Posts tagged ‘DBSI scam’
Expert Says Some Brokerage Firms Performed Poor Private Placement Due Diligence
A recent article by Bruce Kelly of the investmentnews.com reported the opinion of Gordon Yale, a forensic accountant, who has served as an expert for dozens of investors who have brought claims against brokerage firms related to the sale of failed private placement investments issued by companies like DBSI, Inc., Medical Capital Financial Corp., and Shale (Provident) Royalties. In Mr. Yale’s expert opinion, “Broker-dealers that sold billions of dollars in allegedly fraudulent private placements failed massively in their due-diligence responsibilities to investors.”
Yale likened the due diligence failures of firms that sold these private placements to the failures of large banks to perform due diligence on bad mortgage backed securities that led to the mortgage crisis. He said, “It was basically the same recklessness…but it was done by middle- or lower-tier firms and [with] a different set of products.”
Certainly, firms that sold these investments contend that they did do adequate due diligence. However, recent arbitration awards as well as fines and sanctions issued by securities regulators like the Financial Industry Regulatory Association (FINRA) indicate that they are at least skeptical of the due diligence work performed. Kelly notes that FINRA recently fined the former president of Capital Financial Services $10,000 related to the sale of Medical Capital and Provident Royalties. He also noted that only one of the cases that Yale has worked on necessitated his testimony in arbitration (many settled in advance of arbitration) and in that case a $1.2 million award was ordered to be given to an investor by Securities America Inc. and a broker.
In the investmentnews.com piece Yale indicated his opinion that firms too often relied on 3rd party due diligence reports, he said, “They viewed those reports as the end of the process, rather than the beginning. There’s a notice to [Finra] members, 05-48, that basically says you can outsource any function, but you can’t outsource your responsibility for compliance with federal securities laws or regulations.” Yale feels like firms, especially one’s like Securities America who sold $700 million in Medical Capital notes, should have hired an independent CPA to conduct financial due diligence on the investments.
The White Law Group is all too familiar with the difficulties investors have had over the last several years with failed private placements. The firm has represented and currently represents many investors who have suffered damages as a result of the recommendation of their financial professional to purchase private placement investments from companies like DBSI, Medical Capital, and Shale (Provident) Royalties. We have found that in many cases the FINRA registered firms failed in their fiduciary duty to perform adequate due diligence and to disclose the risks involved with these investments. Brokerage firms that fail in this fiduciary duty may be liable in FINRA dispute resolution claims to recover investment losses.
If you are concerned about an investment you made in a private placement like those from DBSI, Medical Capital, and Shale (Provident) Royalties and would like to speak to an attorney about your potential to recover investment losses through a FINRA claim please call out 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.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.
Update on the White Law Group’s Investigation into DBSI, Inc. and Broker-Dealers that sold DBSI TIC and/or DBSI REIT investments
The White Law Group is continuing to pursue securities fraud claims against broker-dealers who invested their clients’ funds in DBSI TIC (tenants in common) and DBSI REIT investments. In April, the firm filed a Financial Industry Regulatory Authority (FINRA) arbitration statement of claim involving investment losses in various private placements, oil and gas partnerships, and real estate tenants-in-common investments, including DBSI. The claim, filed against DeWaay Financial Network, seeks recovery of investment losses of over $500,000.
In the cases the firm is investigating, the brokerage firms allegedly represented that the DBSI TIC (tenants-in-common) investments provided a 6-7% guaranteed return and was a perfect investment for investors seeking to do a 1031 exchange. Unfortunately, unbeknownst to the investors, it appears that the brokerage firms failed to perform reasonable due diligence in recommending the DBSI TIC investments to investors.
DBSI filed for bankruptcy protection in late 2008 and many investors in DBSI investments have suffered catastrophic losses.
Although DBSI acted as the sponsor for various properties, the investors actually purchased a percentage interest in specific properties. Upon information and belief, many of those properties are listed below.
If you have questions about investments you made in DBSI or any of the properties listed below the securities attorneys of The White Law Group may be able to help. To speak with a securities attorney, please call the firm’s Chicago office at (312) 238-9650.
