Category Archives: Private Placement Offerings

Aubrey Lee Price was a former Georgia investment adviser who went missing in 2012 after duping investors out of millions of dollars in a private-placement fraud scheme. Price was later presumed dead when authorities discovered an apparent suicide note detailing the fraud.

Now, it appears Price is back from the dead. The Federal Bureau of Investigations (FBI) reported on its Web site last week that Price had been captured and charged with securities and wire fraud.

In 2012, the Securities and Exchange Commission (SEC) froze the assets of Price, alleging that he had raised about $40 million from hundreds of investors by selling shares in an unregistered investment fund (PFG) that he managed. Price purported to invest fund assets in traditional marketable securities, but he also made illiquid investments in South America real estate and a troubled South Georgia bank. In order to conceal the mounting losses of investor funds, Price created bogus account statements with false account balances and returns that were provided to investors and bank regulators.

As reported today by Investment News, Price pleaded not guilty last Wednesday to federal bank fraud charges in U.S. District Court for the Southern District of Georgia before consenting to be held in custody while the case proceeds.

If convicted, Price faces a possible penalty of 30 years in prison and a $1 million fine. If that happens, it would be justice for victims like Rick Smith. Smith, 63, retired early from Lockheed Martin in 2007 on Price’s advice. Now, however, Smith and his wife have gotten part-time jobs and been forced to sell a boat and RV in order to compensate for the losses they incurred by investing with Price.

“It helps a whole lot just knowing where he is,” Smith said in a Jan. 6 story by the Globe and Mail. “Maybe he’ll pay for what he did.”

Once known as a financial broker to the rich and famous, Bambi Holzer has now been barred from the securities industry by the Financial Industry Regulatory Authority (FINRA). Holzer agreed to the settlement with FINRA last week.

Holzer’s problems seemingly began at the onset of her career in the financial business. As reported in a 2009 article by Forbes, Holzer started working in the 1980s as a receptionist for Oppenheimer & Co. She was promoted within a few weeks to assist the firm’s muni bond trading desk. Shortly thereafter, Holzer moved to Shearson Lehman Hutton, where she was accused of fraud, negligence and churning a client account. According to the Forbes article, Holzer’s employer paid $70,000 to resolve those allegations.

Regulatory records show that Holzer returned to Oppenheimer in 1989 and was “permitted to resign” the following year. Over the years, Holzer worked for at least 10 different broker/dealers, including Brookstreet Securities, A.G. Edwards, Bear Stearns, Newport Coast Securities and UBS.

Despite her problems with regulators – as well as a growing list of investor complaints and disciplinary actions – Holzer somehow managed to maintain an image of wealth and success. With a Beverly Hills office located just off of Rodeo Drive, Holzer counted several celebrities among her clients, including former “Seinfeld” star Julia Louis-Dreyfus. In addition to dispensing financial advice, Holzer authored several books and made numerous television appearances.

Eventually, however, Holzer’s sketchy regulatory history caught up with her. In 2007, former client and actress Julia Louis-Dreyfus, as well as other investors, sued Holzer and one of her former employers over a dispute involving $4.4 million invested in annuities. That suit was later settled.

According to the Investment News article, Holzer and her firm at the time, UBS PaineWebber, paid out at least $11.4 million to settle dozens of investor claims that she misrepresented variable annuities by saying that they offered guaranteed returns.

In September 2013, Holzer was suspended by FINRA since September; at the time, her BrokerCheck report contained 115 pages of investor complaints.

One month later, Holzer was sued by FINRA for allegedly lying to one of her former broker/dealers, Wedbush Morgan Securities Inc., about several clients’ net worth when she sold preferred shares of one of the deals issued by Provident Royalties. In July 2009, Provident Royalties was sued by the Securities and Exchange Commission (SEC) for fraud and what later turned out to be a $485 million Ponzi scheme.

