A financial adviser sought out investors through church and faith based relationships, resulting in portfolios filled with illiquid “alternative investments” including non-traded REITs, oil and gas rights, water rights, and a stake in a Ukrainian farming operation. According to the claims most recently filed by the investor rights law of firms Vernon Litigation Group and Dovin, Malkin, and Ficken against the brokerage firm in charge of supervising the financial adviser in these cases, two retired couples suffered dramatic losses. Collectively, the investors lost over a million dollars on these investments as a result of being sold these speculative and illiquid investments that were pitched as conservative income producing investments.
The adviser, Paul Larsen, met these retirees through church connections and used their faith connection to gain the couples’ trust. During the initial consultation with one of the couples who recently filed a claim, financial adviser Larsen learned that the couple was conservatively invested in a series of mutual funds, and that aside from a part-time job, relied on their investment income to fund their retirement. This is a typical scenario in these types of cases.
Possibly Working Against Investors Goals
Despite the investors’ goals to preserve their capital and create low-risk interest income, Paul Larsen made speculative recommendations which proved fatal to the investors’ life savings, according to the claims filed with FINRA. For example, Mr. Larsen allegedly directed one of the couples to cash out their mutual funds and invest in a Ukrainian farming operation that would “make a great return while helping the economic, social and spiritual development of the Ukrainian villages,” the claim states.
According to one of the investors’ attorneys, Chris Vernon, “these types of investments are alternative in nature; meaning, among other things, that there is no robust secondary market for investors to re-sell or liquidate the investments.” Vernon added, “not only do alternative investments often lead to investors holding non-income producing investments that can’t be sold or liquidated, but the speculative investments are often deceptively sold and oversold—to fixed income investors—as bond substitutes.”
KBS REIT and Other Real Estate Investment Trusts
Among the assertions in the claims filed in FINRA Arbitration, it is alleged that Mr. Larsen also advised one of the couples to invest in KBS REIT and other similarly illiquid Real Estate Investment Trusts (REITs). According to attorney Sandy Malkin (also representing the investors), “in cases involving alternative investments such as hedge funds, non-traded REITs, or other alternatives to stocks and bonds, the truly speculative nature of the investment is typically downplayed and often misrepresented.” As a result, investors’ portfolios often implode years after purchasing these investments (which effectively become permanent fixtures in the investor’s portfolio). Moreover, when a portfolio is over-concentrated in these alternative investments, the illiquidity itself can lead to catastrophic financial harm from which investors cannot recover.
These recently filed cases involving Paul Larsen’s recommendations and representations to multiple investors also included investment pitches for a speculative water rights company (which was designed to profit from a shortage of water in Colorado and surrounding areas). Mr. Larsen claimed that he too was invested in the Colorado water operation because, according to the claims filed, Larsen’s assessment of a “growing water shortage” [in Colorado], and that cities like Denver would be “forced to buy water from those owning land with water rights.” The claim filed by Vernon Litigation Group and Dovin Malkin and Ficken asserts that not only did Mr. Larsen fail to disclose the associated liquidity risks mentioned above, but also failed to disclose that he was earning compensation from the Colorado entities as an owner/employee in addition to the commissions he was earning from the investors’ funds.
Finally, Mr. Larsen’s investment recommendations to the retired couples also included Ridgewood Energy Q Fund, Yokam Land Holdings LLC, and Breakwater Capital Group, all of which resulted in non-performing assets effectively stuck in the clients’ portfolios. With respect to Breakwater Capital, the recently filed claims include allegations that Mr. Larsen offered this investment only to a “select group of investors.”
Chris Vernon, founding partner of Vernon Litigation Group, says that “cases like these serve as a clarion call for investors. While advisers may seem trustworthy and come to you based on common affiliations or referrals, investors must proceed with great caution.” More specifically, Vernon noted that approximately 80% of new investment advisory relationships come from referrals, despite the fact that investors should not rely on referrals to select their investment professionals unless the referring source has significant investment expertise and has no connection or financial relationship to the financial professional they are recommending.
Contact An Experienced Attorney
As an investor, you should have as much knowledge about your financial adviser as possible, be sure to use a FINRA broker check, and If you feel like you may have had a similar experience, or want to check out the validity of your claim, contact the experienced REIT attorneys from Vernon Litigation Group today.