DBSI ABBOTTS BRIDGE LEASECO LLC, DBSI ACADEMY PARK LOOP LEASECO LLC, DBSI ALLISON POINTE LEASECO LLC, DBSI ALWORTH LLC, DBSI ANNA PLAZA LEASECO LLC, DBSI ARLINGTON TOWN SQUARE LEASECO LLC, DBSI ARROWHEAD LEASECO LLC, DBSI ATLANTIC BOULEVARD LLC, DBSI AVENUES NORTH CENTER LEASECO LLC, DBSI BANDERA TRAILS LEASECO LLC, DBSI BATTLEFIELD STATION LEASECO LLC, DBSI BAYMEADOWS LEASECO LLC, DBSI BEACON POINT LLC, DBSI BELTON TOWN CENTER LEASECO LLC, DBSI BRECKINRIDGE LEASECO LLC, DBSI BRENDAN WAY LEASECO LLC, DBSI BROADWAY PLAZA LEASECO LLC, DBSI BROOKFIELD PELHAM LEASECO LLC, DBSI CAMBRIDGE PLACE LEASECO LLC, DBSI CAMDEN VILLAGE ASSETCO LLC, DBSI CAROLINA COMMONS LEASECO LLC, DBSI CHATTAHOOCHEE LLC, DBSI CLEAR CREEK SQUARE LEASECO LLC, DBSI CLEAR CREEK SQUARE LLC, DBSI COLONNADE WEST LAKE LEASECO LLC, DBSI COLONNADE WEST LAKE LLC, DBSI COLONY COMMONS LLC, DBSI COPPERFIELD TIMBERCREEK LEASECO LLC, DBSI CRANBERRY LEASECO LLC, DBSI CROSS POINTE LEASECO LLC, DBSI CROSSTOWN WOODS LEASECO LLC, DBSI CURRELL CENTRE LLC, DBSI DEZAVALA CROSSING LEASECO LLC, DBSI DEZAVALA CROSSING LLC, DBSI DRAPER LEASECO LLC, DBSI EAGLE RIDGE LLC, DBSI EAGLES LANDING LEASECO LLC, DBSI EAST 21ST STREET LLC, DBSI EMBASSY TOWER LEASECO LLC, DBSI FAIRLANE GREEN LEASECO LLC, DBSI FAIRLANE GREEN LLC, DBSI FAYETTE TOWN CENTER LEASECO LLC, DBSI FLORISSANT MARKET PLACE LEASECO LLC, DBSI FRIAR’S BRANCH CROSSING LLC, DBSI GADD CROSSING LEASECO LLC, DBSI GOSHEN VILLAGE LLC, DBSI GRANT STREET PORTFOLIO LEASECO LLC, DBSI GREEN STREET COMMONS LEASECO LLC, DBSI GREEN STREET COMMONS LLC, DBSI HAMPTON LEASCO LLC, DBSI HAVERFORD PLACE LLC, DBSI HICKORY PLAZA LEASECO LLC, DBSI HICKORY PLAZA LLC, DBSI HIGHLANDS & SOUTHCREEK LEASECO LLC, DBSI HOLLY HILL LEASECO LLC, DBSI HOUSTON LEVEE GALLERIA LEASECO LLC, DBSI HOUSTON LEVEE GALLERIA LLC, DBSI INVESTORS XIV NORTHGATE LLC, DBSI KEMPER POINTE LEASECO LLC, DBSI KENWOOD CENTER LEASECO LLC, DBSI KEYSTONE COMMERCE LEASECO LLC, DBSI LAKE ELLENOR LEASECO LLC, DBSI LAKE NATOMA LEASECO LLC, DBSI LAKE PARK TOWER LEASECO LLC, DBSI LAKEVIEW SOJOURN LLC, DBSI LANDMARK TOWERS LEASECO LLC, DBSI LANDMARK TOWERS LLC, DBSI LANTERN BEND LLC, DBSI LEGACY COUNTRY LEASECO LLC, DBSI LEGACY MAIN & HIGH LEASECO LLC, DBSI LEGAL TRUST, LLC, DBSI LIFESTYLE CENTER LEASECO LLC, DBSI LINCOLN PARK 10 LEASECO LLC, DBSI MANSELL FOREST LEASECO LLC, DBSI MANSELL PLACE LEASECO LLC, DBSI MANSELL PLAZA LLC, DBSI MCCANN LLC, DBSI MEADOW CHASE APARTMENTS LEASECO LLC, DBSI MEGAN CROSSINGS LEASECO LLC, DBSI MERCY MEDICAL LLC, DBSI METROPOLITAN SQUARE LEASECO LLC, DBSI MISSOURI LEASECO LLC, DBSI NORTH LOGAN RETAIL CENTER LEASECO LLC, DBSI NORTH PARK II LLC, DBSI NORTH PARK III LLC, DBSI NORTH STAFFORD LEASECO LLC, DBSI NORTH STAFFORD LLC, DBSI NORTHGATE LEASECO LLC, DBSI NORTHGATE LLC, DBSI NORTHLITE COMMONS II LEASECO LLC, DBSI NORTHPARK RIDGELAND LEASECO LLC, DBSI NORTHPOINTE TOWER ASSETCO LLC, DBSI NORTHPOINTE TOWER LLC, DBSI OAKWOOD PLAZA LEASECO LLC, DBSI OLD NATIONAL TOWN CENTER LEASECO LLC, DBSI OLYMPIC LLC, DBSI ONE