Berthel Fisher & Co. Financial Services Inc., a little more than a year after settling most investor claims related to real estate deals created by bankrupt real estate manager Diversified Business Services and Investments Inc., is 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 alleged failure to perform due diligence on the TNP 2008 Participating Notes Program and make proper disclosures to investors.
It is the first time a broker-dealer that sold a product sponsored by Thompson National Properties LLC has faced a 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 didn't sell the entire $26 million of the TNP 2008 Notes Program to its clients but is the focus of the suit because it acted as the deal's underwriter, said Alan Rosca, an attorney for the plaintiff.
Several other broker-dealers were involved, he said.
“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 lawsuit also named Thomas Berthel, founder and chief executive of Berthel Fisher, as a defendant.
“We, of course, take all claims seriously,” Mr. Berthel said last Friday.
“It is important to note, however, that Hanson is not and never was a customer of Berthel Fisher. He was a customer of one of the other 38 broker-dealers who each conducted their own due diligence on the TNP 2008 Participating Notes Program and who found it appropriate to make the investment available to their customers,” Mr. Berthel said.
“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,” he said. “These risks were all clearly disclosed in the private-placement memorandum.”
Meanwhile, Mr. Thompson faces mounting legal problems.
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 wasn't disclosed to investors.
Sold at a loss
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 at Fishman Haygood Phelps Walmsley Willis & Swanson LLP.
Mr. Thompson's attorney, H. Thomas Fehn, said that the allegations contained in the two potential class actions are false.
He added that the complaints were based on an “inaccurate” settlement last month between a former Thompson executive, Wendy J. Worcester, and the Financial Industry Regulatory Authority Inc.
Last month, Finra suspended her 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.