Considering Private Placements? Think Twice

Independent broker/dealers that sold private placements Medical Capital Holdings and Provident Royalties LLC – both of which were charged with fraud by the Securities and Exchange Commission (SEC) – are finding themselves under the regulatory gun lately. Some, like QA3 Financial and GunnAllen Financial, have been forced to close their doors, while others – including Securities America – face a slew of arbitration claims and lawsuits from investors.

Earlier this month, another broker/dealer, Workman Securities Corp., also was in the news over private-placement sales involving Provident Royalties and Medical Capital Holdings. In a settlement with the Financial Industry Regulatory Authority (FINRA), Workman handed over $700,000 for partial restitution to more than a dozen clients who had sued the firm over private-placements investments in Medical Capital and Provident.

Problems surrounding private-placement deals came to a head in July 2009 when the SEC accused Medical Capital Holdings and Provident Royalties of fraud. Medical Capital currently is in receivership. According to the SEC, the company allegedly defrauded investors out of at least $18.5 million. On Aug. 3, 2009, the SEC obtained an emergency court order halting a $77 million offering fraud perpetrated by the company.

In the case of Provident Royalties, the SEC says the Texas-based company allegedly bilked 7,700 oil and natural gas investors out of millions via an elaborate $485 million Ponzi scheme. In the SEC’s 2009 complaint, Paul R. Melbye, Brendan Coughlin and Henry Harrison are accused of orchestrating the scheme, as well as Provident, broker/dealer Provident Asset Management LLC, and 21 entities that offered and sold the private-placement securities to investors.