EXECUTIVE CENTER LEASECO LLC, DBSI ONE HANOVER LLC DBSI OWENS PLACE ASSETCO LLC, DBSI OWENS PLACE LLC, DBSI PARK CREEK-GAINESVILLE LEASECO LLC, DBSI PARK PLAZA RETAIL CENTER LLC, DBSI PARK PLAZA RETAIL LEASECO LLC, DBSI PARKWAY III LEASECO LLC, DBSI PEACHTREE CORNERS PAVILION LEASECO LLC, DBSI PEACHTREE CORNERS PAVILION LLC, DBSI PHILLIPS LLC, DBSI PINEHURST SQUARE EAST LEASECO LLC, DBSI PINEHURST SQUARE WEST LEASECO LLC, DBSI PORTOFINO TECH CENTER LEASECO LLC, DBSI RED MOUNTAIN LEASECO LLC, DBSI RED MOUNTAIN LLC, DBSI RENAISSANCE LEASECO LLC, DBSI REPUBLIC LEASECO LLC, DBSI REPUBLIC LLC, DBSI RIVERSIDE LLC, DBSI RIVERSTONE MEDICAL LLC, DBSI ROAD 68 RETAIL CENTER LEASECO LLC, DBSI ROMENCE VILLAGE II & III LEASECO LLC, DBSI ROMENCE VILLAGE II & III LLC, DBSI ROSE GARDEN LEASECO LLC, DBSI ROYAL MONTREAL LLC, DBSI ROYAL MONTREAL MEZZ LLC, DBSI SAM HOUSTON TECH CENTER LEASCO LLC, DBSI SAPPHIRE POINTE LEASECO LLC, DBSI SENTRY STATION ASSETCO LLC, DBSI SENTRY STATION LLC, DBSI SHARPSTOWN COURT LLC, DBSI SHEPHERD’S CROSSING LEASECO LLC, DBSI SHERIDAN LLC, DBSI SHERWOOD PLAZA LEASECO LLC, DBSI SHERWOOD VILLAGE LLC, DBSI SHOPPES AT MISTY MEADOWS LEASECO LLC, DBSI SHOPPES AT TRAMMEL LEASECO LLC, DBSI SHOPPES AT TRAMMEL LLC, DBSI SHOPS @ KATY LLC, DBSI SHOPS EAST WEST CONNECTOR ASSETCO LLC, DBSI SHOPS EAST WEST CONNECTOR LLC, DBSI SHOPS OF TURKEY CREEK LLC, DBSI SILVER LAKES LEASECO LLC, DBSI SILVER LAKES LLC, DBSI SOUTH 75 CENTER LEASECO LLC, DBSI SOUTHPORT PAVILION LEASECO LLC, DBSI SPALDING TRIANGLE LEASECO LLC, DBSI SPRINGVILLE CORNER LEASECO LLC, DBSI SPRINGVILLE CORNER LLC, DBSI ST TOWER LEASECO LLC, DBSI ST TOWER LLC, DBSI ST. ANDREWS PLACE LEASECO LLC, DBSI STONE GLEN VILLAGE LEASECO LLC, DBSI STONE OAK CROSSING LLC, DBSI STONY BROOK SOUTH LEASECO LLC, DBSI STREETSIDE AT TOWNE LAKE LEASECO LLC, DBSI SUMMIT SQUARE LLC, DBSI THISTLE LANDING LEASECO LLC, DBSI THISTLE LANDING LLC, DBSI TOPSHAM FAIR MALL LEASECO LLC, DBSI TORREY CHASE LEASCO LLC , DBSI TOWER PARK LLC, DBSI TREASURE VALLEY BUSINESS CENTER LEASECO LLC, DBSI TRINITY PLACE LEASECO LLC, DBSI TRINITY RIDGE BUSINESS CENTER LEASECO LLC, DBSI TRINITY RIDGE BUSINESS CENTER LLC, DBSI TWO NOTCH RD. LEASECO LLC, DBSI VALLEY VIEW LLC, DBSI VILLAGE AT OLD TRACE LLC, DBSI VILLAGE TOWNHOMES LLC, DBSI WEST OAKS SQUARE LEASECO LLC, DBSI WILLIAMSBURG LLC, DBSI WILLOW BEND LLC, DBSI WILSON ESTATES LEASECO LLC, DBSI WINCHESTER OFFICE LEASECO LLC, DBSI WINDCOM COURT LEASECO LLC, DBSI WISDOM POINTE LEASECO LLC, DBSI WISDOM POINTE LLC, DBSI WISTAR CENTER LLC, DBSI WOODLANDS MEDICAL OFFICE I LEASECO LLC, DBSI WOODSIDE CENTER LEASECO LLC.
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.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.
Broker Dealers Suing Insurance Carriers Over Coverage For Customer Claims
According to the Investment News, three independent broker-dealers are suing their respective insurance carriers for failing to cover investors’ legal claims, with one charging that its insurer has exposed it to “financial ruin.”
