Category Archives: Private Placement Offerings

Private-placement sales in Provident Royalties LLC have come back to haunt many once-successful broker/dealers. The Securities and Exchange Commission (SEC) charged Provident with civil fraud last summer, accusing the company and various top executives of operating a $485 million Ponzi scheme allegedly involving phony oil and gas securities.

Fifty broker/dealers that sold private placements in Provident are now being sued by Provident’s trustee, Milo H. Segner Jr. At the same time, hundreds of investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA).

As reported July 11 by Investment News, many broker/dealers facing Provident-related lawsuits appear to have dangerously low net-capital positions – a fact that could put them in peril if they eventually pay out large legal claims over soured Provident deals.

“Broker-dealers facing millions of dollars in lawsuits could be in a world of hurt,” said Carrie Wisniewski, president of B/D Compliance Associates, in the Investment News article. “It’s a big problem,” she said.

One of the broker/dealers named in the trustee’s June 21 lawsuit is Capital Financial Services. It had only $390,000 in excess net capital at the end of 2009. The firm also has at least nine pending arbitration claims against its president, Brian Boppre, totaling $10.8 million in damages.

Next Financial Group also is a big seller of Provident private placements. It had $3.1 million in excess net capital at the end of last year, including $1.1 million reserved to pay contingent legal liabilities, according to Investment News.

Violation of the SEC’s net-capital requirement can signal the end of a broker/dealer. The Provident case – and the resulting legal claims it produced – has pushed many broker/dealers to the breaking point. Okoboji Financial Services, the fifth-largest seller of the Provident private placements, said in May it was closing up shop. Okoboji reportedly had excess net capital of $32,048 at the end of 2009, but made no provisions for legal liabilities.

GunnAllen Financial got caught up in a similar situation. A leading seller of investment deals in Provident Royalties, the broker/dealer closed in March when its available capital fell below the amount needed to adhere to industry rules. At least 10 other firms that sold private placements in Provident Royalties, as well as in Medical Capital Holdings, have shuttered recently because of net-capital issues.

If you are a retail or institutional investor and sustained investment losses related to Provident Royalties, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Non-traded REITs such as Behringer Harvard REIT I, Behringer Harvard Opportunity, Wells Real Estate Investment Trust II, Inland America Real Estate Trust and Inland Western Retail Real Estate Trust may become more transparent thanks to a new platform under development by the Depository Trust and Clearing Corporation (DTCC).

As reported June 6 by Investment News, the intent of the platform it to provide standards, centralize data and automate transactions for alternative investments like private placements, non-traded real estate investment trusts, limited partnerships and hedge funds. Through the new platform, the DTCC will operate as a go-between among firms that create alternative investments and the broker/dealers and companies selling them.

The platform – called the Alternative Investment Product (AIP) – currently is being used by Pershing LLC. The Charles Schwab Corp. is testing it, according to the Investment News story, and National Financial Services LLC, a clearing unit of Fidelity Investments, plans to have it operating by 2011.

In the interim, about 15 DTCC- affiliated sponsors of alternative investment products are testing the platform.

Alternative investments like non-traded REITs and private placements have come under fire by regulators in recent months for their lack of transparency. In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against the Tustin, California, lender Medical Capital Holdings in connection to private placements that the company issued to more than 20,000 investors nationwide.

Non-traded REITs also faced intense scrutiny lately. Last year, some of the most prominent non-traded REITs, including Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust and Piedmont Office Realty Trust slashed dividends to investors and/or shut down their redemption programs.

The AIP is intended to standardize the way the alternative investment industry communicates information about these types of investments, providing more new clarity.

“The challenge for many alternative investments is that they’re non-standardized,” said one anonymous industry executive in the June 6 Investment News story. “They’re not always priced and valued on a regular basis. This is an investor need, a broker/dealer need.”

Sales of private placements in Provident Royalties LLC have come back to haunt broker/dealer Okoboji Financial Services. On May 28, the Iowa-based company filed notice with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) of its intent to withdraw as a broker/dealer. Investment News first reported the story on June 2.

Last summer, the SEC brought a fraud lawsuit against Provident Royalties and its related funds and business entities. In the complaint, the SEC charged Provident with selling fraudulent private-placement offerings from September 2006 through January 2009. According to the SEC, Provident raised $495 million from at least 7,700 investors throughout the country.

Okoboji Financial also is named in the SEC’s lawsuit for having received a 5% payout in connection to selling Provident notes. As reported in the Investment News article, Okoboji was fined $30,000 by FINRA in 2009 for selling private placements to prospective investors with whom neither the firm nor its representatives had a pre-existing relationship.

