Monthly Archives: May 2011

The private-placement game is changing, thanks in large part to ongoing legal cases over failed private placements – also known as Reg D offerings – in Provident Royalties and Medical Capital Holdings. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.

Major private-placement players like Securities America are feeling the ramifications of the issues involving Medical Capital and Provident Royalties – including a rash of lawsuits and arbitration claims filed by investors, as well as fraud charges issued by state securities regulators.

For some broker/dealers, the legal troubles stemming to Provident and Medical Capital, as well as to other failed private-placement offerings, have proven too much. Unable to sustain sufficient capital to fight their legal battles, many have gone out of business. Among the broker/dealers that have shuttered: Cullum & Burks Securities Inc., Securities Network, GunnAllen Financial, QA3 Financial Corp. and Jesup & Lamont Securities Corp., among others.

For the broker/dealers that do remain in the private-placement game, it’s likely they will see stricter oversight of the investments they market and sell to investors in the future. Just this week, the head of the Financial Industry Regulatory Authority (FINRA) publicly called upon broker/dealers that sell private placements to engage in a more vigorous due diligence process, “pushing and pulling” for information about the products.

“We want to recognize where there’s limited disclosure and appears to be a speculative investment, you need to push to try to get more information,” said Richard Ketchum, chairman and chief executive of FINRA, at the regulator’s annual meeting in Washington

“It’s not good enough to go to a canned information session. You need to push and pull,” he said of the due diligence process for broker/dealers touting risking private-placement deals.

Following a lengthy legal battle with various state regulators over failed private placements issued by Medical Capital Holdings, broker/dealer Securities America has agreed to make whole 63 Massachusetts clients who bought $5 million worth of the investments.

According to Massachusetts Secretary of State William Galvin, Securities America will pay $2.8 million to clients within 10 days.

The settlement, however, is contingent on several factors. As reported May 24 by Investment News, Securities America could be liable for up to another $2.2 million if a class action settlement currently being heard before a federal judge in Dallas falls through.

In addition, Securities America may have to pay more if the receiver for Medical Capital fails to pay 10% back to investors.

In the end, Massachusetts investors will recover 100% of the $5 million in principal they lost in Medical Capital. In July 2009, the Securities and Exchange Commission (SEC) charged the company with fraud.

Dozens of independent broker/dealers – the largest of which was Securities America -sold private placements in Medical Capital. From 2003 to 2008, Securities America sold about $700 million of the notes to investors. About half was lost in the alleged fraud.

In 2010, the Massachusetts Securities Division charged Securities America with fraud and accused the company of failing to disclose to investors that the Medical Capital notes it was selling were high-risk investments.

Massachusetts regulators also charged Securities America of using sales tactics that ignored warnings of their own analysts. In addition, the regulator claimed that the broker/dealer touted the Med Cap notes to unsophisticated investors.

Sales of private placements in Provident Royalties have put yet another broker/dealer of business. Securities Network LLC of Norcross, Ga., told the Financial Industry Regulatory Authority (FINRA) in March of its plans to terminate its broker/dealer license.

As reported May 24 by Investment News, Securities Network was not a huge seller of private placements in Provident Royalties. According to a court filing, the company sold $215,000 of Provident’s preferred stock to investors.

The amount is minuscule compared to that of other firms that marketed and sold hundreds of millions of dollars of the product. In total, independent broker/dealers sold about $485 million of Provident private-placement offerings.

The list of broker/dealers that have shut down because of connections to sales involving Provident private placements, as well as another private-placement deal – Medical Capital Holdings – keeps getting bigger. Among the broker/dealers to shutter: GunnAllen Financial Inc., QA3 Financial Corp., Okoboji Financial Services, and Jesup & Lamont Securities Corp.

In 2009, the Securities and Exchange Commission (SEC) charged both Provident Royalties and Medical Capital Holdings with fraud. In its complaint against the two companies, the SEC alleged that both operated as Ponzi schemes.

In the wake of soured private placement deals in Medical Capital Holdings and Provident Royalties – as well as other investments gone bad at the hands of rogue brokers – the Financial Industry Regulatory Authority (FINRA) is putting more information about its disciplinary actions online for investors and others to view.

Launched May 17, the new Disciplinary Actions Online database provides access to FINRA complaints filed against firms and individual brokers, settlement agreements and decisions by FINRA arbitration panels. In the past, anyone wanting information about those items had to contact FINRA directly.

The new and improved database will provide enhanced functionality, allowing users to conduct searches by broker or firm name, timeframe, key words and case numbers.