The broker-dealers, Next Financial Group Inc., Berthel Fisher & Company Financial Services Inc. and Brecek & Young Advisors Inc., allege that the insurance carriers are refusing to meet the maximum coverage amounts for claims that investors have filed over various private placements, real estate investments and unsuitable investment products.
The insurance carriers, however, contend that the maximum coverage is millions of dollars less than the broker-dealers seek, because the investors’ lawsuits are related to one another and arise, at least in the case of Next Financial and Berthel Fisher, from the failure of a specific product.
For example, in Next Financial’s lawsuit against Arch Specialty Insurance Co. in U.S. District Court in Dallas, the broker-dealer’s amended complaint, which was filed last month, claims that it has liability limits of $2 million per occurrence and a total coverage limit of $15 million per policy period.
Next Financial has $9.5 million in claims stemming from its sales of Provident Royalties LLC private placements and wants Arch to cover them. Arch, in its counterclaim, alleges that the maximum amount it should pay is $2 million because all the claims are related to one product.
Next Financial is one of the firms named in a class action, also in federal court in Dallas, alleging damages by broker-dealers as a result of the sale of Provident private placements. Next Financial is alleging that Arch is in breach of contract and that its positions make resolution of the class action “impossible and expose Next to financial ruin.”
In total, Next Financial sold $43 million of Provident and received more than $3 million in commissions and fees. Provident, which raised $485 million and sold its oil and gas deals through dozens of independent broker-dealers, was charged with fraud in 2009 by the Securities and Exchange Commission.
Barry Knight, chief executive of Next Financial, didn’t return calls last week seeking comment.
Conflicts between broker-dealers and insurance carriers over whether claims can be bundled together or are “interrelated” are becoming more common, industry executives and attorneys said.
If firms are thinly capitalized and have little cash reserved for legal costs and lawsuits, the results could prove debilitating, particularly if firms suffer big dollar losses in arbitration claims, executives said
Before it closed its doors this month, QA3 Financial Corp. was also involved in a lawsuit with its insurance carrier, Catlin Specialty Insurance Co., disputing the extent of its coverage over private investments, claiming that it faced bankruptcy if the matter was not resolved. (See related stories on Pages 4 and 16.)
In the dispute between Berthel Fisher and Arch, the former is claiming $7 million in aggregate coverage, while the latter is claiming a $1 million limit to all related claims. Berthel’s lawsuit is in federal court in Cedar Rapids, Iowa.
As with Next Financial, the Berthel claims stem from client lawsuits regarding one product.
