July 25, 2016

Hedge Funds Sue Puerto Rico and Its Governor

A group of hedge funds that are holding Puerto Rico debt are suing the U.S. territory and Governor Alejandro García Padilla. Monarch Alternative Capital, Aurelius Capital Management, Stone Lion Capital Partners, Covalent Capital Partner, Aurelius Capital Management, Fundamental Credit Opportunities, and a number of other funds claim that Puerto Rico and Governor García violated PROMESA, which stands for the Puerto Rico Oversight, Management and Economic Stability Act. President Barack Obama signed the new debt restructuring law on June 30, which is when García issued a debt moratorium on the nearly $800 million in general obligation debt that was due on July 1 (along with other Puerto Rico debt for a collective total of about $2 billion). The hedge funds say that Governor García had no legal right to call a debt moratorium in the wake of PROMESA.

The bondholders want the court to stop the island from “unlawfully dissipating” assets before a federal oversight board is appointed. PROMESA places the U.S. territory under the supervision of the board, which is tasked with pressing for fiscal reform and supervising spending. However, the board won’t be in place for at least two months.

In their complaint, filed in United States District Court for the District of Puerto Rico, the creditors claimed that Governor García took advantage of this time gap in implementation and is spending hundreds of million dollars in ways that garner "political favor.” The hedge funds argued that certain expenditures would have been challenged by the board if it were already in place.

The plaintiffs, as holders of general obligation bonds, say they are entitled to some of the money being spent because Puerto Rico still owes them the debt payments. They want the district court to freeze the payments that have been issued and mark them as invalid until the board can take a look at them.

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July 21, 2016

Dallas Cowboy Wide Receiver Sues His Former Texas Investment Adviser for Securities Fraud

Dez Bryant, the wide receiver for the Dallas Cowboy, is suing Texas State Senator Royce West for financial fraud. West used to be Bryant’s adviser. The NFL football player is claiming breach of fiduciary and professional obligation.

West was Bryant’s adviser and lawyer. According to the Dallas Cowboy player's Texas securities fraud case, West recommended his friend David Wells as a financial manager to Bryant even though for had more than $1K in pending judgments against him in 2010 alone.

Because of West’s recommendation, Bryant gave Wells power of attorney and signatory authority over his banks accounts. The football star said that Wells stole more than $200K from him.

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July 20, 2016

Ameriprise Financial Advises Clients to Sell OppenheimerFunds Muni Bond Funds with Puerto Rico Debt

According to Bloomberg.com, in the wake of Puerto Rico’s default on July 1 of $911 million of bond payments it owes creditors—including $779 million of general obligation bonds—Ameriprise Financial Inc. (AMP) is recommending that clients sell their OppenheimerFunds (OPY) municipal bond funds that are holding any of the island’s debt. In a report this week, Ameriprise senior research analyst Jeffrey Lindell said that with the acceleration of Puerto Rico bond defaults—as the island tries to lower its $70 billion debt via bondholder losses—mutual funds holding these bonds could end up having to “cut dividend rates.” He also wrote that as Puerto Rico bonds respond to “speculation and news,” the mutual funds’ net asset value could turn “volatile.”

In its recent article, Bloomberg provided data from Morningstar Inc., which reports that as of the end of March, Oppenheimer held $3.5 billion of Puerto Rico securities in 19 funds, which is more than anyone else. Now, Ameriprise wants clients to look at investment options that are not as risky as the funds holding Puerto Rico municipal bonds. The firm is suggesting that clients sell investments involving 16 Oppenheimer muni funds. Included in the recommendation to sell are a number of state specific municipal bond funds, including the:
· Oppenheimer Rochester Virginia Municipal (ORVAX)
· Oppenheimer Rochester Pennsylvania Municipal (OVPAX)
· Oppenheimer Rochester Maryland Municipal (ORMDX)
· Oppenheimer Rochester North Carolina Municipal (OPNCX) and
· Oppenheimer Rochester Arizona Municipal (ORAZX)

Several days after the July 1 default, credit rating agency Standard & Poor’s (SP) reduced the U.S. territory’s credit rating to “default” status. The default was not the first time Puerto Rico was unable to cover debt payments that were due—although it was the first default involving Puerto Rico’s general obligation debt, which was supposed to have a constitutional guarantee.

