At the same time, FINRA released an Investor Alert, Reverse Convertibles - Complex Investment Vehicles, to educate retail investors about how these products work, what risks they involve and what factors to consider before investing in an RCN. FINRA also issued Regulatory Notice 10-09, reminding firms of their sales practice obligations when recommending or selling RCNs to retail investors.

An RCN is a structured product that typically consists of a high-yield, short-term note of an issuer and effectively a put option that is linked to the performance of an unrelated, or "linked," asset - usually a single common stock, but sometimes a basket of stocks, an index or some other asset. As a general rule, upon maturity of an RCN, the investor will receive either his full principal investment or a predetermined number of shares of the linked equity (which may be worth less than the principal investment), depending on the performance of the linked equity. Generally speaking, the higher the coupon rate, the higher the expected volatility of the linked equity and the greater the likelihood of the investment resulting in payment of shares. Reverse convertibles not only come with the risks that fixed income products ordinarily carry, such as issuer default and inflation risk, but with additional risks of the underlying asset, which can depreciate or even become worthless. The initial investment for most RCNs is $1,000 per unit and most RCNs have maturity dates ranging from three months to one year.

Similar to at least two nation-wide class-action lawsuits and dozens of FINRA securities arbitration claims that have been filed against Securities America, the Massachusetts complaint alleges that Securities America failed to conduct proper due diligence of Medical Capital or ignored red flags or which it was aware and made "material omissions and misleading statements" in the course of the sale of approximately $697 million of promissory notes to Medical Capital investors.

The Massachusetts complaint states "...all material risks and information regarding MC Notes were not disclosed to investors. These risks were known to [Securities America]. Year after year, the due diligence analyst, retained by [Securities America] to conduct a review of the various Medical Capital offerings, specifically requested and at many times pleaded that investors be informed of certain heightened risks."

The report also reveals that Medical Capital was paid administrative fees of more than of $323 million. In other words, more than $323 million of investors’ money went straight into Medical Capital’s coffers. The receiver also reported that: (a) none of the Medical Capital entities ever generated enough profit to pay investors’ principal and interest, and (b) just under $1 billion in loans and assets were transferred among various Medical Capital entities in order to make payments to earlier investors using new investors’ funds. This is a classic example of a Ponzi scheme.

Between the use of new investors’ money to pay earlier investors, “faking” receivables, and fraudulently marking up the value of aged receivables, it appears that investors have lost more than $1 billion and that investors are highly unlikely to recover much of that loss from the receivership. Blum & Silver, LLP continues to file FINRA arbitration claims against the brokerage firms that sold Medical Capital notes to investors. Please contact Blum & Silver if you would like to discuss claims that you may have against the brokerage firm that sold Medical Capital investments to you.

The volume of cases increased in every category, with the exception of online trading. The increased type of controversies include margin calls, churning, unauthorized trading, failure to supervise, negligence, omission of facts, breach of contract, breach of fiduciary duty, unsuitability and misrepresentation. The largest number of cases involved breach of fiduciary duty, as cases filed soared 48 percent to 4,206 last year. Misrepresentation and negligence claims were second and third on the list, cited in 3,408 (70% increase) and 3,405 (113% increase) cases, respectively.

Cases involving mutual funds and common stock were the most numerous, with the former being the subject of 1,556 claims last year, up 45% from 2008. Common stock claims increased by 77% from the previous year, up to 1,367 claims in 2009.

Although FINRA arbitration filings have vastly increased, it is noteworthy that the turnaround time for such cases in 2009 decreased by 12%. This means that investors are seeing resolutions to their cases at a faster rate.

In 2009, tens of thousands of investors lost more than $16.5 billion in these investment scams, including the life savings of many people.

The Securities and Exchange Commission describes a Ponzi Scheme as a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Money from new investors is used to pay off earlier investors until the whole scheme collapses. Often there is no "investment" occurring — money is simply being shifted from one person to another, with the initiator of the investment scheme skimming money off the top.

The following statistics from the AP highlight the proliferation of such investment scams:

—The FBI opened more than 2,100 securities fraud investigations in 2009, up from 1,750 in 2008. The FBI also had 651 agents working in 2009 on high-yield investment fraud cases, which include Ponzis, compared with 429 last year.

—The SEC this year issued 82 percent more restraining orders against Ponzi schemes and other securities fraud cases this year than in 2008, and it opened about 6 percent more investigations. Ponzi scheme investigations now make up 21 percent of the SEC's enforcement workload, compared with 17 percent in 2008 and 9 percent in 2005.

—The Commodity Futures Trading Commission filed 31 civil actions in Ponzi cases this year, more than twice the 2008 amount.

Experts attribute the recession responsible for the collapse of so many of the Ponzi schemes, as well as heightened awareness and regulatory scrutiny that resulted from the infamous Madoff scandal.

Blum & Silver, LLP routinely represents investors in recovering Ponzi scheme losses, including investors who lost money in Medical Capital Holdings, Provident Royalties, DBSI and many other investments.