In this case, it wasn’t a private placement but a series of real estate deals known as tenant-in-common exchanges that were packaged by DBSI Inc. DBSI filed for Chapter 11 bankruptcy protection in November 2008.
The trustee in the DBSI bankruptcy is seeking to claw back $49 million in commissions from broker-dealers that sold DBSI. Berthel reportedly generated $5.6 million in commissions from DBSI, according to bankruptcy court documents.
According to the Berthel and Arch lawsuits, investors have filed up to 20 different arbitration claims against Berthel with the Financial Industry Regulatory Authority Inc.
Tom Berthel, chief executive and owner of Berthel Fisher, declined to comment on the firm’s lawsuit against Arch, saying only: “I hope there is a resolution to it. I think there can be.”
Mr. Berthel added: “We’re not interested in going out of business.”
He said that recent chatter among broker-dealers included “badmouthing” some firms, particularly after the collapse of QA3 Financial this month.
“There’s talk of who’s next,” Mr. Berthel said, adding that he has no interest in indulging in speculation.
“Let’s figure out what caused some of the issues with insurance carriers,” he said. “I’m a little disgusted” with the recent industry gossip about broker-dealers potentially closing, Mr. Berthel said.
Regarding QA3, he said that it was “not good for the industry to have a firm go down like that” and that it was particularly harmful to the advisers and their clients, as they were scrambling to find a firm to land their accounts.
Attorneys for Arch in the lawsuits by Next Financial and Berthel Fisher didn’t return calls seeking comment.
Brecek & Young is suing Lloyds of London Syndicate 2003 over an arbitration claim that it settled in 2009 for about $1.4 million, which includes a settlement with investors and legal costs. Lloyds has paid only $390,000 toward Brecek & Young’s defense-and-indemnity expenses, according to court filings.
The firm is suing Lloyds in federal court in Kansas City, Kan. David Buchanan, an attorney for Lloyds, didn’t return a call seeking comment.
Securities America Inc. acquired Brecek & Young in 2008, and Janine Wertheim, a spokeswoman for Securities America, said that the lawsuit “involves Brecek & Young pursuing coverage for a previously known case that arose prior to Securities America‘s acquisition” of the firm.
If you have questions about investments you made with Next Financial, Berthel Fisher, or Brecek & Young, the securities attorneys of The White Law Group may be able to help. For a free consultation, call 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.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.
FINRA focused on possible securities fraud Involving Private Placements and Non-Traded REITs
Broker-dealer sales of opaque and illiquid private investments are squarely in the sights of securities regulators at the Financial Industry Regulatory Authority Inc.
In fact, Regulation D private placements and “close cousin” non-traded real estate investment trusts are listed as the first and second areas of focus, respectively, for FINRA’s enforcement department, according to James Shorris, executive vice president and executive director of enforcement.
Watching the marketplace for Reg D deals, known as such for how they are filed with the Securities and Exchange Commission, is a “major, major initiative” at FINRA, Mr. Shorris said Tuesday. He was speaking on a panel at the annual meeting of broker-dealer members of the Financial Services Institute, an advocacy group for independent firms.
He said FINRA officials have monitored failures at some broker-dealers that sold private placements as suitable investments for their clients — but noted that there were some firms that failed to perform appropriate due diligence on certain private offerings.
During his comments, he specifically named the offerings of Medical Capital Holdings Inc. and Provident Royalties LLC. Both of those offerings raised hundreds of millions of dollars through sales by independent broker-dealers. In 2009, the SEC charged both with fraud.
Mr. Shorris then pointed to the sale of non-traded REITs as a big focus of FINRA staff. “Those may not have been sold properly by reps to customers,” he said, with the reps at times not telling clients about the lack of liquidity that came after buying the product (as well as the general lack of oversight of these investments compared with more scrutinized investments such as stocks, mutual funds, etc.)
FINRA is also zeroing in on exotic products such as reverse convertibles and leveraged exchange-traded funds, and anti-money-laundering issues at broker-dealers.
If you have suffered investment losses in private placement or non-traded REIT investments, the securities attorneys of The White Law Group may be able to help.
The firm is currently representing numerous investors in cases involving private placements and non-traded REITs, including cases involving Medical Capital, Provident Royalties, DBSI, Desert Capital REIT, Behringer Harvard (among others).