It was in May that NY City Council Speaker Melissa Mark-Viverito asked the SEC to investigate whether OppenheimerFunds played a part in causing Puerto Rico’s financial crisis to worsen. Mark-Viverito believes that banks, hedge funds, and other investors who bought into Puerto Rico utility debt and general obligation bonds contributed to the territory’s debt woes.

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July 19, 2016

Prudential Annuities Fined $950K for Not Stopping Broker From Stealing $1.3M from Elderly Customer’s Variable Annuity Account

The Financial Industry Regulatory Authority is fining Prudential Annuities Distributors Inc. $950K for not identifying and stopping a senior fraud scam that allowed a broker to steal $1.3M from an older investor’s variable annuity account. The self-regulatory organization said that the firm failed on numerous occasions to properly investigate “red flags” indicating that Travis Weitzel was moving money from the 89-year-old’s VA account to a bank account listed under the maiden name of Wetzel’s wife.

According to FINRA, from 6/10 until 9/12, Wetzel turned in 114 forged annuity withdrawal requests to Prudential Annuities. He initiated up to five withdrawals a month, totaling close to $50K. He asked for the money to be wired from the elderly customer’s account to the third-party account of his wife.

The SRO said that Prudential Annuities did as Wetzel instructed without properly investigating the warning signs. When the firm looked at certain withdrawals during several quarterly audits, it saw that the money was going to a third party and determined that these were legitimate transactions. Prudential also purportedly failed to discern what the relationship was between the elderly customer and the third-party account holder.

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July 16, 2016

AOG Wealth Management President Ordered to Pay Couple $331K for Private Placement Investments

A Financial Industry Regulatory Authority Arbitration Panel is ordering AOG Wealth Management chief executive and president Frederick Baerenz to pay Roger and Barbara Bond $331K in compensatory damages. The panel found Baerenz liable for unsuitable trading because he allegedly misled the Bonds about the risks involved in the direct private placements they invested in from ’06 to ’09. At the time, Baerenz was affiliated with Pacific West Securities.

The Bonds invested about $941K in private placements. Their legal team contends that these were not suitable investments for them.


Private Placements
Private placements are offerings of a company’s securities that are not registered with the SEC. They are not offered to the general public.

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July 15, 2016

SEC Fines RiverFront Investment Group For Charging Clients Extra Fees

The U.S. Securities and Exchange Commission says RiverFront Investment Group has agreed to pay a $300,000 to settle allegations that the firm charged clients additional investment management fees beyond the agreed upon wrap fees. RiverFront is settling the SEC charges without denying or admitting to them.

With wrap fee programs, clients pay a yearly fee that is supposed to cover a number of services, including the cost of trades made by a sponsoring brokerage firm. Any additional fees have to be fully disclosed.

According to the regulator, RiverFront used a designated broker-dealer from ’08 until late ’09, which is when it started to use other brokers. However, although RiverFront told investors that some “trading away” from the sponsoring broker was occurring, the firm did not accurately describe how often this was happening. The use of these other brokers cost clients additional fees.

RiverFront maintains that it had been looking for best execution prices when working with the other broker-dealers, and the SEC acknowledges that the firm did not make money by trading away when it used these brokerage firms. However, clients still paid millions of dollars in added charges. It wasn’t until late 2011 that RiverFront modified its Form ADV disclosure so that clients were notified about its use of non-designated brokers.

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July 14, 2016

Bill to End Securities Law Exemptions in Puerto Rico Passes the U.S. House

The U.S. House of Representatives has voted to pass legislation that would get rid of exemptions from federal securities law for registered securities offered in U.S. territories, including Puerto Rico. The bill is called the U.S. Territories Investor Protection Act of 2016. Rep. Nydia Velazques (D-NY), who sponsored the legislation, said that if passed into law it would give key protections to American citizens in the territories. The bill would also put an end to long standing exemptions that were granted to territorial securities under the Investment Company Act.