The idea of mandating that brokerage firms carry arbitration insurance is on the table for consideration by the Financial Industry Regulatory Authority (FINRA). As reported by the Wall Street Journal last week, the problem of brokerage firms shutting down without paying awards or other legal claims owed to investors has been an ongoing issue for FINRA for some time now.

“We’re going to evaluate the whole area and see if there are additional steps we can take,” said Susan Axelrod, FINRA’s executive vice president of regulatory operations, in the Wall Street Journal story.

As noted in the Wall Street Journal article, “the financial cushion at some brokerage firms is so thin that just one arbitration award could put them out of business. More than 940 firms disclosed net capital of less than $50,000 in their most recent financial reports as of July 1.”

In 2011, FINRA says that $51 million of arbitration awards granted in 2011 haven’t been paid, or 11% of the total awards. The percentage is up from 4% in 2009 and 2010.

Adding to the problem is the fact that many brokers at firms that go out of business often continue working in the financial industry. Meanwhile, investors are left with nowhere to turn and no help by state regulators when they try to collect their awards.

Some state securities regulators support the idea of requiring brokerage firms to have arbitration insurance.

The Securities and Exchange Commission, which oversees FINRA, requires smaller brokerage firms to have net capital of at least $5,000 or a level related to the firm’s debts, if higher. The net capital rules are in place to ensure that brokerage firms can return investors’ assets if the firm fails.

Still, those rules don’t do much good for investors who lose money because of alleged broker misconduct and are unable to get their arbitration awards because the firm has shuttered its business.

FINRA’s Axelrod said in the Wall Street Journal article that regulator will consider whether brokerage firms should be required to have “errors and omissions” insurance, which can cover claims for negligence or misconduct by the brokers.

Case in point: Provident Royalties LLC. In 2009, the SEC charged the firm and its three owners of operating a $485 million Ponzi scheme. Earlier this year, the executives pleaded guilty to criminal charges related to the fraud.

FINRA has since taken disciplinary action against several brokerage firms and brokers for allegedly selling Provident Royalties’ private placements without conducting their proper due diligence. More than $150 million was sold by firms that have closed and appear to have no insurance or other means to pay investors.

The Financial Industry Regulatory Authority (FINRA) has issued a new investor alert that cautions investors about investing in private placements.  A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (SEC) and is not offered to the public at large.

“Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing. Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education, in the alert titled Private Placements—Evaluate the Risks before Placing Them in Your Portfolio.

Among other things, FINRA advises investors to do the following before investing their money in a private placement investment:

*Carefully review the private placement memorandum or other offering document.

*Find out as much as you can about the company’s business and understand how and when you might liquidate your private placement securities.

*Ask your broker what information he or she was able to review about the issuing company and this private placement.

*Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.

*Be extremely wary of private placements you hear about through spam emails or cold calling. They are very often fraudulent.

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

Advertising for private-placement securities offerings has been given the green light to move forward following approval by the Securities and Exchange Commission (SEC) last week.

In a 4-1 vote, the SEC’s action opens the door for private-equity funds, hedge funds and brokers selling unregistered securities to market the investments to the general public.

Sales will be limited to accredited investors, who are defined as individuals with a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually. Nearly 9 million U.S. households meet the net-wealth criteria to be accredited investors.

As reported July 14 by Investment News, as the general public is introduced to private-securities offerings through advertising, investment advisers are likely to see more demand from clients who want to take advantage of such opportunities. That then puts the onus on advisers to evaluate these often-risky and complex investments and decide whether their clients have the sophistication to thoroughly understand the risks they are taking on.

“It does put more onus on an adviser to make sure someone is an appropriate investor,” said Jennifer Openshaw, president of Finect, a compliant social-media network for the financial industry, in the Investment News story.

“Today, it’s easy to meet the $1 million threshold as an accredited investor,” she added. “But that doesn’t mean they’re sophisticated.”

The SEC’s ruling implements a provision of a law that was enacted in April 2012 – the Jumpstart Our Business Startups Act. The measure eases securities regulations for small companies.