For a free consultation, please call 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 attempt to recover their investment losses.
FINRA Rules on Private Placements
Private Placements have become a hot button issue for FINRA regulators and securities attorneys representing investors. The number of private placement cases has spiked considerably over the past few years in large part because of the sizable commissions brokerage firms generate from selling private placements. We are currently handling numerous cases involving private placement investments that went under like DBSI, Medical Capital, and Provident Royalties (among others).
New rules have been implemented requiring full disclosure of these commissions, and even more rules are being contemplated. The following is a brief overview of those FINRA Rules, as well as some of the relevant case law that discusses a brokerage firms obligation to perform due diligence on a private placement investment prior to recommending it to any of its clients.
The first significant rule that applies in private placement fraud cases is NASD Rule 2310. NASD Rule 2310 states that a brokerage firm must have a reasonable grounds to believe that a customer recommendation to purchase, sell or exchange a security (including a private placement investment) is suitable for the customer. See, also FINRA Notice to Member 03-71 concerning non-conventional investments and Notice to Member 05-18 concerning private placements of tenants-in-common interests.
This suitability analysis has two principal components. First, the “reasonable basis” suitability analysis requires the brokerage firm to have a reasonable basis to believe, based on a reasonable investigation, that the recommendation is suitable for at least some investors. This is where certain private placements, such as Medical Capital, DBSI, and Provident, fail the suitability test. Had brokerage firms perform the proper amount of due diligence on these investments, the firms would have realized that ponzi schemes are obviously not appropriate investments for any investors.
The second prong, is the “customer specific suitability analysis, which requires that the brokerage firm determine whether the security is suitable for the customer to whom it would be recommended. This is often referred to as the Know Your Customer Rule, but in essence, brokerage firms are required to account for a client’s age, investment experience, net worth, and investment goals in determining whether an investment is appropriate for a particular client. Private placements often fail the suitability test for this reason. Private placements, by there very nature, are often risky investments, which are virtually never appropriate for conservative or retired investors.
In addition to determining suitability, brokerage firms have a high due diligence requirement. Specifically, brokerage firms are charged with exercising a high degree of case in investigating and independently verifying an issuer’s representations and claims. Additionally, when an issuer is seeking to finance a new speculative venture, a broker dealer can not blindly rely on the issuer’s representations and are required to be particularly careful in this instance and must verify the issuer’s obviously self-serving statements.
A brokerage firm has an even greater responsibility to perform due diligence on a specific investment if the firm is deemed to be affiliated in some way with the issuer. This can occur if the brokerage firm assists the company in preparing the private placement memorandum or if there are red flags present.
Finally, brokerage firms are required to follow NASD Rule 3010 and to ensure that the firm’s personnel, including its registered representatives, comply with their legal and regulatory requirements.
Much of the foregoing is discussed in FINRA Regulatory Notice 10-22 on Regulation D offerings.
Brokerage firms are also required to follow FINRA Rule 5122 when dealing with private placements. FINRA Rule 5122 was developed in response to abuses in the sale of private placements issued by broker-dealers and their control entities. The Rule generally requires that a member firm or associated person (financial advisor) engaging in a private placement of unregistered securities issued by the firm:
(1) disclose to investors in a private placement memorandum, term sheet or other offering document the intended use of offering proceeds, the offering expenses and the amount of compensation that will be paid to the broker-dealer and its associated persons;
(2) submit the offering documents to the FINRA Corporate Financing Department; and
(3) comply with the requirement that at least 85% of the offering proceeds raised may not be used to pay for offering costs, discounts, commissions or any other cash or non-cash incentives.
Obviously, the big one here is the disclosure of the commission paid. In many cases we have handled, the commission is either not disclosed or is disclosed in such a way that an unsophisticated investor cannot determine the commission paid to the brokerage firm making the representation. Private placements often pay a commission far in excess of other traditional types of investments (sometimes as high as 8-10%) and investors would certainly be more concerned about making such an investment if they knew that the broker was being paid this commission.
For more information on FINRA Rule 5122 look at FINRA Regulatory Notice 11-04.
If you have additional questions about private placements or are concerned about a private placement investment you made through a brokerage firm, the securities attorneys of The White Law Group may be able to help. For a free consultation, please call 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.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.