Rep. Velazquez believes that had there been such a law previously, certain investment losses that have been sustained in the U.S. territories could have been prevented. She recently noted that certain issuers of securities in Puerto Rico have allegedly become their own underwriters, allowing them to sell and package the securities without letting investors know of this conflict of interest.

Unfortunately, this exact situation is what played out in Puerto Rico over the last decade. Many residents in Puerto Rico have suffered because they were not told of conflicts of interest and about how risky the bond funds they bought were. Their losses have been further compounded by the U.S. territory’s debt crisis. Puerto Rico owes $70 billion to investors, many of whom purchased the bonds indirectly through bond funds.

With Velazquez’s bill, investment companies on the island and other U.S. territories would have to deal with the same rules as their counterparts on the mainland. The legislation includes a three-year grace period for companies to get into compliance with new rules. (It also grants the SEC the authority to extend that timeframe via rulemaking if necessary.)

Last month, U.S. President Barack Obama signed into law PROMESA, the Puerto Rico Oversight Management and Economic Stability Act, which will help the island restructure its debt. On July 1, Puerto Rico defaulted on $911 million of bond payments that were due to creditors that day. At least $799 million of that was general obligation debt, which was supposed to be constitutionally guaranteed. However, Puerto Rico Governor Alejandro Garcia Padilla issued a debt moratorium that made the default on these debt payments possible.

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July 13, 2016

Ex-Prudential Financial and MetLife Broker is Barred over Deceptive MetLife Variable Anuuity Sales

FINRA has banned Winston Wade Turner from the securities industry. The former Prudential (PRU) and MetLife (MET) broker is accused of engaging in deceptive variable annuities sales. Turner was fired from Pruco Securities, a Prudential subsidiary, in 2015. The cause of his firing was deceptive sales practices.

Now, FINRA has barred him for a number of causes, including giving false information to clients about variable annuity sales, the fraudulent misrepresentation and omission of key facts to customers about the sales, providing false information in VA-related documents, and not giving testimony to the self-regulatory organization during its probe into this matter.

According to the SRO, Turner fraudulently misrepresented and omitted material facts about VA sales and concealed that he had persuaded a lot of customers to give up existing variable annuities or other investments so that they would buy the newer VAs that he was selling. He is accused of persuading at least 12 clients to trade their existing investments for this purpose, costing them over $150K in surrender charges.

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July 9, 2016

Elder Financial Fraud News: Indiana, Vermont, and Alabama Add New Laws to Protect Older Investors, US House Votes Approval of Senior Safe Act, & Garden State Securities to Pay Damages to Older Clients

The U.S. House of Representatives has voted to approve a bill that will hopefully encourage financial advisers to help stop senior financial fraud. The Senior Safe Act protects financial advisers and their firms from liability for violating privacy laws when they report suspicions or evidence of elder financial abuse.

The bi-partisan legislation, unanimously approved by house members, seeks to help financial institutions and their employees identify when a person may be the victim of exploitation. It also gives them the ability to report their suspicions without fear of liability. However, specialized training to help advisors identify and report such incidents would be required in order for immunity from liability to go into effect.

Also this month, laws were put in place in Indiana, Alabama, and Vermont mandating that financial advisers notify state authorities when they suspect that an elderly person or another vulnerable adult may be the victim of financial abuse. The new legislation lets advisers put a freeze on fund disbursements from a client’s accounts. It also gives them immunity from liability for reporting their suspicions.

Meantime, the Securities and Exchange Commission and the Financial Industry Regulatory Authority remain committed to their battle against elder abuse. FINRA has proposed a rule that, while it doesn’t mandate reporting of senior abuse, allows advisers to name a third party that could be notified if they suspect that a client is the victim of elder financial abuse. Also, in January, the North American Securities Administrators Association unveiled its NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation.

