Complaint Review: LEAF Financial Corporation

This report accompanies several others on RifoffReport.com from third party users, alleging fraud, threats, extortion, harassment, deceptive lending, shady accounting, and deceptive payment practices in leasing arrangements at the hands of LEAF FINANCIAL CORPORATION (LEAF). It addresses related issues regarding LEAF, namely: (i) LEAFs financial engineered business plan, (ii) the parent and subsidiary companies with which LEAF is affiliated, (iii) exploitative tactics LEAF uses to procure funds for purchasing lease equipment, and (iv) the ongoing LEAF investment scheme which is being sold by slight of hand to unsuspecting investors, often depriving them of their life savings and hard-earned retirement funds.

THE PARTIES

LEAF is the commercial finance subsidiary of RESOURCE AMERICA, INC. /NASDAQ:REXI (REXI), a company that specializes in developing investment funds for outside investors and providing asset management services either by contract or by acting as the manager or general partner of its own sponsored investment funds. REXI and LEAF are in be together and are headquartered on different floors of the same building in Philadelphia, PA.. The edges blur between these two companies. Investor Relations Representatives at REXI, for example, answer the phones and interface with LEAF investors regarding client support. CHADWICK SECURITIES, INC. (CHADWICK) representatives used to serve the same role before CHADWICK changed its name to RESOURCE SECURITES, INC.. More about that appears below.

LEAF manages the leases for its own account, for institutions, and for individual investors. Among a variety of funding models and sales channels, LEAF ASSET MANAGEMENT, LLC, a limited liability company, acts as General Partner for a handful of non-traded, illiquid, limited partnership equipment leasing fund investment programs. LEAF ASSET MANAGEMENT, LLC is a wholly-owned subsidiary of REXI and is headquartered at the same address along with LEAF and REXI.

The subject LEAF partnerships are LEAF EQUIPMENT LEASING INCOME FUND I,  L.P. (LEAF I),  LEAF EQUIPMENT LEASING INCOME FUND II, L.P. (LEAF II), LEAF EQUIPMENT LEASING INCOME FUND III, L.P. (LEAF III), and LEAF EQUIPMENT LEASING INCOME FUND IV, L.P. (LEAF IV). For the most part, these partnerships invest in portfolios of new and used computers, industrial equipment, medical equipment, office equipment, restaurant equipment, building systems, communication equipment and garment care equipment that they lease to third parties.

RESOURCE SECURITIES, INC., formerly CHADWICK is REXIs wholly owned, registered broker dealer/subsidiary and dealer-manager for the offering of LEAF I, LEAF II, LEAF III and LEAF IV shares (units) to investors. REXIs chairman of the board and CHADWICKs chairman and chief executive officer are father and son. REXIs chief executive officer is brothers with CHADWICKs chairman and chief executive officer and the son of REXIs chairman of the board. REXI used to pay fees to CHADWICK for its services as the introducing agent. Chances are this same practice remains intact with RESOURCE SECURITIES, INC..

FACTUAL BACKGROUND

In their investment prospectuses, LEAF I, LEAF II, LEAF III and LEAF IV publish a lengthy list of warnings, including the facts below from LEAF III which are intended to be illustrations and not exhaustive. Any rational person armed with these flat facts would readily conclude that the LEAF equipment leasing investment contracts are stacked mercilessly against investors and would stay clear of them.

Were it not for a deceptive sales pitch and the paradigm of nefarious sales strategies that are woven into the corporate design for soliciting investors,  and were it not for a fleet of unscrupulous sales agents who are willing to lie, deceive, mislead, misrepresent, manipulate and commit investment fraud to sell these products, LEAF would not have a leg to stand on. In order to solicit to unsuspecting investors, LEAF offers agents a whopping 10.5% commission in an industry where the otherwise typical fee for fee only advisors is 0.50% - 2%. One is hard-pressed to find a higher-paying commission-based investment product than the LEAF equipment leasing income funds.

The exorbitant LEAF commission deftly opens the opportunity for untrustworthy financial advisors to sell LEAF shares by deceiving inexperienced investors (e.g., the elderly and unsophisticated customers ) via whatever persuasion tactics it takes to get them to sign on the dotted line. Motivated by the higher than normal, excessive LEAF commissions rather than by a clients age, needs, plans or financial condition, LEAF agents insidiously avoid explaining any of the following pitfalls to their victims:

1. The investment involves a high degree of risk.

2. You should purchase these shares only if you can afford a complete loss of your investment.

3. Approximately 20% in fees, expenses, commissions and the like is skimmed off the top of investors purchases upfront, leaving only approximately $80 of each $100 invested; right off the bat, investors lose an immediate approximately 20% of their investment.

