Galvin's LPL suit a boon to plaintiffs

Dec 16, 2012 @ 12:01 am

By Bruce Kelly

Investors who recently sued LPL Financial LLC over the sale of nontraded real estate investment trusts were handed an early Christmas gift by Massachusetts Secretary of the Commonwealth William Galvin, who last week sued LPL over the sales practices of its brokers regarding the REITs.

The state's complaint against LPL could strengthen investors' arbitration claims.

“There is no question that the Massachusetts complaint will lead to a big surge of cases against LPL,” said Andrew Stoltmann, a plaintiff's attorney with 10 such REIT claims against the company.

“I give Galvin credit,” he said. “He's one of the most aggressive regulators out there, and when he brings an action [against a firm], he provides a crystal-clear road map for where the bodies are buried.”

Mr. Galvin charged LPL with failure to supervise registered reps who sold the nontraded REITs in violation of both state limitations and the company's rules.

The Massachusetts Securities Division also charged the company with dishonest and unethical business practices.

“That's extremely helpful for [attorneys] who have arbitration claims opened against LPL,” Mr. Stoltmann said.

The state's allegations about LPL's failure to supervise went to the heart of arbitration complaints, he added.

“Massachusetts in particular has been at the forefront to put specificity in complaints [against broker- dealers], and references to documents,” said Steven Caruso, a partner at Maddox Hargett & Caruso PC, a group of plaintiff's attorneys. “That is tremendously helpful” for clients suing a firm.

The Massachusetts complaint is “a very helpful road map for investors” in litigation, Mr. Caruso said. He added that his firm has at least seven claims in the pipeline against LPL over disputes involving nontraded REITs.

The state's charges stem from the sale of $28 million of nontraded REITs to almost 600 clients from 2006 to 2009. Charges include sales made in violation of Massachusetts' 10% concentration limits, prospectus requirements and LPL compliance practices.

The firm received gross commission of $1.8 million for those sales, according to the complaint.

Of the REITs listed in the complaint, the highest sales were for Inland American Real Estate Trust Inc., the largest nontraded REIT, with $11.2 billion in real estate assets. Massachusetts investors put at least $20.1 million into Inland American, which is the focus of a fact-finding investigation by the Securities and Exchange Commission.

Mr. Stoltmann said the lion's share of investor complaints he is working on involve Inland American.

An LPL spokeswoman, Betsy Weinberger, said the firm believes that claims in the Massachusetts complaint are “substantially overstated.

“LPL Financial takes protection of investors' interests seriously,” she said. “We have always endeavored to promote a strong culture of compliance, and continue to do so.”

In the past, complaints by regulators have acted as blueprints for plaintiff's attorneys seeking clients in order to sue the broker-dealer in question.

Massachusetts, for example, sued Securities America Inc. in 2010 over its sale of Medical Capital Holdings Inc. notes. The firm later settled with the regulator and paid $2.8 million in restitution to clients.

But in a separate series of claims, Securities America agreed to pay investors $150 million as part of a global settlement over sales of Medical Capital and Provident Royalties LLC.

Lawyers who sued Securities America on behalf of Medical Capital clients routinely used the Massachusetts complaint as part of their claims.


In the LPL case, Massachusetts' investigation “revealed significant and widespread problems with LPL's adherence with product prospectus and [state] requirements,” according to the complaint. By testimony of LPL reps, the Securities Division “uncovered similar issues with other nontraded REITs. In many ways, the division's investigation unearthed a boat with many holes.”

“On paper, LPL set forth stringent requirements for the sale of nontraded REITs,” according to the complaint. “In practice, LPL failed to review properly sales of nontraded REITs.”

Massachusetts is seeking full restitution to clients who were sold REITs allegedly in violation of state and prospectus requirements. It is also seeking an unspecified administrative fine against LPL.

The firm has changed its policies around the sale of the product, according to the complaint. “In July of 2012, LPL changed its policies and procedures, creating a separate complex-products team to review all alternative investments.” Twitter @bdnewsguy


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