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July 7, 2016

Rhode Island Investment Adviser to Plead Guilty in $21M Ponzi Scam

The U.S. Attorney’s Office has issued a statement announcing that Patrick E. Churchville, the president and owner of ClearPath Wealth Management, will plead guilty to one count of tax fraud and numerous counts of wire fraud related to the running a $21M Ponzi scam. According to prosecutors, Churchville also used $2.5M of investor money to buy a house and neglected to pay over $820K of his federal income taxes.

Court documents report that a federal probe determined that from ‘08 through October ’11 the Rhode Island investment adviser and his firm invested about $18M in JER Receivables on behalf of investors. The government said that in 6/10, Churchville found out that the investments were no longer rendering returns and that ClearPath had been the subject of misleading and fraudulent representations by JER principals. However, instead of notifying clients that he lost millions of dollars of their money, he tried to hide the losses while continuing to collect investment fees.

As a result, Churchville misappropriated about $21M of investor money, misusing their funds while bringing in money from new investors. For example, he used investor money to repay JER investors while pretending that the funds were investment returns. He also lied when he told investors that past investments with JER Receivables had resulted in high return rates.

The government’s probe, conducted by the FBI, the U.S. Attorney’s office, and the IRS Criminal Investigation, also found that Churchville set up a scam in which he used investor money as collateral and, without their permission, used the funds to help him get $2.5M to buy a home. He did not report that money as income on his personal tax returns, hence the more than $820K nonpayment of his taxes.

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July 5, 2016

SEC Fines Texas-Based Investment Advisory Firm for Overcharging REIT Clients

The U.S. Securities and Exchange Commission is ordering WFG Advisors to pay a $100K penalty for charging clients too much on their investments business development companies and real estate investment trusts. The Dallas-based firm is the registered investment advisory arm of Williams Finance Group.

According to the regulator, the purported overcharges took place from 1/11 through 8/13. The SEC claims that WFG Advisors had policies and procedures that were inadequate, which kept it from identifying and stopping incidents of overcharging. Because of these inadequacies, including what the regulator considered a lack of technological capabilities, 35 accounts were collectively overcharged $34,640.63 in advisory fees.

The Commission said client’s in the firm’s wrap account program were told that they would be charged a commission to buy alternative investment product interests, including interests in BDCs and REITs. However, there wasn’t supposed to be an advisory fee. Instead, said the Commission, WFG Advisors charged both a commission and an advisory fee. (Forms submitted to the regulator included false statements saying that wrap program participants would not have to pay commissions for transactions that took place in their accounts.)

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July 1, 2016

Puerto Rico Defaults on $911M Bond Payment

The U.S. territory of Puerto Rico did not pay $911 million of bond payments due July 1, as expected. At least $779 million of that is general obligation bonds, which are constitutionally-backed debt and supposed to be guaranteed.

However, Puerto Rico Governor Alejandro Garcia Padilla has issued a debt moratorium that allows the territory to default on the general obligation bonds also. This is not the first time Puerto Rico has defaulted on payments due on its debt. The Commonwealth started defaulting on smaller payments last year for several agencies. In May, the government defaulted on the majority of the $422 million of debt that it owed.

The island had $2 billion in bond payments that was due on July 1. In total, the Commonwealth and its agencies owe over $70 billion of debt.

News of the default comes just as President Barack Obama signed the Promesa legislation into law to help Puerto Rico deal with its debt load. Because the territory is not a U.S. state, it has not been able to file for municipal bankruptcy protection under Chapter 9. Promesa, which is the Puerto Rico Oversight, Management and Economic Stability Act, will establish a several-member federal board to oversee Puerto Rico’s finances. The board will be able to postpone lawsuits from creditors seeking payments owed and restructure the U.S. Commonwealth’s debt, including make bondholders go to court, if necessary, to lower the territory’s debt obligations. (The U.S. Senate had passed the bill on Wednesday, making it possible for Mr. Obama to sign the legislation.)

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