4. The company relies on a general partner as manager, and the general partner has no prior experience managing a company like this.

5. The amount of fees and commissions investors have to pay does not stop with the 20% in initial fees, costs, and expenses mentioned above in number 3; the general partner receives substantial compensation which further reduces investors distributions.

6.  Dividends, which are unstable, are apt to be a deceiving return of investors capital in small increments, and these returns can be cut at any time. This practice is similar to that of a Ponzi scheme that uses new investors money or borrowed funds to pay prior investors.

7. Regulators and securities analysts do not closely scrutinize these types of investments, increasing their lack of transparency.

8. The LEAF board of directors establishes all market values for statement purposes, and this stated market value may have little relationship to the actual liquidating value, thus deceiving investors.

9. The general partner may have conflicts of interest, and such conflicts will be resolved by officers of the general partner or its affiliates and may not be favorable to investors.

To those with a strong moral compass, all this looks at least fishy. LEAF III attempts to protect itself by stating in its prospectus that the selling dealers must maintain documents in their files disclosing the basis on which they made the suitability determination of an investment in us by the investors to whom they sold our units. In this way, LEAF puts their agents in the awkward position of holding up the bus. The agent who sold this investment to Complainant, for example, has proven unable to provide any such documents upon formal request to do so.

In full awareness of Complainants lack of investment knowledge and because Complainant had expressed an objective to conserve the principal which had been bequeathed to her as an irreplaceable inheritance, the instance sales agent (under the self-concocted title of Senior Financial Advisor) recommended the wildly risky LEAF III units as a safe and prudent alternative to money market and mutual funds.

The subject agent recommended LEAF III as a reliable investment to help diversify Complainants portfolio. He represented LEAF III as a stable, share-program that paid a fixed rate of interest income without being affected by stock market volatility. At a time when bank APRs were approximately 5.3%, he completely ignored all appropriate potential recommendations for his clients financial needs, basing his motivation solely instead on his own desire for profits and on the opportunity to line his pockets with LEAFs hefty 10.5% commission.

Complainants combined holdings in LEAFs non-traded, illiquid, private placement, equipment leasing fund are huge. According to information that was provided to investors in June 2001, the average LEAF III shareholder owns 467.979 units. Claimants combined investment in LEAF III, a placement that totaled 1,500 units while completely ignoring her goals, financials and risk tolerance, represents more than three times the average LEAF III shareholders position.

Priced at $100.00 per unit at the time of sale, LEAF III offers no units-redemption program, meaning they will not buy back the otherwise illiquid investment upon request of the investor. Within a couple of years after purchase, the originally agreed upon distributions (the fixed income payment so crucial to the sales pitch, payments which turned out to be nothing more than a return of investors capital in small increments) were reduced from 8.5% to 2%. The investment is now estimated to be worth only $2.00 2.25 per unit (i.e., 2 cents on a dollar) on the secondary market. Accounting for deceiving distributions, Complainant has lost approximately $110,000 on the LEAF III scheme. (Actual amount of loss will be known only if and when a buyer is found.)

PARTICULARS OF THIS COMPLAINT

There are a multitude of well-dressed people in this industry; but few are willing to address the scandal surrounding it. While Complainant is in pursuit of a FINRA case involving the sales agent, this Ripoff Report is to focus on REXI and LEAF and to bring evidence forward regarding one individual document that has not yet been made public.

Having purchased the LEAF III investment in 2007, Complainant contacted LEAF in April 2009 to request an accounting of the estimated fair value of her $100.00 LEAF III units. (Except for LEAFs reply to this request and other requests like it that Complainant has made annually, LEAF III customarily fails to report any estimated values of units. Instead, it lists only Amount Invested on its monthly statements to investors.)

In a letter dated March 19, 2009, Cora D. Pappas, Executive Director of Investor Relations-Direct Participation Programs for REXI and LEAF provided Complainant with a distribution history, informing her that the estimated fair value per unit for LEAF Equipment Leasing Income Fund III, L.P. was $99.00 per unit on December 31, 2008.

The $99.00 estimated value was obviously deceptive, incorrect, and misleading. It failed to account for the approximately 20% which the prospectus admits is taken off the top of the purchase value to pay fees, expenses, commissions etc., and it failed to reflect a net loss of -$17.7 (14.75%) for the year 2008, a loss which LEAF later reported to investors in 2011.

