Category Archives: Private Placement Offerings

Private-placement lawsuits and investigations continue to make their presence known, much to the chagrin of the broker/dealers that touted some soured deals involving Provident Royalties. The latest B-D to face the music is Next Financial Group, which will pay $2 million in restitution to customers who purchased oil and natural gas private placements of Provident Royalties.

According to the Financial Industry Regulatory Authority (FINRA), Next Financial sold $20 million of three separate Provident private placements from July 2008 to January 2009. During that time, Next Financial’s due diligence was lacking, FINRA said.

“Despite the fact that Next received a specific fee related to the due diligence that was purportedly performed in connection with each offering, beyond reviewing the private-placement memorandum for the offerings, [Steven Nelson, vice president of investment products and services] did not perform adequate due diligence on the [Provident] offerings,” according to FINRA.

Two years ago, the Securities and Exchange Commission (SEC) charged Provident with fraud.

As reported Nov. 28 by Investment News, outside due diligence reports highlighted a number of red flags regarding the Provident offerings, as well as the fact that Next Financial and Steven Nelson “should have scrutinized each of the [Provident] offerings, given the purported high rate of returns.”

About 50 broker/dealers sold private placements in Provident, which raised $485 million from 7,700 investors between 2006 to 2009. At least 20 broker/dealers that sold Provident private placements have shut down or declared bankruptcy.

FINRA also levied fines of $50,000 on Next Financial and $10,000 on Nelson, who was suspended as a principal for six months.

Private placements have been a ongoing source of controversy – not to mention financial losses for investors – this year, with regulators filing fraud charges against issuers like Medical Capital Holdings and Provident Royalties.

Now a well known forensic accountant says that the broker/dealers behind the doomed private-placement deals failed miserably in their due-diligence responsibilities to investors.

As reported Nov. 25 by Investment News, Gordon Yale, a certified public account and principal of Yale & Co., contends that broker/dealers’ due diligence showed incredible “sloppiness” when touting private placements in Medical Capital and Provident. According to Yale, the actions by the broker/dealers exhibited the “same recklessness with which major investment banks conducted their mortgage-backed-securities business, but it was done by middle- or lower-tier firms and [with] a different set of products.”

Over the past year, regulators have issued several fines and sanctions against various broker/dealers that sold private placements in Medical Capital Holdings, Provident Royalties, and DBSI tenant-in-common exchanges. In September, the Financial Industry Regulatory Authority (FINRA) imposed a $10,000 fine and a six-month suspension against Brian Boppre, former president of Capital Financial Services. Capital Financial was a top seller of both Medical Capital and Provident Royalties notes. Both companies were charged with fraud by the Securities and Exchange Commission in 2009.

The allure has rapidly faded for once-hot real estate investments known as TICs, or tenant-in-common exchanges. Between 2004 and 2008, investors bought $13 billion worth of TICs, according to OMNI Real Estate Services. But TICs, also called 1031 exchanges, are complex, high-fee deals and, as in many deals orchestrated by Wall Street, the products have increasingly left countless investors high and dry.

Case in point: Mary Boston, 70, of Dunlap, Tennessee. In 2007, Boston and her husband sold their local theater for $1.2 million, net of debt, according to an Oct. 29 article by the Wall Street Journal. Their tax preparer suggested a financial adviser might be able to help them arrange a 1031 exchange.

After paying the advisor, who was from ING Financial Partners, a 7% commission fee, the couple ended up putting $1.2 million – their entire liquid net worth – into two TICs. In return, they received a stake in two apartment complexes, the Sequoia at Stonebriar in Texas and The Retreat at Stonecrest in Georgia. The offering documents projected an annual yield of 6.5%.

But the Bostons had zero prior investing experience; Mrs. Boston says she told the advisor that she and her husband had a “conservative and moderate” risk tolerance, and that income was their primary investment objective.

After the deals closed, the Bostons had to come up with more money when one of the properties became involved in various lawsuits. Between the capital added and legal fees, the couple has sunk roughly $70,000 more into the property, the Wall Street Journal said.

Meanwhile, the monthly income on the Boston’s investment has plummeted from about $5,000 to $300 – and is projected by the property manager to dry up altogether this month.

The bottom line: TICs are considered a private placement, which is a highly complex and risky investment. The products, in fact, are listed as one of the top 2011 Investor Traps by the North American Securities Administrators Association.

A proposal to expand private placement offerings via the Internet has state regulators up in arms. Specifically, a bill pending in Congress would use social networking as a way to sell online private placement offerings to more investors. Critics say the concept, known as crowd funding, is a dangerous one, with the potential to victimize investors.

Last week, the House Financial Services committee backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes. The legislation is expected to go to the House floor for a vote later this week. The measure also would have to pass the Senate and already is facing opposition from state regulators.

Among other things, critics of the crowd-funding legislation say it’s likely to breed fraud and place countless number of unsophisticated investors in financial risk.

“It’s dangerous,” said Heath Abshure, the commissioner of the Arkansas Securities Department, in a Nov. 1 article in Barrons. “Successful investors in small businesses tend to be savvy investors with deep knowledge of a business and its market. Mom and Pop investors on the Internet don’t have the ability to make the right kinds of assessments.”