In March 2010, Okoboji Financial lost a $978,000 arbitration claim over unsuitable structured settlements, according to records with FINRA.

In April, a lawsuit was filed in federal court in South Dakota involving an Okoboji representative who sold private placements in Provident and Medical Capital Holdings to 87-year-old Thelma Barber. As in the Provident case, the SEC charged Medical Capital Holdings with fraud in July 2009. It is now under a court-appointed receiver.

A recent Medical Capital win by an investor over soured private placement deals is an encouraging sign for other investors with similar losses. The $400,000 award, which was issued May 10 and reported June 1 by Investment News, appears to be the first successful claim against a broker/dealer for selling Medical Capital investments.

The investor in the case was Marilyn Hazell, who filed her complaint against broker/dealer Peak Securities of Largo, Florida. In the complaint, Hazell cited breach of contract, breach of fiduciary duty, negligence and fraud.

Private placements in Medical Capital are at the center of a July 2009 fraud complaint by the Securities and Exchange Commission (SEC). In its complaint, the SEC charged Medical Capital Holdings with fraud in the sale of $77 million in notes. According to the SEC, Medical Capital told investors that any funds raised from its private placement deals would be invested in medical receivables. Instead, the SEC alleges that the company took $25 million in administrative fees for one fund, Medical Provider VI.

Federal prosecutors also have opened a criminal investigation of Medical Capital’s officers: Sidney M. Field and Joey Lampariello. In late May, U.S. District Judge David O. Carter agreed to let them tap more than $100,000 in previously frozen assets so they could hire criminal defense attorneys.

As reported in the June 1 Investment News article, Medical Provider Funding VI is the last in a series of offerings that raised $2.2 billion from investors. About $1 billion in investors’ money has reportedly been wiped out.

Since then, many investors have filed arbitration claims against the broker/dealers that sold them Medical Capital notes.

Peak Securities lost its registration with FINRA in November.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us.

Investor complaints regarding private placements – including those linked to Medical Capital Holdings – have prompted several state and federal investigations into the private placement sales practices of broker/dealers across the country. In many instances, the investigations have revealed a significant lack of regulatory compliance.

In response, the Financial Industry Regulatory Authority (FINRA) has published new guidance for FINRA-registered firms about their obligations when it comes to customer suitability, disclosures and other requirements for selling private placements to customers. Specifically, FINRA Regulatory Notice 10-22 reinforces and details a broker/dealer’s obligation to conduct a reasonable investigation of an issuer and the securities that are recommended in its offerings.

The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.

Private placements under Regulation D are usually sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker/dealer’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.

“An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests,” said FINRA Chairman and CEO Rick Ketchum, in a statement.

“That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings,” he said.

FINRA has brought three enforcement actions in recent months involving private placement offering violations. The actions include a complaint charging McGinn, Smith & Co. and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities; the expulsion of Dallas-based Provident Asset Management for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme; and fines totaling $750,000 against Pacific Cornerstone Capital and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.

Private placement offerings and leveraged ETFs (exchange-traded funds) are among the investments that con artists turn to as a way to scam innocent victims. Private placements in particular have been in the news lately, with their issuers – i.e. Medical Capital Holdings and Provident Royalties – accused of committing fraud.

As reported April 9 by CNBC, it’s become increasingly commonplace for investors to find themselves a victim of an investment scam or con. According to the North American Securities Administrator Association (NASAA), senior citizens are the No. 1 target for fraud, with baby boomers ranking a close second. In 2008, the FBI estimated that some $40 billion was lost to securities and commodities fraud.

In addition to private placement offerings, leveraged ETFs rank high in terms of potential abuse for fraud. While legitimate financial products, ETFs are complicated investments that trade on a daily basis. ETFs use exotic financial instruments, including derivatives, to generate better returns than the market return. This potential volatility, along with the increased exposure to risk, may make ETFs an unsuitable investment for most retail investors.

The best way to prevent fraud is to do your homework. If you suspect a deal is too good to be true, contact your state securities regulator. You also can find out if the person selling the offering or investment is registered with the Financial Industry Regulatory Authority (FINRA) on FINRA’s BrokerCheck Web site.

Another red flag to be aware of: Guarantees of a high rate of return on unregistered securities.

Private placements, which have made news in connection to Medical Capital Holdings and Provident Royalties, are becoming an increasingly questionable investment for ordinary investors.