The database also includes pending complaints that FINRA has filed against firms and brokers. As reported May 18 by Investment News, this feature alone could make pending complaints easier to find, compared to the multistep process needed to locate pending actions disclosed on FINRA’s BrokerCheck system.

Beginning June 15, FINRA’s monthly disciplinary action summaries will contain links to corresponding documents in the new disciplinary database.

An arbitration panel of the Financial Industry Regulatory Authority (FINRA) recently awarded $2.5 million in compensatory damages to an investor for his claim against Merrill Lynch. The investor was represented by Maddox Hargett & Caruso P.C.

The case itself involved one spouse stealing money from another spouse through a brokerage account. In this instance, the brokerage in question happened to be Merrill Lynch.

The issue, however, is not unusual, and gives a whole new meaning to the marriage vow lines of for “richer and poorer.” Every year, investors lose millions of dollars from stockbroker misconduct, investment firm negligence and securities fraud. In the past year, these kinds of cases have skyrocketed, with more investors filing claims for investment negligence, stockbroker incompetence and IRA theft.

If a spouse “steals” money from his or her spouse’s brokerage account, the brokerage can, in fact, be held liable and cited for investment broker negligence, as well as for other types of misconduct or fraud.

Investment broker negligence occurs when the conduct of broker falls below a standard that’s been established to protect investors against unreasonable risk of harm. The cause of action for stockbroker negligence is based upon duties owed by a broker to his or her clients and the breach of that duty. This includes the duty to exercise due diligence and care in connection with a client’s account.

Ultimately, stockbroker negligence can result in severe financial losses for an investor.

Victims of stockbroker negligence can include anyone: Individual investors, retirees, small businesses, corporations, pension funds, and institutional investors. For a free initial consultation regarding your securities claim, contact Mark Maddox at 800-505-5515. Or, fill out the contact form on this Web site to obtain candid legal advice.

In the wake of investor lawsuits over private placements in Medical Capital Holdings and Provident Royalties LLC, the Securities and Exchange Commission (SEC) is considering changes to its offering rules to make it easier to purchase non-public company shares. In addition, the SEC also is looking into whether it should revisit the current ban on public marketing of non-registered offerings as part of an overall review of securities-offering regulation.

As it is, private placements, also known as Regulation D offerings, are exempt from SEC registration. In the past year, the deals have come under increased scrutiny from regulators – with much of the attention generated by failed deals in Medical Capital Holdings and Provident Royalties. In 2009, the SEC charged both entities with fraud.

As reported May 10 by Investment News, in addition to possible changes in the ban on soliciting investors for non-registered offerings, the SEC is examining various restrictions on communications in initial public offerings, the thresholds that trigger public reporting and other regulatory questions that new capital-raising strategies create.

The SEC’s review comes on the heels of a proposal by the Financial Industry Regulatory Authority (FINRA) for a 15% cap on commissions and fees for private placements, as well as more disclosures about offering proceeds.

According to SEC Chairman Mary Schapiro, about 22% of the SEC’s enforcement cases in 2010 year involved investor fraud from securities offerings.

Arbitration claims involving structured investments have become a growing source of contention among investors – many of whom have experienced massive financial losses because of these Wall Street-engineered instruments.

Structured investment products, or SIPs, take several forms. Typically, they entail securities mixed with other derivatives, with a repayment value that is linked to the performance of the underlying assets. The assets can include a single security, a pool of securities, stock, bonds, debt issuances, foreign currencies or swaps.

For years, structured investments have been touted by brokers as a way for risk-wary investors to take advantage of stocks or other investments without having to actually “own” those investments. At the same time, investors could maintain a level of protection in the event of any losses.

What many of these brokers failed to add is that the “protection” in principal-protected notes is contingent on the solvency of the company linked to the note.

Lehman Brothers Holdings is a prime example. When Lehman filed for bankruptcy in September 2008, investors holding Lehman Return Optimization Securities and 100% Principal Protected Notes became stuck with essentially worthless investments. Today, these products are trading for pennies on the dollar.

Many investors who bought structured products are retirees. They sought the investments on the recommendation of their brokers, who touted the “conservative,” “minimal risk,” and “principal-protected” benefits of the products. Those benefits, however, never materialized.

At minimum, investors believed that principal-protected notes like those of Lehman Brothers would allow them to always maintain their principal original investment. Lehman’s own marketing brochures even advertised the products this way.

Lawsuits and arbitration filings over structured investment products have risen significantly in past few years. Among the allegations in the complaints: Investors were never informed about the potential risks of structured investments. Moreover, they never realized that the “investment product” they had put their money and faith behind was actually the unsecured debt of the issuer. If that company went bankrupt, as in the case of Lehman, their investment disappeared, as well.