Among other things, the FINRA notice reminds brokerage firms that in marketing PPNs, they must ensure their communications accurately and fairly explain how the securities operate. Promotional materials must disclose the level of principal protection offered, the credit-worthiness of the guarantor, the potential returns and pay-out structure, the investor’s ability to access funds and any costs or fees that might affect the return of principal. FINRA also advises representatives to perform an adequate suitability analysis based on the aforementioned aspects and components of the PPN.

The risks of PPN's were highlighted with the highly publicized Lehman Brothers' Principal Protected Notes. Brokers at UBS and other firms pitched these products as similar to buying a basket of stocks (such as the S&P 500) but with the added benefit of up to 100% principal protection if the market went down. However, Lehman Brothers declared bankruptcy in September 2008 and the notes became worthless.

Blum and Silver, LLP is actively involved in representing investors in PPN cases. For further information, please contact us.

Blum & Silver, LLP is representing investors in FINRA arbitration claims who suffered losses at UBS as a result of losses in Lehman principal protected notes and Lehman preferred shares. These securities were typically recommended as safe investments. However, many investors allege they were not warned of the risk and suffered extraordinary losses as a result.

Because securities offered under Reg D are not registered with the SEC, the transparency of these companies is limited. Broker-dealers must engage in the due diligence process to determine the validity of the offering, the issuer’s operations and suitability of the investments for their clients. Some broker-dealers engage an outside due diligence firm, whereas others perform their own due diligence, or a combination of both.

Many of the broker-dealers that sold Provident Royalties and Medical Capital securities “relied” on reports prepared by outside diligence firms and actually collected a due diligence fee for allegedly reviewing these reports. The problem with relying on such reports, however, are two-fold: 1) the firms preparing the reports are typically paid by the issuer, posing a conflict of interest and 2) the due diligence firms tend to produce only the most rudimentary information, providing only a brief overview of the issuers and their finances.

As reported September 27, 2009 by Investment News, an undisclosed broker-dealer hired and paid a firm to conduct additional due diligence on Medical Capital. Medical Capital “wasn’t very cooperative” and objected that the firm was going to show the report to more than one broker-dealer. This is not surprising, as any meaningful due diligence would have revealed red flags.

Blum & Silver, LLP is aggressively pursuing FINRA arbitration claims against broker-dealers for losses incurred based on recommendations to purchase Provident and/or Medical Capital.

If you were sold limited partnership interests and/or preferred stock in Provident or Medical Capital, contact our office.

The SEC alleges that, since 2003, Medical Capital has raised more than $2.2 billion through private securities offerings in the form of notes, and that since August 2008, nearly $1 billion of the notes have been in default or were late in paying principal and/or interest.

The award was against a former Boca Raton stockbroker who was ordered to pay a $7 million arbitration award — including $4 million in punitive damages — by a FINRA arbitration board.

The FINRA arbitrators found Gary J. Gross made false representations and didn’t tell customers about the risks and suitability of securities he bought for them while working for Axiom Capital Management and UBS. The investments included private placements, mutual funds and low-priced securities.

Many of Gross’ customers were elderly and lost their life savings. Gross preyed on members of his community and continues to live in the same home valued in excess of several million dollars.

The FINRA award found Gross fabricated values while generating commissions from frequent trades on customer accounts and engaged in unauthorized trading and other sales practice violations.

Last yar, Gross consented in a Securities and Exchange Commission civil case to the entry of a permanent injunction that barred him from working in the securities industry until all FINRA arbitration awards against him are concluded.

The Medical Capital investment was a private placement. Private placements are generally considered to be risky and cannot easily be sold . However, many investors are alleging that the firms sold these interests as safe conservative investments appropriate for people seeking an interest stream in retirement or other conservative investments. Multiple issues have now been raised regarding what, if any, due diligence was done into Medical Capital and the principals of the company amongst other issues.

The law firm of Blum & Silver, LLP represents multiple investors in claims against the selling broker-dealers. If you have any information about our claims or want a free consultation to discuss your legal rights, please contact our law offices.

However, it now appears that the fraud was much larger and that numerous brokerage firms including Securities America sold investments in Medical Capital without allegedly doing the proper due diligence.

As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating millions raised through the sale of notes. The selling agents received fees and/or commissions for the sale of these investments. Many of these brokerage firms are small or regional brokerage firms which was responsible for performing a reasonable investigation before selling these investments to its investors.

To determine if some, or all, of the investment losses in Medical Capital are recoverable through FINRA securities arbitration claims, please contact Blum & Silver, LLP.

The SEC allleges that from at least June 2006 through January 2009, Provident fraudulently sold stock promising profits though oil and gas assets. The complaint alleges the sales were made to more than 7,000 investors throughout the United States. It is also alleged that the sales were primarily solicited by unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide. However, the SEC's action does not seek any relief from these retail broker-dealers.

According to the SEC's complaint, investors were falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. The SEC alleges that, in fact, less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.

Our firm currently represents a number of Provident investors throughout the United States in claims against the brokerage firms which sold them these investments. The firm is filing multiple claims with FINRA securities arbitration claims against the brokerage firms that sold the investments in an effort to recover clients' investment losses. The allegations include that the brokerage firms failed to perform adequate due diligence before recommending and selling the Provident and Shale Royalties investments.