Private placements are securities in stocks, bonds or other instruments that a corporation issues to investors. The investments are riskier than traditional securities because many of the issuing companies don’t have to register their placements with the Securities and Exchange Commission (SEC).

Former schoolteacher Adrianne Cross found this out the hard way. According to a March 27 article in the Wall Street Journal, Cross, 64, invested her life savings in private placements. She thought the investments were safe. Now she’s lost everything.

According to the Wall Street Journal, Cross’ broker worked for Ameriprise Financial’s Securities America unit in Los Angeles. Cross says the broker persuaded her to invest more than $1 million in private-placement securities issued by Medical Capital Holdings and Provident Royalties LLC in 2007. The broker allegedly told Cross that the investments were a safe alternative to stocks.

The Securities America broker was wrong. Both Medical Capital and Provident Royalties, which face fraud charges by the SEC, collapsed in 2009. For Cross and thousands of other investors, it meant their investments became essentially worthless.

Cross has since filed an arbitration claim with the Financial Industry Regulatory Authority (FINRA) in an attempt to recover her losses.

In January, Massachusetts’ Secretary of State William Galvin brought the first state enforcement case against Securities America over the broker/dealer’s sales practices of Medical Capital securities. According to the complaint, Securities America’s representatives failed to disclose the risks to customers, many of whom were retirees.

If you have a story to tell involving Medical Capital Holdings, Securities America and/or Provident Royalties, please contact a member of our securities fraud team.

Provident Asset Management has officially been expelled by the Financial Industry Regulatory Authority (FINRA) for marketing a series of fraudulent private placements through its affiliate, Provident Royalties, LLC, in what the regulator calls a “massive Ponzi scheme.”

According to FINRA, Provident misrepresented to investors that the funds raised through the various offerings would be used to purchase interests in the oil and gas business. In reality, the funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, FINRA says Provident acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors’ funds during the contingency period of the offering.

FINRA found that from September 2006 through January 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. Provident Asset Management’s only business line was acting as the wholesaling broker-dealer for the Provident Royalties’ offerings, which were sold to customers through more than 50 retail broker/dealers nationwide. In total,  more than $480 million was raised through approximately 7,700 individual investments made by thousands of investors.

Meanwhile, FINRA’s broader investigation into broker/dealers that sold Provident private placements remains ongoing.

The Financial Industry Regulatory Authority (FINRA) has closed the doors on GunnAllen Financial. FINRA apparently informed the financially troubled broker/dealer late last week that if it fell below mandatory net capital requirements it would be forced to close its operations.

GunnAllen’s financial issues stem to the increasing number of lawsuits being filed by investors against the firm. As reported March 22 by Investment News, investors are seeking as much as $50 million in damages, with many of the claims tied to former GunnAllen broker Frank Bluestein.

The Securities and Exchange Commission (SEC) filed fraud charges against Bluestein in September 2009 on allegations that he lured elderly investors into refinancing their home mortgages so he could fund investments in a $250 million Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M).

GunnAllen also is facing a slew of lawsuits by investors over sales of private placements in Provident Royalties LLC.

News of private placement deals run amuck keeps coming. The latest concerns private placement offerings – also known as Regulation Ds – involving Pacific Cornerstone Capital and former CEO Terry Roussel. The two were fined $750,000 in December by the Financial Industry Regulatory Authority (FINRA) for making misleading statements and, in some instances, omitting facts in connection to sales of two private placement deals: Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC.

FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.

Cornerstone Industrial Properties and CIP Leveraged Fund Advisors were affiliated businesses of California-based Pacific Cornerstone. Pacific Cornerstone’s largest single shareholder happens to be Roussel.

According to FINRA, Pacific Cornerstone sold private placements in Cornerstone Industrial Properties and CIP Leveraged Fund Advisors via offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment.

The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted an unrealistic yield on a $100,000 investment in excess of 18%. The alleged actions took place from 2004 to 2009.

In total, investors placed more than $50 million into the two deals. FINRA has not stated how much, if any, of clients’ money may be missing.

Over the five-year period in question, FINRA says that Roussel told investors that all was well with their investments. In addition, he periodically sent letters to investors that portrayed a positive yet unrealistic outlook for their investments. The letters also failed to include required risk disclosures, as well as a complete financial picture of Cornerstone Industrial Properties and CIP Leveraged Fund Advisors.

Maddox Hargett & Caruso is investigating ongoing complaints by investors who sustained losses in private placement offerings related to Medical Capital Holdings, Provident Asset Management LLC and Pacific Cornerstone Capital. If you’ve suffered financial losses in any of these investments, contact us to tell your story.