-traded REITs, or Non-Traded BDCs and you have incurred losses (or if you are aware of a senior investor who did the same), you should consider your potential options for recovering your investment losses.
At least one option for some investors includes a Financial Regulatory Authority (FINRA) customer dispute. The customer dispute process at FINRA is private and quicker and more efficient than traditional court litigation. Also, there are typically no depositions, as it is almost entirely paper-based discovery.
You should contact experienced attorneys who might be able to assist you with these types of disputes.
About Haselkorn & Thibaut, P.A.
Haselkorn and Thibaut, P.A. is a nationwide law firm specializing in handling investment fraud and securities arbitration cases. The law firm has offices in Palm Beach, Florida, on Park Avenue in New York, as well as Phoenix, Arizona, and Cary, North Carolina. The two founding partners have nearly 45 years of legal experience.
Haselkorn & Thibaut, P.A. has filed numerous (private arbitration) customer disputes with the Financial Industry Regulatory Association (FINRA) for customers who suffered investment losses relating to issues similar to those matters mentioned above. There are typically no depositions involved, and those cases are usually handled on contingency with no recovery, no fee terms.
Experienced attorneys at Haselkorn & Thibaut, P.A., are available for a free consultation as a public service. Call today for more information at Call 1-800-856-3352 or visit our website and email us from there at www.investmentfraudlawyers.com.