Posts tagged ‘private placement fraud’
SEC Changes to “Accredited Investor” Rules
The Securities and Exchange Commission recently announced that it has amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings. The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status.
SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.” One way individuals may qualify as “accredited investors” is by having a net worth, alone or together with their spouse, of at least $1 million.
This change is a positive step for the protective of investors. Including the value of someone’s home in this calculation (as had previously been done) only lowered the bar for what was required to be considered an “accredited investor.” This permitted unscrupulous financial advisors to sell high-risk and complicated private placement investments to investors who had no business investing in private placements. The purpose of the “accredited investor” standard was to protect investors and to ensure that private placement investments (which are unregulated by the SEC) are only offered to the most sophisticated of investors who, presumably, do not need the regulatory protection of the SEC in the way that the general public does
One of the most common types of securities fraud cases filed before FINRA involve these unregulated private placement investments. Hopefully, this change will make it more difficult for brokerage firms to take advantage of unsophisticated investors that only qualified as “accredited investors” due to their net worth (which is clearly no real measure of a person’s sophistication).
This information, which is publicly available on the SEC’s website, is being provided by The White Law Group. 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. To speak with a securities attorney, please call 312-238-9650.
For more information on The White Law Group, please visit the firm’s website at http://www.whitesecuritieslaw.com.
FINRA Proposes New Private Placement Offering Rule, NASAA Comments
In October of this year the Financial Industry Regulatory Authority (FINRA) submitted to the Securities and Exchange Commission (SEC) a proposal for a new rule, Rule 5123, which would have an impact on the offering of private placements.
FINRA’s proposed Rule 5123, according to SEC documents, “would require that members and associated persons that offer or sell applicable private placements (as described in the Rule), or participate in the preparation of private placement memoranda (“PPM”), term sheets or other disclosure documents in connection with such private placements, provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation.” The documents associated with the disclosure of the relevant information would be required to “… be filed with FINRA no later than 15 calendar days after the date of the first sale…”
One of the main reasons for this proposed rule change is to protect investors in private placements. According to SEC documentation FINRA is looking to, “ensure that investors in private placements are provided detailed information about the intended use of offering proceeds, the offering expenses and offering compensation.” Investors should be able to know what their capital investment is being used for and how much of it is going into the investment itself versus how much goes to the commission for the financial professional and the fees to execute the transaction. The rule, like any regulation, does contain a laundry list of exemptions, but intends to protect everyday investors.
The North American Securities Administrators Association (NASAA) recently issued a letter to the SEC in which they commented on the proposed FINRA Rule 5123 related to Private Placements. While the NASAA is in support of FINRA’s goal to protect investors by way of better regulation of private placement offerings, they feel that FINRA’s rule does not go far enough. The NASAA “…continues to support a requirement that these securities be subject to substantive regulatory review” and feel that the FINRA proposal “stops short of addressing the issues inherent in unreviewed private placements.”
The NASAA made a series of regulation suggestions in their response to the FINRA Rule 5123 proposal. Among other things, they believe that investors will be inadequately protected until private placements are “substantively reviewed” by regulators. They also would like to require a firm 15% maximum of the offering proceeds that are able to go to costs and compensation for the brokers. This maximum exists in a limited capacity within FINRA Rule 5122, but the NASAA would like to see it expanded. Further, the NASAA also feels that the FINRA proposal does not adequately require those offering private placements to disclose the full risks associated with the investment and has concerns about the extent of the exceptions/exemptions within the proposed rule.
Both the NASAA and FINRA have as goals the protection of investors. It will be interesting to monitor the SEC’s response to both the FINRA proposal and the NASAA’s comments.
The White Law Group often represents investors who are struggling with investments in private placements. If you feel you may be the victim of investment fraud, or are just concerned about a private placement that you invested in, and would like to speak to a securities attorney about your potential to recovery your investment losses please call our 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.
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.
FINRA Proposes More Disclosure with regards to Private Placement Offering Proceeds
According to canadiansecuritieslaw.com the Financial Industry Regulatory Authority (FINRA) recently “published proposed amendments to its rules that would require its members and associated persons that offer or sell private placements, as well as those that participate in the preparation of private placement memoranda, term sheets or other related disclosure documents in connection with a private placement, to provide disclosure to investors regarding the anticipated use of the offering proceeds prior to sale.”
These disclosures would provide the investor with a wealth of information about where their money was headed. The information would “include information regarding the amount and type of offering expenses, as well as the amount and type of compensation provided to sponsors, consultants and members in connection with the offering.”
The documents providing this information would have to be provided to FINRA within 15 days of the first sale. Even with the proposed changes, some offerings would not have to follow these new regulations. These exceptions to the rule would appear to be for private placements being offered exclusively to qualified purchasers or qualified institutional buyers.
FINRA’s goal for these proposed rule changes is to protect investors. FINRA was quoted as stating that the changes would, “provide important investor protections in connection with private placements without unduly restricting capital formation through the private placement offering process” and further helping to “identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud in connection with private placements.”
If you are concerned about an investment you made in a private placement or have questions about FINRA rules and would like to speak to a securities attorney please call our 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.
Capital Financial Services In More Trouble?
According to the Investment News, the Securities and Exchange Commission has alleged that an independent broker-dealer that was a leading seller of private placements that went bust failed to conduct reasonable investigations into the offerings — and pocketed fees for due diligence without adequately researching the instruments.
Capital Financial Services Inc., which has 332 affiliated representatives, sold preferred stock of Provident Royalties LLC entities from 2006 to 2009, according to an SEC cease-and-desist order, which is a preliminary step before a hearing with an administrative judge over the matter. Capital Financial brokers sold $63 million of the offerings by Provident, which the SEC charged with fraud in 2009.
The reps received an 8% commission — or $5 million — for selling the Provident deals. The firm collected a 1% due diligence fee, or $600,000.
Capital Financial also sold $100 million of private placements for Medical Capital Holdings Inc. The SEC has also charged Medical Capital with fraud.
Dozens of independent broker-dealers sold the two series of Regulation D offerings, and many have since folded due to the costs of fending off lawsuits from investors.
According to the SEC’s order, Capital Financial fell far short of adequate due diligence.
“Capital Financial never conducted independent verification of any of the offering materials provided by Provident,” the SEC stated in its order, which it issued April 6.
The broker-dealer “also never received audited or even unaudited financial statements for any of the Provident offerings,” the SEC said. “The only financial information Capital Financial received regarding Provident was an unaudited consolidated balance sheet review.”
The SEC’s order hits on one of the thorniest issues of independent broker-dealers’ selling private placements or non-traded real estate investment trusts.
Citing costs, firms often don’t perform their own due diligence, but rely on outside attorneys to assess the deals and investment programs. Those same firms, however, commonly receive a “due diligence” fee of 1% of the amount of the product sold by its brokers.
It was the fact that Capital Financial received the 1% fee that drew the scrutiny of the SEC.
“Capital Financial failed to disclose to customers that although it was collecting a due diligence fee, it was not conducting any due diligence,” the SEC order stated. In fact, the firm collected the $600,000 as a due diligence fee but incurred no expenses to match the fee, the SEC alleged. “At no time did Capital Financial hire independent counsel, an accounting firm, contact third parties regarding Provident’s business, or hire consultants to review the Provident offerings,” the SEC alleged.
Capital Financial has other legal problems stemming from its sale of private placements. It is working to settle a class action stemming from the sale of Provident shares by its brokers. That case is currently before a federal judge in Dallas.
If you have questions about investments you made with Capital Financial, the securities attorneys of The White Law Group may be able to help. To speak with a securities attorney, 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.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.