iCap Equity Chapter 11 Bankruptcy filing means Investors stand to lose everything. Brokerage firms and investment advisors are in the crosshairs of investor complaints for fraud and suitability.
What does the iCap Enterprises Bankruptcy mean for Investors?
On September 29, 2023, iCap Equity, LLC along with numerous affiliates, filed for Bankruptcy under Chapter 11 of the bankruptcy code in the Eastern District of Washington. This bankruptcy filing comes on the heels of iCap’s CEO stepping down and halting investor interest payments in March. This is a consolidated bankruptcy involving twenty-six affiliated companies. The bankruptcy filing reveals that iCap had between $50 million and $100 million in assets, and between $100 million and $500 million in liabilities. For anyone who invested in any iCap investment, an upside down asset to liability ratio is very bad news because it means that liquidation will pretty clearly lead to substantial liabilities going unpaid, this includes investors.
Under Chapter 11, a company seeks to restructure its debt while it still manages and operates the company. Unsecured creditors of the company, which means anyone who “loaned” funds through bonds or notes of any kind in the form of an investment, will likely be wiped out as part of the restructuring. Bankruptcy is not meant to help investors. It is meant to help the company. In most instances, wiping out the unsecured debt of the company is the goal of the entire process.
Investors should not be fooled into believing that they will get their money back from the bankruptcy. iCap literally discloses on the face of its bankruptcy petition that its debts outweigh its assets. This means all of the properties this entity allegedly owes, if sold at book value, will not result in a sufficient enough return to cover the liabilities of the company. To make matters worse, Chapter 11 restructuring is an expensive process and will likely result in tens of millions of dollars being paid to professionals retained by the restructuring agent. Last, Chapter 11’s of this size and complexity typically takes many years to complete, sometimes ten-plus years.
Allegations that iCap Committed Securities Fraud
An Amended complaint filed in the Superior Court of the State of Washington in King County, by several Chinese investors against iCap, its affiliated entities, and the Christensen brothers makes heinous allegations. The most disturbing allegations are that many of the projects in the iCap real estate portfolio have either not broken ground, or even worse, are not even owned by iCap. The complaint also alleges self-dealing by the Christensens designed to hide assets from creditors and to enrich themselves. The complaint provides details about several properties that iCap allegedly owns, but are of questionable value, like a lot being used for overflow parking for a golf course and other vacant lots, as opposed to the sophisticated developments represented by iCap in its private placement memoranda.
SEC Filings Indicate That Dozens of FINRA Broker-Dealers Sold iCap Private Placements
When a company in the United States seeks to raise money from investors by selling “private placements” must file a Form D with the Securities and Exchange Commission. This document discloses what brokerage firms have arranged with the issuer, here iCap, to sell their securities to investors. An Amended Form D filed in November 2021 for iCap Equity, LLC, identified the following brokerage firms as being part of the selling group offering debt securities in the company:
- Cambridge Investment Research, Inc.
- Ausdal Financial Partners
- Financial Goal Securities, Inc.
- Cobalt Capital, Inc.
- Center Street Securities, Inc.
- Chauner Securities
- IBN Financial
- Pariter Securities
- Advisory Group Equity Services
- Titan Securities
- Green Vista Capital, LLC
- Somerset Securities, Inc.
The filing discloses that, at the time of filing, almost $37 million had been raised in this offering with another $13 million left to me sold for a total of $50 million. Also disclosed is a whopping selling commission of $4 million or 8% of the total offering proceeds going to pay the brokers for selling this speculative debt security. Less than two years after this Form D was filed, iCap is bankrupt and these investors have almost certainly lost their entire investment.
What Did These Brokerage Firms and Financial Advisors Do Wrong?
On its face, any investment in iCap Equity or any of its affiliated entities, was a high risk speculative bet on the success of a private real estate company. Any investor who was solicited by a financial advisor to invest in iCap Equity or any of its affiliated entities, should have been clearly advised of that, as far as the risk spectrum of investments goes, iCap was near the top of the pyramid. Any representations by a financial advisor that the investments in iCap were secured by real property was false and could be grounds for a securities fraud claim against the firm that employed that financial advisor.
When a FINRA member brokerage firm like those identified above sells a private placement, they are bound by strict rules to perform due diligence on the investment and its issuer before soliciting any clients to invest. Before June 2020, these requirements were codified in the FINRA Suitability Rule and was called “reasonable basis suitability.” What this meant was, prior to soliciting any investors, the brokerage firm must have a reasonable basis, based on an investigation, that the investment is suitable for at least some of its customers. If not, then the firm cannot offer the investment to anyone.
After June 2020, Regulation Best Interest took over and the old Suitability Rule does not really apply. Instead, Regulation Best Interest requires all brokerage firms and their financial advisors to only recommend investments that they determine are in the best interests of their clients. FINRA recently reiterated in Regulatory Notice 23-08 that the gold standard due diligence notice, Regulatory Notice 10-22 applies and that under the “best interest” standard, a broker-dealer should investigate, at a minimum, the following information when evaluating a private placement:
- Regulatory and litigation history of the issuer and its management, including the criminal, disciplinary, regulatory, and litigation history associated with the issuer, its management, and any affiliate that may be materially involved in the issuer’s business, as well as the issuer’s compliance with the bad actor provisions under Rule 506(d)–(e).
- New material developments, including events that are or should be reasonably known to the member during an offering, for example, when there are ongoing legal proceedings or regulatory inquiries involving the issuer.
- Transactions or payments between an issuer and the issuer’s affiliates involving offering proceeds, including the terms of the transaction between the related parties and whether an arrangement presents a material conflict of interest for the issuer and, if so, the sufficiency of disclosure.
- Representations of the past performance of the issuer, its sponsor, or its manager to identify any such representations that may be misleading or exclusively selected based on positive results (or “cherry-picking”). This is particularly important when the representations pertain to specific prior issuances.
These “recommendations” are in addition to those items identified in Regulatory Notice 10-22. To be clear, a brokerage firm’s obligation to perform a high-level and detailed investigation into an issuer of private placement securities is clear and unmistakable. The failure to perform this investigation, or the ignorance of red flags that arise during this investigation, can be grounds for a securities fraud and negligence claim against the brokerage firm.
What Options Do iCap Investors Have to Recover Their Investment Losses?
Investors that were solicited by their financial advisor to invest in iCap private placements, can bring a claim in FINRA Arbitration against the brokerage firm for suitability and due diligence violations. The FINRA Arbitration process is a private arbitration forum and allows investors to sue their brokerage firm privately and seek recovery of their investment losses. The process tends to move quickly compared to litigation and discovery is limited to document exchange with no depositions allowed.
If you invested in any iCap investments based on the solicitation of a financial advisor, please call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation free consultation with a securities attorney. Stoltmann Law Offices is a contingency fee firm offering representation to defrauded investors across the country, which means we do not get paid until you do.