A more accurate accounting per unit would have been closer to $65.00 to $70.00 per unit. The incorrect value lulled Complainant into believing that her LEAF III investment was performing according to the sales agents misrepresentations. Had she been given the truth, she may have chosen to begin looking for ways to liquidate her LEAF III units. But a senior executive misrepresented the business outlook of the company without reasonable basis.

One other factor that is not being openly disclosed to LEAF investors although news of it is public: In 2010, LEAF created a new subsidiary which engages in equipment leasing, LEAF COMMERICAL CAPITAL, INC. (LEAF COMMERCIAL). Now, all new deals go through LEAF COMMERICAL into a Guggenheim funding pools, and busy trying to grow LEAF COMMERCIAL, LEAF no longer directs viable deals to LEAF I, LEAF II, LEAF III and LEAF IV where they stand to make little or no profit.

By the time Complainant discovered the above deceptions, LEAF III units had declined precipitously. In June 2011, LEAF mailed investors a Notice of Consent Solicitation, encouraging them to amend the LP Agreement, so that the company could invest all monies into new leases and not pay any cumulative interest. This notice fell on the heels of several duplicitous statements in the LEAF III prospectus, namely: (i) although limited partners are not liable for the obligations of a limited   partnership, they may be held liable if they participate in the control of the limited partnerships business; (ii) it has not been clearly established in all states whether the right to approve some amendments to our partnership agreement constitutes participating in the control of a limited partnerships business; (iii) investors could be held personally liable for our losses beyond the amount you paid for your units. In addition, you may be required to return to us any distribution you received from us if you knew at the time the distribution was made that it was improper because it rendered us insolvent.

Connecting the dots between these statements and LEAFs conduct, Complainant lost all confidence in LEAF and LEAF III and looked for ways to get out from underneath this precarious involvement and to recoup some of her losses. She hired an attorney to represent her in a FINRA complaint against the sales agent and his broker-dealer firm (Multi-Financial Securities Corporation). REXI, LEAF, LEAF III and RESOURCES SECURITIES, INC., formerly CHADWICK, all unnamed respondents in the FINRA action, have eluded scrutiny.

Readers should be aware that FINRA is a self-regulating body, of which any agent or firm brought forward for arbitration is a FINRA member. FINRA arbitrators are known to split the baby. Investors are said to win FINRA arbitration cases only 40-something percent of the time, and when they do, they recover an average of roughly 35% of their claimed damages. Investors also, more often than not, must pay costs, expenses, attorneys fees and expert fees, all of which can deplete their meager recovery amounts by as much an additional 50%. Rather than pursue her complaint via FINRA arbitration, Complainants attorney recommended that she liquidate her investments on the secondary market for a fraction of their worth in order to substantiate a loss and to negotiate a settlement via mediation. At this rate, Complainant is looking at losing as much as 60% of her irreplaceable inheritance funds.
 
Articles targeted at unhappy LEAF investors who may want to recover their LEAF III  losses are scattered across the Internet. Given that no more than 35 LEAF III shareholders are to be non-accredited investors (i.e., banks, insurance companies, millionaires and the like) under SEC Regulation D, the prevalence of online attention targeted at non-accredited LEAF III investors prompts the suspicion of a potential Regulation D violation. A mere 35 non-accredited investors would not seem likely to attract such a level of attention.

DETERMINATION SOUGHT

This Ripoff Report is to promote interest in the need for an SEC or judicial complaint or for class action against REXI and LEAF. When fraud of this magnitude is accomplished successfully, it requires an enormous amount of skill and dedication.

The SEC, in its commitment to protecting investors, has long held that information in prospectuses "furnishes the background against which the salesman's representations may be tested, "and that "those who sell securities by means of representations inconsistent with it do so at their peril"  See Dept. of Enforcement v. Reynolds 2001 NASD Discip. LEXIS17, at #35 (J7n. 25, 2001); see also In re Klein, 52 S.E.C. 1030, 1036 (1996) (holding that broker's delivery of a prospectus to an investor did not excuse broker's failure to inform the investor fully of the risks of the investment package the broker proposed); In re Foster, 51 S.E.C. 1211, 1213 n.2 (1999) ("Notwithstanding [broker] Foster's distribution of the prospectuses, he is liable for making untrue statements of material facts and omitting to state material facts.").

