National investor fraud law firm, KlaymanToskes, has commenced an investigation in light of the recent Letter of Acceptance, Waiver and Consent (No. 2019062569501) submitted by Kevin McCallum (“McCallum”) to FINRA, who worked at LPL Financial (“LPL”) from May 2012 to July 2019. McCallum was also with Cadence Bank during the same time period in Birmingham, Alabama.
According to FINRA, from May 2017 through June 2017, McCallum made unsuitable recommendations to 12 customers, resulting in their overconcentration in a high-risk, publicly traded business development company. During the same time period, McCallum sent emails to certain customers about the business development company that contained unwarranted and exaggerated claims, opinions, and forecasts and did not provide a fair and balanced treatment of the risks and benefits of the investment.
Business Development Company – Kevin McCallum of LPL Financial Overconcentrated Customer Accounts
Business development companies (BDCs) were enacted by a Congressional Act in 1980 to stimulate the U.S. economy to encourage investments in American companies. BDCs are registered with the U.S. Securities and Exchange Commission (SEC) and regulated under the Investment Company Act of 1940, as closed end funds that invest primarily in debt through loans to small to medium-sized private companies with annual revenues from $25 million to $25 billion. BDCs role as a provider of “middle market” debt financing for U.S. corporations has exploded for BDCs since the credit crisis in 2008. Commercial banks no longer play this role since the Dodd-Frank banking reform rules created disincentives for banks to provide capital to this sector of the loan demand marketplace.
According to FINRA, non-traded BDCs are not suitable for all investors. Suitability standards generally require an investor to have either a net worth of at least $250,000, or an annual gross income of at least US $70,000. To improve investor ability to better evaluate non-traded BDCs, FINRA Notice to Members 15-02, provides greater transparency and suitability standards including updated account statement valuations. A financial advisor who fails to limit the amount invested in BDCs subjects a client to the risks of securities concentration. Securities concentration risk occurs when a portfolio is over-weighted in a particular asset class or investment product.
Former LPL Financial Broker Kevin McCallum Made Unsuitable Recommendations
From May 2017 through June 2019, McCallum recommended concentrated investments to 12 customers in a high-risk and highly speculative publicly-traded BDC that exhibited signs of financial distress, even though his customers had low or moderate risk tolerances and investment objectives and lacked any prior experience investing in BDCs.
According to FINRA, “the BDC that McCallum recommended held first and second lien secured loans, unsecured loans, and equity in small and medium-sized companies in a variety of industries, including construction, banking, telecommunications, pharmaceutical, and oil and gas companies. The risk of loss for investments in this BDC was magnified because it borrowed money. Additionally, the illiquidity of the BDC’s investments presented risk that it would be difficult for the BDC to sell such investments if required, causing it to realize significantly less than the value at which the BDC recorded the investments. Further, the BDC was exposed to interest rate risk that could affect its investment returns. From May 2017 through June 2019, the BDC’s net asset value (NAV) declined steadily as a result of write downs to its loan portfolio. Likewise, the BDC’s share price and the percentage of NAV at which it traded declined throughout the period.”
Disclosures Concerning Former LPL Financial Broker Kevin McCallum
Kevin McCallum of LPL Financial, who also worked at Cadence Bank from 2012 to 2019, has 6 disclosures on FINRA’s BrokerCheck, including 3 pending claims. For instance, a February 5, 2021 customer dispute against McCallum alleges that between August 2019 and October 2019, McCallum made unsuitable investment recommendations and concentrated account in Medley Capital Corporation. Another customer alleges that between October 2018 and December 2018 representative made unsuitable investment recommendations and concentrated claimants’ accounts in Medley Capital Corporation, per an October 8, 2020 customer dispute.
Medley Capital, Business Development Companies, and Kevin McCallum
As published on our blog earlier this year, on March 7, 2021, Medley Capital Corp. (NYSE: MCC), a direct subsidiary of Medley Management Inc. (NYSE: MDLY), filed for Bankruptcy Protection from creditors – mostly investors. Medley Management Inc., is an “alternative asset management firm offering yield solutions to retail and institutional investors” through two Business Development Companies, Medley Capital and Sierra Income Corp., a non-traded BDC.
Medley Capital Corp and Sierra Income Corp, invested in non-public companies, under the direction and advice of Medley Management’s affiliate SIC Advisors, LLC. The two BDCs made loans to non-public companies that did not have access to the traditional publicly traded bond markets to finance business operations. As such, the BDC loan portfolios were inherently more risky than traditional bond investments. At one time, Medley Capital’s national direct origination franchise as a provider of capital to the “middle market” companies in the U.S. reached $3.6 billion of assets through the management of the two business development companies, Medley Capital Corp. and Sierra Income Corp.
In the beginning of March 2021, Medley Capital filed for bankruptcy with reported Total Assets of $5,422,369 and Total Debts of $140,752,116. This is a staggering loss of capital when compared to the outstanding obligations of the Medley Capital and its affiliated companies, exclusive of Sierra Income Corp’s operating results. Sierra Income Corp. is a non-traded BDC which was subject to its own unique set of operating and financial costs, including high selling commissions, management fees and a high level of leverage which resulted in an increased portfolio breakeven rate of return. During the same period, Sierra Income Corp’s portfolio loan losses were evidenced by the precipitous drop in the Fund’s Net Asset Value, as quoted in secondary markets for the highly illiquid loan portfolio.
Investment Losses with Kevin McCallum at LPL Financial, Cadence Bank – Contact Us
Former customers of Kevin McCallum who held accounts with him at LPL Financial and/or Cadence Bank, and those who may have information relating to McCallum’s financial misconduct, are encouraged to contact Lawrence L. Klayman, Esq. of KlaymanToskes at (561) 542-5131.
About KlaymanToskes
KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration and litigation, on behalf of retail and institutional investors throughout the world in large and complex securities matters. The firm represents high net‐worth, ultra‐high‐net‐worth, and institutional investors, such as non‐profit organizations, unions, public and multi‐employer pension funds. KlaymanToskes has office locations in California, Florida, New York and Puerto Rico.
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KlaymanToskes
Lawrence L. Klayman, Esq., (561) 542-5131
lklayman@klaymantoskes.com
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