Category Archives: Private Placement Offerings

Top executives of various broker/dealers that sold private placements in Medical Capital Holdings and Provident Royalties have been fined and sanctioned by the Financial Industry Regulatory Authority (FINRA).

Among the executives cited for failing to conduct a reasonable investigation of private placement sales offered by Medical Capital Holdings and/or Provident Royalties:

· Robert Vollbrecht, Workman Securities’ former President. Vollbrecht was barred in any principal capacity and fined $10,000.

· Timothy Cullum, former Chief Executive Officer, and Steven Burks, former President of Cullum & Burks Securities of Dallas, Texas, a now-defunct firm. Both men were each suspended in any principal capacity for six months and fined $10,000.

· Jeffrey Lindsey and Bradley Wells, two former executives with Capital Financial Services. Lindsey and Wells have been suspended for six months in any principal capacity and fined $10,000.

· Jay Lynn Thacker, former Chief Compliance Officer for Meadowbrook Securities, LLC (aka Investlinc Securities, LLC). Thacker was suspended for six months in any principal capacity and fined $10,000.

· David William Dube, former Owner, President, Chief Compliance Officer and Anti-Money Laundering (AML) Compliance Officer of (now-defunct) Peak Securities Corporation. Dube was barred for failing to conduct adequate due diligence, as well as a failure as AML Compliance Officer to detect, investigate and report numerous suspicious transactions in 10 customer accounts where “red flags” existed.

According to FINRA, without performing proper due diligence, the broker/dealers that sold the private placements could not identify and understand the inherent risks of the offerings. Moreover, the sanctioned principals did not have reasonable grounds to allow the firms’ registered representatives to continue selling the offerings despite the red flags that existed regarding the private placements.

A deal may in the works between Securities America and investors who lost hundreds of millions of dollars from soured private-placement deals in Medical Capital Holdings and Provident Royalties. The story was first reported by Investment News on March 28.

Financial problems related to investor lawsuits in the private placements have been a growing source of concern for the broker/dealer. Now, it appears a settlement offer could be on the table.

Details of the offer have not been revealed.

Securities America sold about $400 million in private placements in Medical Capital Holdings. In July 2009, the Securities and Exchange Commission (SEC) charged the company with fraud, accusing it of essentially running a Ponzi scheme. That same month, the SEC also charged Provident Royalties with fraud.

Earlier this month, a federal judge denied a proposed $21 million settlement between Securities America and the plaintiffs in the case. If the settlement had occurred, investors would likely have received only pennies on the dollar.

And while Securities America may not have enough capital to pay plaintiffs 100 cents on the dollar, its parent company, Ameriprise, does.

As reported in the Investment News article, Securities America has reportedly informed its 1,800 brokers of the proposed settlement.

Workman Securities, a big seller of private placements in Medical Capital Holdings and Provident Royalties, has reached an agreement with the Financial Industry Regulatory Authority (FINRA) to settle issues over the deals. The broker/dealer will pay $700,000 for partial restitution to more than a dozen clients with legal claims against Workman for sales of the risky investments involving Med Cap and Provident.

Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

As reported Feb. 14 by Investment News, Workman’s insurance carrier, Catlin Specialty Insurance Co., has paid $2.3 million to various clients who’ve sued the firm.

Workman Securities is one of many broker/dealers that sold investors on risky private-placement deals involving Medical Capital and Provident Royalties. Workman reps sold just over $9 million of private placements in Provident, according to U.S. bankruptcy court filings.

According to FINRA’s Broker Check Web site, Workman allegedly was lacking in the supervision and due diligence department at the time it sold the private placements.

“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” the site alleges.

Broker Check goes on to say: “[Workman] failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.”

If you have a story to tell involving Medical Capital Holdings or Provident Royalties, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

It’s been a tumultuous year for independent broker/dealers, with many closing their doors over private-placement deals gone bad, rising legal costs, and capital violations. Now, it appears QA3 Financial Corp. has become the latest B-D to bite the dust.

With bankruptcy looming, as well as a possible net capital violation, QA3 Financial told 400 reps last week of its impending future plans. According to a Feb. 4 story by Investment News, Steve Wild, QA3’s owner and CEO, delivered the news via an email approximately one hour after the market closed.

“In light of the arbitration award rendered against QA3 on January 14, and the fact that our errors and omissions carrier has not yet provided coverage set forth in our policy, we have made the difficult decision to cease conducting business as a broker-dealer effective as the close of business on February 11,” the email read.

QA3’s exit from the brokerage business follows at least two dozen firms that have either shut down or were forced to close their doors in the past year.

QA3’s financial issues have been in the making for some time. The broker/dealer was a big seller of private placements in Medical Capital Holdings and Provident Royalties LLC – both of which face fraud charges from the Securities and Exchange Commission (SEC).

