A Florida broker who was barred from the securities industry for selling high-risk collateralized mortgage obligations in the run up to the credit crisis has since sold millions of dollars worth of commercial mortgage loans issued by the Woodbridge Group of Companies, which filed for Chapter 11 bankruptcy on Monday and has stopped paying investor distributions.
The broker, Barry Kornfeld, was barred by the Securities and Exchange Commission in 2010 for selling unsuitable CMOs to clients from 2004 to 2007, according to the SEC's order. Through his Boca Raton firm, First Financial Tax Group, he sold the defunct loans, according to a plaintiff's attorney, Jeff Sonn, and a client, who said her family had invested close to $1 million in Woodbridge loans.
"Please understand that we are Woodbridge investors just like you, and we have been as blindsided by this as you have," Mr. Kornfeld wrote Tuesday in a note to his clients. "Woodbridge was such a large part of our business that this situation has precipitated the end for First Financial Tax Group. We will be closing our doors once we help you all get the information you need to know, what is going on and where you stand in this situation."
First Financial Tax Group could not be reached for comment, and the company's website, which had advertised investments in First Position Commercial Mortgages that yielded 5%, had been taken down. Mr. Kornfeld did not respond to questions on LinkedIn.
"He sold the product as a guaranteed promissory loan to the consumer," Mr. Kornfeld's client, who asked not to be identified, said. "The investments were individual notes, and we were told that if anything happened to Woodbridge, if the company went bankrupt or belly up, investors, who are mostly retirees, would be paid first because of our position as the note holder."
Based in Sherman Oaks, Calif., Woodbridge has raised over $1 billion from investors. The SEC said in October it was investigating Woodbridge to determine whether the company was operating as a fraud.
The company intends to recapitalize $750 million in debt and has a commitment of $100 million from an investor, Hankey Capital, according to a statement from the company.
When he was working as a broker, Mr. Kornfeld "told his customers that the CMOs in which they would invest were safe, secure, liquid investments that were suitable for retirees with conservative investment goals," according to the SEC. In fact, the CMOs jeopardized clients' yield and principal and were only suited for sophisticated investors with a high-risk investment profile, according to the commission.
From 2004 to 2007, Mr. Kornfeld worked at Brookstreet Securities Corp., according to his BrokerCheck report. A harbinger of the credit crisis that saw the ruin of dozens of brokerage firms, Brookstreet infamously blew up in June 2007 after it failed to meet margin calls for the CMOs and then failed to meet net-capital requirements. The SEC charged two years later that the firm and its founder, Stan Brooks, sold the risky mortgage obligations to retirees and others with conservative investment goals and continued to promote the CMOs even after learning they could quickly become worthless.
A spokeswoman for Woodbridge, Kris Cole, did not answer a question about Mr. Kornfeld when a reporter asked why the real estate company would work with a broker who had been barred from the securities industry previously.
In its announcement about entering Chapter 11 bankruptcy, Woodbridge blamed increasing costs, including those from litigation and compliance, as a reason for its bankruptcy.
"Woodbridge's new executive management team, along with its financial and legal advisers, is currently in the process of evaluating not only the company's financials, but also its operational structure, its policies and procedures," Ms. Cole said. "Gathering and understanding all of this information is part of the process of conducting as smooth a restructuring as possible as we look to maximize recovery for our investors. Monthly payment funds are being held in a secure account and we intend to ask the bankruptcy court for permission to resume these payments during the pendency of this case."
Ronald Richards, a California attorney who has been trying to get regulators to focus on Woodbridge's lending for almost a year, said he first became aware of the company when it bought a luxury home in his neighborhood in Beverly Hills in early 2017. Woodbridge wanted to double or triple the size of the property and took a mortgage against it for millions of dollars more than it was worth, Mr. Richards said.
The new management at Woodbridge "doesn't realize how bad the debt is," he said. And the new investor has essentially diluted the equity of the current note holders, he said.
When asked about Mr. Richards' comments, Ms. Cole of Woodbridge said the company does not comment on speculation.