“This is tailor-made for Internet fraud,” said Mercer Bullard, a law professor at the University of Mississippi, in the same Barrons article. “The measure would allow someone living solely on Social Security to invest $1,500 in an unregistered offering sold through a website that wasn’t subject to regulation as a broker.”

Indeed, using the Internet for crowd-funded deals would affect current protections under which private placements are sold. Currently, those protections do not allow public solicitation and limit the amounts sold to non-accredited investors. That would be eliminated under the proposed crowd-funding plan.

Private placement investments in Medical Capital Holdings and Provident Royalties have caused a mountain of legal woes for broker/dealers recently. Now another private placement may come back to haunt Commonwealth Financial and LPL.

As reported Aug. 4 by Investment News, financial reps from both Commonwealth and LPL sold the fund in question, the Laeroc 2005-2006 Income Fund LP. The fund now wants to raise another $12 million to $15 million to pay off – at a big discount – nearly $50 million of debt.

According to the article, real estate investor Laeroc Partners issued a “cash call” notice in June to investors who bought the Laeroc 2005-2006 Income Fund. The notice states that the fund’s lenders will foreclose by the end of the year on a shopping center in Sacramento, Calif., if the new cash isn’t paid. Reportedly, the Laeroc Fund has paid more than $180 million to buy eight properties and owes some $105 million in mortgage debt.

It isn’t clear exactly how much of the Laeroc 2005-2006 Income Fund that Commonwealth and LPL brokers sold.

The fallout from private placements in Medical Capital Holdings and Provident Royalties reached a fever pitch after the Securities and Exchange Commission (SEC) charged the two sponsors with fraud in July 2009. Investors saw about half of their principal wiped out in the two deals. Meanwhile, legal costs associated with client arbitration claims and settlements forced many broker/dealers to close their doors.

Industry executives noted that real estate deals of various stripes, including nontraded real estate investment trusts, which raised money and bought properties from 2006 to 2009, are struggling.

If you are an LPL or Commonwealth client and invested in the Laeroc 2005-2006 Income Fund LP, contact us to tell story.

Soured investments in real estate deals and private placements involving Medical Capital and Provident Royalties have caused a number of broker/dealers to go belly up this year. Closures of broker/dealers, in fact, are outpacing new entrants into the market. Between May 2010 and May 2011, a total of 336 broker/dealers notified the Financial Industry Regulatory Authority (FINRA) that they were closing their doors for business. By comparison, 190 new B-Ds came on board.

And there appears to be more bad news ahead. As reported June 23 by Investment News, the Compliance Department predicts that the broker/dealer industry could see an 11% net loss of broker/dealers by 2014.

The dwindling number of broker/dealers came to a head this year, highlighted by the failures of such names as GunnAllen Financial, QA3 Financial Corporation and Jesup & Lamont Securities.

Other well known B-Ds like Securities America also have come under fire because of legal troubles connected to private-placement sales in Medical Capital Holdings and Provident Royalties. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Most recently, California-based MCL Financial Group filed its broker/dealer withdrawal form with FINRA. Last year, the receiver for bankrupt real estate syndicator DBSI sued MCL in an attempt to recover commissions generated from sales of tenant-in-common exchanges (TICs). According to court documents, MCL collected $210,000 in commissions from selling TICs issued by DBSI.

Earlier this month, WFP Securities of San Diego, California, also notified FINRA of its plans to shutter. WFP is facing more than $14 million in legal claims, after having sold more than $27 million of private placements issued by Medical Capital Holdings and $6.8 million issued by Provident Royalties.

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 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.

Sales of risky private placements in Provident Royalties and DBSI Inc. have come back to haunt broker/dealer CapWest Securities, possibly putting its future existence in peril.

As reported April 26 by Investment News, CapWest Securities stated in its latest filing with the Securities and Exchange Commission (SEC) that a number of events – including a rash of lawsuits tied to private placement deals that went south – has “raised substantial doubt” about the company’s ability to meet regulatory net-capital requirements.

CapWest is far from alone. Several other broker/dealers that sold private placements have shuttered in recent months, including QA3 Financial Corp. in February. As a result, regulators are stepping up their oversight of private placements and the broker/dealers that market and sell them to investors.

According to court documents, CapWest brokers sold about $22 million of private placements issued by Provident Royalties LLC. In the summer of 2009, the SEC charged Provident with fraud. CapWest also sold an unknown volume of sales in DBSI Inc., a packager of real estate deals that is now in bankruptcy court.

Broker/dealers involved in sales of private placements have been put on notice by the Financial Industry Regulatory Authority (FINRA). In the future, the regulator says it will be stepping up its oversight of private-placement deals.

Evidence of the new scrutiny became apparent last week, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.

As reported April 10 by Investment News, FINRA’s recent actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Private placements are high-commission products, yielding broker/dealers fees of 7% or 8%.

“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” said Brad Bennett, executive vice president and chief of enforcement for FINRA.

“FINRA will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers. Broker-dealers and the executives should have looked at the private-placement offerings much more closely,” Bennett said.