In September, bankruptcy rumors began to circulate because of a dispute between QA3 and its insurance carrier and the amount of coverage that was needed for the growing number of legal claims from investors over sales of high-risk private placements.

Last month, a Financial Industry Regulatory Authority (FINRA) arbitration panel ruled in favor of an elderly couple who had a filed a claim against QA3 for real estate deals that had soured. The arbitration award was for $1.6 million.

If you have a story to tell involving private placement deals or independent broker/dealers issues, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Private-placements deals in Medical Capital Holdings and Provident Royalties have become a bone of contention for the Financial Industry Regulatory Authority (FINRA), which plans to focus new attention on the broker/dealers responsible for selling the opaque and illiquid private investments to investors.

As reported Feb. 2 by Investment News, private-placements are on FINRA’s hot-button issue list because of the devastating financial losses they’ve caused for investors in the past year. In many instances, the losses are tied to the broker/dealers selling private placements as suitable investments for their clients, yet failing to perform appropriate due diligence on certain private offerings.

Two such offerings include private placements in Medical Capital and Provident Royalties. Both companies were charged with securities fraud by the Securities and Exchange Commission (SEC) in 2009 for misrepresentation and misappropriating hundreds of millions of dollars of investors’ money.

A number of brokers/dealers that sold both products also face lawsuits by regulators, as well as arbitration claims filed by investors.

James Shorris, executive vice president and executive director of enforcement for FINRA, says oversight of private placements will be a “major, major, major initiative” at FINRA in the future. During his remarks at the annual meeting of broker/dealer members of the Financial Services Institute on Feb. 2, Shorris specifically named private placements associated with Medical Capital Holdings and Provident Royalties LLC.

In addition to private placements, Shorris says FINRA also will step up its scrutiny of non-traded REITs, as well as other exotic investments such as reverse convertibles and leveraged exchange-traded funds.

Private placement investments in Medical Capital Holdings and Provident Royalties have caused financial devastation for hundreds of investors after the deals later soured and the companies issuing the securities went belly up. Now, several independent broker/dealers that sold the products to investors are facing financial issues of their own.

As reported Jan. 17 by Investment News, QA3 Financial Corp. is one of those broker/dealers. The story says QA3 is looking at bankruptcy because of a dispute with its insurance carrier over the amount of coverage available for legal claims stemming from private placement sales in Medical Capital and Provident Royalties.

According to the article, QA3 claims it had coverage for $7.5 million of legal claims, damages and expenses, while its carrier, Catlin Specialty Insurance Co., said the coverage is capped at $1 million.

A lawsuit filed in September states that QA3, which includes about 400 independent representatives and advisers, is facing bankruptcy because of its issues with Catlin. Catlin later sued QA3, claiming that private-placement claims under the policy were, in fact, limited to $1 million. That suit is pending.

Like a number of broker/dealers that sold private placement in Medical Capital and Provident Royalties, QA3 is facing a slew of arbitration claims filed by clients who suffered huge financial losses in their investments when the companies were sued by the Securities and Exchange Commission for fraud. Today, both Medical Capital and Provident Royalties are in receivership.

In the case of Medical Capital, Securities America was a top seller of Med Cap private placements. QA3 was a leading seller of Provident deals. By some estimates, QA3 sold $32.6 million in Provident notes, reportedly collecting almost $7 million in commissions.

Sales of tenant-in-common exchanges (TICs) have come back to haunt a number of broker/dealers, as they face a lawsuit brought by the trustee of one of the biggest creators and distributors of TICs – DBSI Inc.

DBSI, which defaulted on its payments to investors in 2008, has filed for Chapter 11 bankruptcy protection. Now, James Zazzali, the trustee in charge of the bankruptcy, is taking legal action against nearly 100 broker/dealers that sold the doomed product. The lawsuit, which was filed in November, alleges that the TIC from DBSI was actually a $600 million Ponzi scheme.

As reported Dec. 8 by Investment News, the five biggest earners of commissions for selling DBSI include: Berthel Fisher & Co. Financial Services Inc.; QA3 Financial Corp.; DeWaay Financial Network LLC; The Private Consulting Group, which shut down last year; and Questar Capital Corp.

Many of the firms listed in the DBSI lawsuit already are waging similar legal battles over failed private-placement deals. Among those on the DBSI list: Brecek & Young Advisors Inc., which merged into Securities America Corp. in 2009; KMS Financial Services; J.P. Turner Co. LLC; and Alternative Wealth Strategies Inc.

Unlike other private-placement investments that have hit hard times recently, DBSI has not been charged with fraud by the Securities and Exchange Commission (SEC). In July 2009, two high-profile private placements, Medical Capital Holdings Inc. and Provident Royalties LLC, were sued by the SEC for fraud. In the case of Provident Royalties, more than 40 broker/dealers that sold the product have been sued by Provident’s receiver.

A TIC is a real estate investment in which two or more parties own a fractional interest in a select property. The investments became popular in 2002 after the Internal Revenue Service ruled that investors could defer capital gains on real estate transactions involving the exchange of properties.