As early as 1963, in a case in which a registered broker-dealer made false and misleading statements in the offer and sale of securities, the SEC stated: "At the expense of restating the obvious, we emphasize that compliance with these requirements for delivery of a prospectus or offering circular does not, however license broker-dealers or their salesmen to indulge in false or fanciful oral representations to their customers. The anti-fraud provisions of the Securities Act and the Securities Exchange Act apply to all representations whether made orally or in writing, during or after the distribution. We have repeatedly held that the making of representations in the sale of securities unsupported by a reasonable basis is contrary to the obligation of fair dealing imposed on broker-dealers and their salesmen by the securities laws.  This obligation is not diminished because a prospectus or offering circular containing information specified by the Act and our rules has been or is to be delivered. Such information furnishes the background against which the salesman's representations may be tested.  Those who sell securities by means of representations inconsistent with it do so at their peril". In Re Ross Secs., Inc 41 S.E.C., at 510. 

Ninth circuit federal courts have also held that written risk disclosures in a prospectus do not bar investors' claims for damages based on contrary oral representation as a matter of law. In Casella v. Webb 883 F2nd 805 (9th Cir. 1989) the 9th circuit held that constructive knowledge of the contents of written risk disclosures cannot bar a purchaser's recovery under Section 12(a) (2). In Casella the investors did not read the offering memorandum which described the underlying investment as risky, and instead, relied on their broker's contrary oral representations. 

In securities arbitration, it is often claimed, merely because the claimants were provided with a prospectus which set forth all relevant and necessary disclosures, that the claimants are legally charged with knowledge of those disclosures. The basic issue in question is constructive notice, and within the Ninth Circuit it has been held that receipt of a prospectus does not necessarily place an individual on constructive notice of what is contained within that prospectus. Even if some cases do intend to hold that mere receipt of a contradictory prospectus necessarily starts the fraud or misrepresentation statute of limitations running, the Court does not believe that the Ninth Circuit would or should adopt such a broad vision of constructive notice.

For example, in Rochelle v. Marine Midland Grace Trust Co. of New York, 535 F. 2d 523, 531-533 (9th Cir. 1976), the Ninth Circuit refused to impute knowledge of proxy materials filed with the Securities and Exchange Commission to a company holding debentures, even though it was a sophisticated investor [emphasis added].  In declining to do so, the Rochelle court explicitly invoked the fundamental policy considerations underlying the securities laws:  We are mindful that the overriding purpose of Section 10(b) and Rule 10b-5 was to protect the purity of the securities market and that private claims for relief thereunder are a means to that end.  We would impair the larger purpose if we were to expand the concept of constructive notice to defeat such claims [emphasis added]. Id. at 522-33.

Luksch v. Latham, 675 F.Supp. 1198, 1201 (N.D. Cal.1987),  this ruling by the Luksch  court, in regard to the receipt of a prospectus, is merely an extension of the general principles of California and Ninth Circuit law in regard to what constitutes adequate notice to an individual in regard to a fraud or misrepresentation claim.  Following Luksch, the court rejected the defendant's attempt to have the court adopt a per se imputation rule [regarding receipt of the prospectus amounting to knowledge of clear contradictions between the prospectus and oral representations made to the investor].  Luksch, 675 F. Supp. at 1201-03. 

Instead, the court noted that it must consider various factors before imputing constructive knowledge, including access to information, knowledge and business sophistication of the plaintiff, existence of long standing business relationships and the nature of the plaintiff's allegations.  Luksch, 675 Supp. at 1203.  The court concluded that constructive knowledge of information in a prospectus 'should not be legally imputed to investors except in the unusual case' [emphasis added].  Luksch 675 F. Supp. at 1199.

Wenzel v. Patrick Petroleum Co., 745 F. Supp. 211, 218 (D.Del. 1990).

Johnson v. CIGNA Corp., 916 P.2d 643, 649 (Colo. App. 1996.  The court stated that, "Defendants respond that the plaintiffs were placed on inquiry notice of any alleged unsuitability when they were given the PPM's and Subscription Agreements, which stated that the investments were high risk. . . This contention assumes, however, that plaintiffs were cognizant, or could be cognizant, of the application of the term "risky" to their individual investment situations. To say, as defendants argue, that a risky investment is one in which the investor could lose all of his or her money begs the question, since every investment has that possibility. If a fiduciary duty did exist between plaintiffs and defendant's, plaintiffs' level of inquiry of the significance of the details of their financial status would be altered.  

Complainant is available to collaborate with the media, attorneys, regulators, the FBI, securities analysts, consumer advocates, government officials, injured LEAF investors, damaged LEAF lessees and others to bring justice to this ongoing concern. Please make contact via RipoffReport.com. Genuine appreciations for you for your support and attention!