Category Archives: Provident Royalties

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.

Legal problems tied to private placements sales in Medical Capital Holdings and Provident Royalties have proved to be the undoing for yet another broker/dealer. Last week, CapWest Securities announced it had filed withdrawal papers with the Financial Industry Regulatory Authority (FINRA).

As reported Sept. 4, by Investment News, CapWest’s profile status with both FINRA and the Securities and Exchange Commission (SEC) is no longer “active.” Instead, it’s listed as “termination requested.”

Representatives for CapWest sold $22 million in private placements issued by Provident Royalties and $30.6 million of Medical Capital notes. Both companies were charged with fraud by the SEC in 2009.

The closing of CapWest comes on the heels of several other broker/dealer closings over private placement deals gone bad, including GunnAllen Financial, Jesup & Lamont Securities Corp. and QA3 Financial Corp.

Earlier this year, CapWest lost a $587,000 FINRA arbitration claim to four clients who claimed negligence and misrepresentation in the sale of oil and gas ventures offered by Provident and Striker Petroleum LLC.

CapWest is owned by Capstone Financial Group.

Plagued by lawsuits and arbitration claims over sales in Medical Capital Holdings and Provident Royalties, broker/dealer Securities America has been sold to Ladenburg Thalmann Financial Services for at least $150 million in cash.

Ameriprise, the parent company of Securities America, revealed in April of its intention to sell the broker/dealer subsidiary.

In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital Holdings and Provident Royalties with fraud. Securities America was one of the largest sellers of the troubled private placements. Ultimately, clients of Securities America suffered an estimated $400 million in losses from the investments.

In April, Ameriprise offered a settlement of nearly $160 million to Securities America clients.

As reported Aug. 17 by Reuters, Miami-based Ladenburg – which owns other independent brokerages – agreed to make additional cash payments if Securities America meets certain targets in the next two years.

The purchase, which will be financed by another firm affiliated with Ladenburg Chairman Phillip Frost, is expected to be completed by December 2011.

There is some new information for Securities America clients who suffered losses from private placement investments in Medical Capital Holdings and Provident Royalties. On Aug. 4, U.S. District Court Judge W. Royal Furgeson Jr. signed an order to approve an $80 million settlement between Securities America and class action investors suing the broker/dealer over the failed investments.

Earlier this year, a separate $70 million settlement was reached with investors who had filed individual arbitration claims against some brokers.

As reported Aug. 14 by Investment News, approval of the settlement means Securities America reps and financial advisers who had tainted employment records because of open or pending investor arbitration claims from the MedCap and Provident sales will now see closure.

From 2003 to 2008, Securities America brokers sold about $700 million of Medical Capital private placements. Other broker/dealers sold the investments, as well, but Securities America was by far the biggest distributor of them.

In the summer of 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud.

Sales of private placements in Provident Royalties have become the undoing of yet another broker/dealer. Workman Securities announced earlier this week of its plans to close in November, telling 100 advisers they could move as a group to Virginia-based Allied Beacon Partners.

As reported Aug. 5 by Investment News, Workman representatives who agree to the move were promised a smooth transition, with Allied agreeing to keep Workman’s payout schedule or grid for two years.

In the summer of 2009, Provident Royalties was charged with fraud by the Securities and Exchange Commission (SEC). Workman was a large seller of private placements in Provident, selling $9 million of the investments.

According the Investment News story, Workman had up to 20 unsettled investor complaints relating to losses from sales of private placements in Provident Royalties.

In shuttering, Workman Securities joins dozens of other broker/dealers that met a similar fate because of private placement deals gone bad in Provident and another sponsor in bankruptcy, Medical Capital Holdings.

In February, Workman reached an agreement with the Financial Industry Regulatory Authority (FINRA) to pay $700,000 for partial restitution to more than a dozen clients who had sued the B-D over investments in both Provident Royalties and Medical Capital.

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.

Omni Brokerage Inc. is the latest broker/dealer to go out of business. The Utah-based B-D, which is facing $2.8 million in claims for selling DBSI tenant-in-common (TICs) exchanges, says its shuttering is tied to lack of business, not legal issues.

However, Omni is at the center of several arbitration claims filed by investors with the Financial Industry Regulatory Authority (FINRA) over failed DBSI deals. As reported in a June 2 story by Investment News, a lawsuit filed by DBSI trustee James Zazzali says Omni generated $271,000 in commissions from pitching the DBSI TICs.

Omni joins dozens of other broker/dealers that sold failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC and, as a result, have gone out of business. As of March 2010, a total of 16 broker/dealers have closed their doors.

DBSI was a leading packager of tenant-in-common exchanges. TICs are a form of real estate ownership in which two or more parties have a fractional interest in a property.

DBSI began to default on its payments to investors in 2008. The firm later filed for Chapter 11 bankruptcy protection.

In December 2010, the trustee for the DBSI bankruptcy sued more than 90 broker/dealers that sold the failed product, including Omni.

According to the Investment News story, the DBSI trustee claims that TICs from DBSI were actually part of a $600 million Ponzi scheme. A similar allegation has been waged against Medical Capital Holdings and 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.