Private placements – from Medical Capital to Provident Royalties – have made a name for themselves this year, producing massive financial losses for unsuspecting investors. Unsuspecting because, in many instances, investors were unaware of the untold risks associated with these largely unregulated investments.

Take Tracy Nye, a 50-year-old Idaho restaurant owner who was forced to come out of retirement after losing $1.5 million on private placements in Medical Capital Holdings and in Shale Royalties, an affiliate of Provident Royalties LLC. Both entities were sued for fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

In total, investors lost more than $1 billion in private placements issued by Tustin, California-based Medical Capital and some $485 million from Dallas-based Provident Royalties, an oil and gas investment firm.

According to the SEC, both Medical Capital and Provident misrepresented their investments, as well as misappropriated investors’ money.

Meanwhile, investors like Nye are paying the price. Many have witnessed their life savings vanish overnight, while others say their money for retirement and children’s college education are now a thing of the past.

As reported in a Nov. 19 article by Bloomberg, private placements were initially marketed and sold to institutional investors and financially savvy individuals. However, because the SEC hasn’t changed the majority of its net-worth requirements for private placements since 1982, the products are being sold to investors even though many may not thoroughly understand what they’re actually getting into. In particular, retirees are a favored target of issuers of private placements because they have access to retirement accounts and equity in their homes.

According to the Financial Industry Regulatory Authority (FINRA), complaints about private placements have increased 35% in this year alone and more than 50% in 2009. Earlier this year, FINRA issued a notice to brokers regarding private placements; it also has launched an investigation into an undisclosed number of broker/dealers regarding sales practices of the products.

If you sustained financial losses related to Medical Capital, Provident Royalties or another private placement investment, contact our securities fraud team. We will evaluate your situation to determine if you have a claim.

Even though Securities America continues to wage legal battles stemming from sales of Medical Capital private placements, the company apparently is beefing up its network of independent representatives and advisers.

As reported Nov. 1 by Investment News, Securities America acquired a branch of about 45 representatives and managers in control of $500 million in client assets formerly affiliated with Equitas America LLC in September. One month earlier, Steve Bull, a former branch manager with 20 reps under him at Next Financial Group, joined Securities America.

Additional acquisitions and/or mergers could occur in the future, according to Securities America CEO Jim Nagengast, especially in light of the fact that more broker/dealers are closing up shop – either for capital funding issues or legal battles over private placement deals.

For more than a month, Securities America has been involved in an administrative hearing with the Massachusetts Securities Division over allegations that the firm misled Massachusetts investors who bought $7.2 million in Medical Capital Holdings notes from Securities America reps.

The administrative hearing comes on the heels of a Jan. 26 lawsuit in which Massachusetts Secretary of State William Galvin accuses Securities America of committing securities fraud on a “massive scale.” Among the charges, Massachusetts regulators allege that Securities America intentionally failed to reveal potential red flags to advisers and clients about Medical Capital.

In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital, which currently is in receivership.

Since then, investors have filed lawsuits and arbitration complaints over the high-risk private placements against more than 50 securities firms.

If you suffered investment losses in Medical Capital notes sold by Securities America, please contact us. A member of our securities fraud team will help you determine if there is a viable claim for recovery.

Embattled broker/dealer Securities America has a new leader at the helm: Jim Nagengast. One of his first assignments as the new CEO: Dealing with the problems that Securities America brokers created when they unloaded Medical Capital private placements on investors from 2003 to 2008.

In January, Massachusetts Secretary of State William Galvin filed a lawsuit against Securities America, accusing the firm of misleading investors who bought the investments. According to the complaint, 400 Securities America representatives and advisers sold almost $700 million private placements issued by Medical Capital Holdings.

In July 2009, the Securities and Exchange Commission filed fraud charges against Medical Capital.

The Massachusetts lawsuit alleges that Securities America failed to tell investors key information about the private placements and, specifically, the financial condition of Medical Capital itself. In total, Medical Capital issued $2.2. billion in notes; about half are in default. Many broker/dealers sold the notes, but Securities America, which has more than 1,900 representatives and advisers, is the largest broker/dealer to have sold them.

As reported July 26 by Investment News, an administrative hearing at the Massachusetts Securities Division is set for Aug. 30. According to the story, Nagengast believes Securities America performed its due diligence in selling Medical Capital notes to investors.

There may be evidence to the contrary, however. The Massachusetts lawsuit cites several e-mails from Nagengast in 2005 stating that the firm should stop selling the product until it received audited financials from Medical Capital.

According to the complaint, Nagengast wrote the following in one e-mail:

“We simply have to tell [Medical Capital] that if they don’t have financials by [a specified] date, we will stop distributing the product on that date. Then they can decide if it’s worth spending $50,000 to have [the audit] done. If they won’t spend the money, that should give us concern.”

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.