Supporters of the law say it will help entrepreneurs raise capital. Critics, however, contend that the SEC is lifting the advertising ban without including sufficient measures to protect investors. In response to those concerns, SEC Chairman Mary Jo White recently offered a separate regulatory proposal designed to tighten the rules surrounding private-placement solicitation.

The one dissenter of the SEC who voted against dropping the 80-year-old ban on advertising is skeptical about the potential investor safeguards.

“Any protections from today’s proposal will come too late – if they ever come at all – for investors,” said SEC member Luis A. Aguilar. Aguilar added that the SEC is moving “recklessly” and is “allowing fraudsters to cast a wider net” through private-placement advertising.

A. Heath Abshure, Arkansas’ securities commissioner and president of the North American Securities Administrators Association, echoes those sentiments.

“The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection,” Abshure said in a statement.

The culprits behind a massive multimillion-dollar private-placement fraud will soon be heading to jail. On July 3, U.S. District Judge Marcia A. Crone handed down sentences for four former executives of Provident Royalties – a $500 million oil and gas Ponzi scheme that was sold through a network of independent broker/dealers. Unable to pay the litigation costs by investors who later sued over the phony investments, many of those broker/dealers involved with the Provident offerings ultimately were forced to shutter their business.

Brendan Coughlin, 46, and Henry Harrison, 47, were sentenced to 21 months in federal prison. They founded and controlled Provident along with Joseph Blimline, 35, who already had been sentenced to 12 years in prison. Paul Melbye received a sentence of 18 months in prison.

W. Mark Miller, 59, Provident’s chief financial officer and later president, was sentenced to six months in federal prison and six months in home confinement.

In addition, the four executives were ordered to pay $2.3 million in restitution. Each had earlier pleaded guilty to conspiracy to commit mail fraud.

According to the Justice Department, the Provident executives entered into what was essentially a cover-up. Investors lost money due to Blimline’s “manipulation of investor capital prior to his departure in late 2008,” reads a statement from the Justice Department.

“From Jan. 1, 2009, to Feb. 3, 2009, even after discovering what [Mr.] Blimline had done, [Mr.] Coughlin, [Mr.] Harrison, and [Mr.] Melbye failed to disclose the dire state of the company to investors in order to take in an additional $2.3 million, while [Mr.] Miller, who knew that the crime had occurred, authorized lulling payments to investors to conceal the crime from discovery.”

The sentencing of the four men follows a recent announcement by the Securities and Exchange Commission (SEC) approving a rule to allow advertising for private-placement offerings such as the one associated with Provident Royalties. The SEC’s ruling lifts an 80-year prohibition on the practice.

That decision has many concerned. As reported July 11 by Investment News, following the vote, Commissioner Luis A. Aguilar warned that the SEC was moving “recklessly.” He further warned that the regulator’s backing of private-placement advertising would allow fraudsters “to cast a wider net.”

Sales involving alternative investment products sold to elderly investors has an unleashed an investigation by Massachusetts securities regulators into 15 brokerage firms. The firms include LPL Financial LLC, Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services LLC, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade Inc., ING Financial Partners Inc.,  Commonwealth Financial Network, MML Investor Services LLC, Investors Capital Corp., Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc.

As reported yesterday, the Massachusetts securities division has sent subpoenas to the firms being targeted, asking for information on sales of the products to state residents who are 65 or over.  Among the non-traditional investments included on the list:  Oil and gas partnerships, private placements, structured products, hedge funds and tenant-in-common offerings.

Massachusetts is demanding information on any such products that have been sold over the past year, the investors who purchased them, the commissions generated, how the sales were reviewed, and all relevant compliance, training and marketing materials used for marketing and sales purposes.

The firms have until July 24 to respond.

This isn’t the first time that Massachusetts has come down hard on broker/dealers for alleged improper sales of certain alternative investments. In May, the state settled cases involving non-traded REITs with Ameriprise Financial Services; Commonwealth Financial Network; Lincoln Financial Advisors Corp., Royal Alliance Associates; and Securities America. The five firms agreed to pay a total of $6.1 million in restitution to investors, as well as fines totaling $975,000.

