Category Archives: Private Placements, Reg D 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.”

For many investors, promissory notes tend to conjure memories of recent deals gone bad, especially those associated with Medical Capital Holdings or Provident Royalties. Both entities were charged with fraud by the Securities and Exchange Commission (SEC) and cost investors millions of dollars in financial losses.

Promissory notes are again back in the news. This time a broker who worked for a firm – Success Trade Securities – that is alleged to have sold more than $18 million in fraudulent promissory notes to 58 investors has been barred by the Financial Industry Regulatory Authority (FINRA).

The broker, Jinesh “Hodge” Brahmbhattm, worked for Success Trade Securities from 2009 until April. He was barred by FINRA last week.

Many of the individuals who invested in the fraudulent notes are current and former NFL and NBA players. As reported Nov. 20 by Investment News, one athlete, Jared Odrick of the Miami Dolphins, has filed an arbitration complaint with FINRA against Brahmbhatt, Success Trade and the company’s top executive, Fuad Ahmed.

The letter of acceptance, waiver and consent from FINRA doesn’t mention Brahmbhatt’s work with Success Trade as the reason he was barred from FINRA. Rather, it cites Brahmbhatt’s failure to appear and testify in August at a disciplinary hearing regarding Success Trade and Ahmed.

Earlier this spring, FINRA filed a cease-and-desist order against Success Trade and Ahmed. The order specifically instructed the two “to halt further fraudulent activities” and cited “the misuse of investors’ funds and assets.”

FINRA also filed a complaint against Ahmed and Success Trade, alleging “fraud in the sale of promissory notes issued by the firm’s parent company, Success Trade Inc.”

According to a Nov. 18 story by Yahoo Sports, Brahmbhatt had once been registered in a financial advisers program created by the NFL Players Association. He dropped his FINRA license in April, and told Yahoo Sports at the time that he had more than 30 clients who had purchased some $12 million of the allegedly fraudulent promissory notes from Success Trade.

Meanwhile, Odrick, the NFL player, filed his arbitration complaint with FINRA in April. He says in the complaint that he invested $625,000 in Success Trade notes and one other series of promissory notes beginning in 2011. Among other things, Odrick alleges that he was promised returns of 10% to 12.5%. The Success Trade note “was part of a large Ponzi scheme orchestrated by Success Trade, Ahmed and Brahmbhatt,” the complaint states.

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.

For the second time in less than a week, another broker/dealer announced plans to suspend sales of American Realty Capital Trust V, or ARC V. As reported July 19 by Investment News, the broker/dealer, National Planning Corp., cited continuing due diligence as the reason for the halt in sales.

Last Friday, Securities America told its registered reps it was no longer offering ARC V because of a risk of overconcentration.

National Planning Corp. said that its concerns over ARC V stem to another American Realty Capital REIT, American Realty Capital Trust IV. In June, that REIT announced plans to purchase 986 properties from an affiliate of General Electric Capital Corp. for $1.45 billion. The majority of those properties are fast-food and casual-dining establishments.

“Due to concerns with style drift, deviations from the prospectus and growing pains, which all have implications for [ARC V], NPC decided to suspend sales” of the REIT, said an e-mail to NPC reps from the firm’s products group. The same e-mail noted that NPC was adding to its selling list another American Realty Capital REIT, the Phillips Edison – ARC Shopping Center REIT II Inc.

“Based upon the GE transaction, the portfolio for [ARC IV] does not match the [REIT’s] stated strategy in terms of the average credit rating of the portfolio,” according to the e-mail. “Additionally, [ARC IV] appears to deviate from the marketed strategy in terms of the types of tenants and adding value through aggregation.”

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.”

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

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.