Berthel Fisher & Co. Financial Services Inc., little more than a year after settling most investor claims relating to real estate deals created by bankrupt real estate manager Diversified Business Services and Investments Inc., is now the the target of a prospective class action stemming from a failed deal with noted real estate investor Tony Thompson.
Jon Hanson, an investor in the TNP 2008 Participating Notes Program LLC, which went into default last year, is suing the independent broker-dealer. His allegations center on Berthel Fisher's allegedly failing to perform due diligence on the TNP 2008 Participating Notes Program and make proper disclosures to investors.
It's the first time a broker-dealer that sold a product sponsored by Thompson National Properties LLC has faced a prospective class action, attorneys for both sides said.
“Berthel Fisher had actual knowledge of misrepresentations and omission in the 2008 [private-placement memorandum] and failed to investigate red flags that pointed to other misrepresentations and omissions,” according to the complaint, which was filed July 8 in U.S. District Court for the Northern District of Iowa. “Through the use of the misleading TNP 2008 PPM, Berthel Fisher helped raise approximately [$26.2 million]” from more than 200 investors, according to the complaint.
Berthel Fisher did not sell the entire $26 million of the TNP 2008 Notes Program, but is the focus of the suit because it acted as the deal's underwriter, said Alan Rosca, an attorney for the plaintiff.
“A lot of times, retail broker-dealers don't deal directly with a product sponsor but go through the managing broker-dealer or underwriter, generally speaking,” Mr. Rosca said. The $26 million was not all sold to Berthel Fisher clients. Several other broker-dealers were involved, he said.
The lawsuit also named Thomas Berthel, founder and chief executive of Berthel Fisher, as a defendant.
“The investment in the TNP 2008 Participating Notes Program was expressly disclosed to be a high-risk investment, and the business plan was expressly disclosed as being an attempt to take advantage of opportunities created by the debt and real estate crisis that existed at the time of the offering,” Mr. Berthel said. “These risks were all clearly disclosed in the private placement memorandum.”
Meanwhile, Mr. Thompson is facing mounting legal problems and continues to express dismay at the actions of the board of the nontraded real estate investment trust he formerly managed, the TNP Strategic Retail Trust Inc.
In June, an investor in another Thompson National Properties-sponsored deal, the TNP 6700 Santa Monica Boulevard, also known as TNP Kodak, filed a prospective class action against Mr. Thompson and other executives associated with Thompson National Properties.
Filed in U.S. District Court for the Central District of California, Southern division, the investor, Carol Prock, alleged that Mr. Thompson and his team's “misrepresentations, mismanagement, misappropriation of investor funds and other misconduct” with regard to the TNP 6700 Santa Monica Boulevard investment was the “modus operandi” in several other TNP-sponsored deals, a fact that was not disclosed to investors.
To avoid foreclosure, TNP Kodak in May sold the property to a lender at a $6.4 million loss. After that, the Thompson team returned to investors about 37% of their initial investment, according to the complaint.
The two prospective class actions were filed by the same group of attorneys, led by Joseph Peiffer, a partner with Fishman Haygood Phelps Walmsley Willis & Swanson LLP.
Mr. Thompson's attorney, H. Thomas Fehn, said the allegations contained in the two potential class actions are false. He added that the complaints were based on an “inaccurate” settlement from June between a former Thompson executive, Wendy J. Worcester, and the Financial Industry Regulatory Authority Inc. In June, Finra suspended Ms. Worcester for five months and fined her $15,000 for failing to conduct adequate and independent due diligence into an array of Mr. Thompson's deals.
Meanwhile, Mr. Thompson has not sat idle during this barrage of legal action stemming from his failed real estate deals.
In March, he wrote a letter to investors in his nontraded real estate investment trust, the TNP Strategic Retail Trust Inc., claiming that the three independent directors of the REIT's board had increased expenses, which then resulted in the cut of REIT's dividend to investors.
Earlier this month, the cash-strapped REIT said it had sold a 12% interest of one of its real estate subsidiaries to Glenborough LLC, another real estate manager, for $1.93 million.
Mr. Thompson, chief executive of the REIT, later issued a statement decrying that transaction.
“We believe the July 17 press release by TNP Strategic Retail Trust Inc. is a disingenuous attempt to deflect the blame for the disastrous consequences of the [board's] special committee's decisions,” the statement said. “In our view, Glenborough's recent equity investment in the company provides yet another unfortunate example of the special committee's questionable decision making.”