According to the Business Record, DeWaay Financial Network LLC of Clive and three other Iowa investment brokers are among 49 firms that have been sued in connection with the bankruptcy of a company accused of running a $485 million Ponzi scheme involving allegedly bogus oil and gas investments.
Provident Royalties LLC, based in Dallas, filed for bankruptcy protection last year in Texas after being charged by the U.S. Securities and Exchange Commission (SEC) with running the scheme from June 2006 through January 2009.
A lawsuit filed June 21 in the bankruptcy case accuses DeWaay and the other firms with failing “miserably in upholding their fiduciary obligations” when selling private placements in the securities.
The lawsuit seeks to return $285 million in investments and commissions paid to brokers to 7,700 investors. According to the lawsuit, DeWaay sold $850,000 in private placements and received $134,525 in commissions.
Trustee Milo Segner Jr. alleges in the lawsuit that commissions were paid to brokers as an inducement to prevent them from investigating the soundness of the investments.
“Each avoidable payment was part of a scheme that was used to ensure that proper due diligence was not performed, that a reasonable investigation was not conducted and that information that would otherwise be important to individual investors and other interested third parties would not be disclosed,” Segner said in the court document. “In other words, the commissions, fees and payments received from Provident Royalties encouraged and played a substantial role in the negligent and/or grossly negligent conduct of the broker-dealers, from the liquidating trustee’s complaint.”
In all, the 49 brokers were paid $34 million in commission on $485 million in investments.
According to the lawsuit, DeWaay was paid commissions between June and October 2008.
Other Iowa firms named in the court document are Ausdal Financial Partners Inc. of Davenport, which received $2,250; Eagle One Investments LLC of Washington, which received $42,500; and Okoboji Financial Services Inc. of Okoboji, which was paid $2.6 million.
Okoboji Financial Services notified the SEC and the Financial Industry Regulatory Authority (FINRA) on May 28 that it had withdrawn as an independent broker-dealer, InvestmentNews reported.
The company, unlike DeWaay, also was cited in the original SEC complaint for receiving a payout for selling the Provident notes.
Okoboji Financial sold $22 million in Provident securities, according to a document in Provident’s bankruptcy case.
In addition, the company was sued in April in federal court in South Dakota for selling $150,000 in private placements in a variety of companies, including Provident, to an 87-year-old widow.
FINRA censured Okoboji Financial and fined it $30,000 for selling private placements to prospective investors with whom neither the firm nor its representatives had a pre-existing relationship, in violation of rules regulating the sale of private placements.
In March, Okoboji Financial lost a $978,000 arbitration over unsuitable structured settlements, according to an InvestmentNews report on FINRA records.
Andrew Dorr, DeWaay’s chief operating officer, said he was confident the complaint against his company would be dismissed.
“There’s is a big difference with the way DeWaay did business and some bad-actor Iowa firms did business,” Dorr said.
The top sellers were Capital Financial Services Inc., Minot, N.D., with $33.7 million in sales; Next Financial Group, Houston, with $33.5 million; and QA3 Financial Corp., Omaha, with $32.6 million.
Three Provident officials orchestrated a Ponzi scheme by offering preferred stock and limited partnerships in oil and gas assets, according to a complaint filed by the SEC in July 2009 in the U.S. District Court for the Northern District of Texas.
An affiliated company, Provident Asset Management LLC, solicited retail broker-dealers such as DeWaay to enter into placement agreements for each offering. The brokers sold the stock to investors, according to an SEC statement on its website.
“Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights and interests, exploration and development,” the SEC said.
Less than half of the investor funds were used for those purposes. Instead, proceeds from the offering were used to pay expenses related to previous offerings and to pay returns to investors in those offerings, the SEC said.
If you have questions about investments you made in Provident Royalties with any of these firms, please contact the firm’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.
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