In February, Massachusetts reached a similar settlement with LPL Financial, which agreed to pay at least $2 million in restitution and $500,000 in fines related to sales of non-traded REIT investments.

The REIT investigations “heightened my concern that the senior marketplace is being targeted for the sales of these high-risk, esoteric products,” said Massachusetts Secretary of the Commonwealth William F. Galvin in a statement yesterday.

“While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score … large commissions.”

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Kimberly Springsteen-Abbott, owner, chief executive and head of compliance for Commonwealth Capital Securities Corp., for allegedly misusing investors’ money to pay for personal expenses, including home improvements, trips, meals, holiday decorations and tools.

Initially reported May 14 in a story by Investment News, FINRA’s complaint says Springsteen-Abbott allegedly misused $345,000 in investors’ funds between December 2008 and February 2012. FINRA also says Springsteen-Abbot allegedly was involved in falsifying and backdating a memo accounting for “Disney Tickets” that was given to FINRA staff members while they were conducting an exam in 2011.

Commonwealth Capital Securities, which packages and distributes illiquid equipment-leasing funds, is the broker/dealer of Commonwealth Capital Corp. It employs about 22 registered reps and is involved in private placements and direct investments.

FINRA’s complaint goes on to state that the broker/dealer has distributed 13 different equipment-leasing funds from 1993 to the present, raising more than $240 million. Each fund acquires equipment involving information technology, medical technology, telecommunications and other categories; proceeds from the offerings are invested primarily in equipment that is subject to operating leases with durations of 12 to 36 months.

“Ms. Springsteen-Abbott “directed the misuse of investor funds to pay for various American Express credit card charges that were not related to legitimate business purposes of the funds,” FINRA’s complaint reads.

The complaint includes 27 pages of alleged purchases from Springsteen-Abbott and other company executives. Among the purchases listed: $63.43 for a meal at a Hooter’s restaurant in 2009; $1,971.11 for a family vacation in 2010 that included Ms. Springsteen-Abbott’s husband, daughter, ex-son-in-law and two grandchildren at the Animal Kingdom Lodge in Orlando, Fla.; and $12,414 for a board of directors meeting, also in 2010, at the Princeville St. Regis Hotel in Kauai, Hawaii.

This isn’t the first time Commonwealth Capital has faced the scrutiny of regulators. In 2012, a sexual discrimination suit was filed by a former Commonwealth Capital employee, Shannon Givler, who previously contacted the Securities and Exchange Commission (SEC) in 2010 as a whistleblower. In that complaint, Givler accused Springsteen-Abbott and other company executives of “misrepresenting investor return rates and misappropriating investor funds for lavish personal expenses.”

Suitability, misrepresentation and complex investment products like structured notes, non-traded REITs, and private placements played a key role for the increase in fines and disciplinary actions brought by the Financial Industry Regulatory Authority (FINRA) against firms and brokers in 2012. Last year saw 4% more disciplinary cases than in 2011, as well as an increase in fines by 15%.

A recent study conducted by Sutherland Asbill & Brennan LLP showed 2012 as the fourth consecutive year of growth in the number of cases filed by FINRA and the second consecutive year of growth for the amount of fines.

In total, FINRA filed 1,541 disciplinary actions in 2012 and assessed $78.2 million in fines, the study says.

In addition to the increase in fines, the study revealed that FINRA is becoming more aggressive when it comes to getting restitution for aggrieved investors. Last year, FINRA ordered firms and representatives to pay a record $34 million in restitution, up 80% from $19 million in 2011.

Leading the list of enforcement actions by FINRA in 2012 were suitability and due-diligence cases. A total of 117 suitability cases were brought by FINRA in 2012, a 10% increase from the 106 cases reported in 2011 and nearly double the amount in 2008 and 2009.

Of the 62 due-diligence cases filed in 2012, FINRA issued $12.8 million in fines.