Court puts kibosh on investors suing B-Ds that sold bankrupt Inspired Healthcare deals

In what some plaintiff’s attorneys are calling a sea change for investor protection, a federal judge in July, and then later backed by FINRA, halted almost 100 investor lawsuits against broker-dealers that sold high-risk, high-priced private placements issued by Inspired Healthcare Capital.

Inspired Healthcare Capital, which raised more than $1 billion to finance dozens of real estate and senior housing developments, declared bankruptcy earlier this year, leaving investors who bought the securities in the lurch. 

Financial advisors sell illiquid real estate private placements like those issued by Inspired Healthcare to investors promising steady yields that beat money market returns and the stability traditionally associated with real estate investing.

Private placements, which do not disclose commissions on clients’ account statements, are expensive for clients and lucrative for advisors and firms, with fees and commissions of up to 10% - 10 cents per dollar.

On July 24, U.S. bankruptcy court judge Mark X. Mullin granted an injunction that enjoined or halted any new arbitration claims or the further proceedings of current claims. Mullin’s order was in response to a prior motion by Inspired Healthcare Capital Holdings.

According to attorneys, FINRA’s general counsel in the weeks that followed deferred the matter to the federal courts.

“Our firm represents approximately 25 investors who invested approximately $10 million in various Inspired Healthcare offerings,” said Kal Nekvasil, a plaintiff’s attorney whose law firm appealed the injunction in August. “Many of our firm’s clients are elderly and suffering from serious medical conditions, including cancer.”

“And many of these FINRA arbitration claims have been pending for almost one year, with at least one final hearing scheduled for this October,” Nekvasil said.

A FINRA spokesperson declined to comment.

Before this injunction, when a company that sold securities using broker-dealers and their financial advisors declared bankruptcy, investors seeking redress sued the firms that approved and sold the securities via arbitration using FINRA Dispute Resolution Services.

Recently, for example, GWG Holdings declared bankruptcy in 2022 after raising more than $1 billion from financial advisors’ clients; investors were free to file FINRA arbitration complaints against broker-dealers in that matter, attorneys noted.

Emerson Equity, a California broker-dealer, was the biggest seller of both GWG Holdings L bonds and Inspired Healthcare private placements. An attorney for Emerson Equity did not return a call to comment.

“This has caused chaos,” said Ryan Bakhtiari, another plaintiff’s attorney. “All these cases involve investors who bought Inspired Healthcare private placements or clients who owned Inspired Healthcare securities along with other investments.”

“It’s all come to a halt, and FINRA has deferred to the bankruptcy court,” he added.

Founded in 2016 by Luke Lee, Inspired Healthcare Capital of Scottsdale, Ariz., first used private placements to raise money and then in 2020 relied on Delaware Statutory Trusts, or DSTs, according to a filing from February 4 in the federal court bankruptcy proceedings in Fort Worth, Texas.

Broker-dealers that sold the now defunct private securities deals backed by Inspired Healthcare Capital generated more than $100 million in fees and commissions for securities that no longer issue distributions – think dividends - to clients.