Archive for the ‘Private Placements’ Category
Wednesday, May 26th, 2010
Provident Royalties investors who received a ballot for accepting or rejecting the Fourth Amended Consolidated Plan of Liquidation are advised that the ballot must be received by EPIQ Bankruptcy Solutions by May 28, 2010. Eligible voters should be aware that they have the right to pursue their own claims, rather than assign them to the PR Liquidating Trust. An investor who submits their ballot but fails to exercise the opt-out election will automatically assign to the PR Liquidating Trust their individual claims they may have against their brokerage firm or financial advisor who placed them in the Provident investment, and will be barred from bringing an individual action.
Klayman & Toskes strongly encourages eligible voters who purchased Provident Royalties from a full-service brokerage firm and FINRA member, and sustained damages of $200,000 or more, to consider filing an individual arbitration claim instead of assigning their rights away. By assigning your causes of action and claims to the PR Liquidating Trust, any future lawsuit brought by the Trust to recover Provident losses will most likely be filed as a class action or mass action. However, by participating in a class action or mass action lawsuit, an investor may only recover a nominal amount. If one has experienced significant losses in Provident Royalties, and purchased the investment from a full-service brokerage firm, it may be more beneficial for them to file an individual securities arbitration claim. In 2003, Klayman & Toskes conducted a detailed study of securities arbitration versus class action. The study concluded that investors who file a securities arbitration claim traditionally obtain an overall higher rate of recovery as opposed to participating in a class action lawsuit. To view the full results of the comparison, please visit the following link: http://www.nasd-law.com/documents/classvr.pdf
Under NASD Rules, brokerage firms have an obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the SEC’s Regulation D under the Securities Act of 1933, also known as private placements. Provident Royalties securities were private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A brokerage firm has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering. Failure to comply with this duty gives rise to an individual cause of action against the brokerage firm who sold the product to the customer.
Provident Royalties investors who received a ballot for accepting or rejecting the Fourth Amended Consolidated Plan of Liquidation can contact Klayman & Toskes to explore their legal rights and options.
Posted in Opt-out, Private Placements, Provident Royalties/Shale Royalties, Regulation D, Suitability | No Comments »
Tuesday, April 27th, 2010
Earlier this month, FINRA issued Regulatory Notice 10-22 which reminds brokerage firms of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Securities and Exchange Commission’s (”SEC”) Regulation D under the Securities Act of 1933 (”the Act”)—also known as private placements. A copy of Regulatory Notice 10-22 can be found by clicking on this link: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p121304.pdf
Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A brokerage firm has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering.
Regulatory Notice 10-22 also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that brokerage firms adequately investigate the private placements that they recommend. According to a recent estimate by the SEC, in 2008, companies intended to issue about $609 billion of securities in Regulation D offerings, making it a key source of capital for American business, particularly small businesses.
“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. “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.”
Recent problems uncovered by FINRA in Regulation D offerings have resulted in various brokerage firms being sanctioned for providing private placement memoranda and sales materials to investors that contained inaccurate statements or omitted information necessary to make informed investment decisions.
Private placements under Regulation D are typically sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, Regulatory Notice 10-22 emphasizes that a brokerage firm’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D. In addition to conducting a reasonable investigation concerning the issuer and its securities, a brokerage firm must have reasonable grounds to believe that the investment is suitable for the particular customer to whom it’s offered and ensure that the customer fully understands the risks involved in the investment.
FINRA has brought three enforcement actions in recent months involving private placement offering violations. They 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 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, Inc. 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.
Klaymay & Toskes is presently prosecuting numerous arbitration claims against various brokerage firms across the country to recover losses sustained in private placements. These include Medical Capital, Provident Royalties, and Shale Royalties investments.
Posted in Arbitration, Enforcement, FINRA, McGinn, Medical Capital, Pacific Cornerstone Capital, Private Placements, Provident Asset Management, Provident Royalties/Shale Royalties, Regulation D, Regulatory Notice, Smith & Co., Suitability | 1 Comment »
Tuesday, March 30th, 2010
FINRA has expelled Provident Asset Management, LLC, a Dallas-based broker-dealer, for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme.
The expulsion of Provident Asset Management is the first produced by a FINRA initiative involving active examinations and investigations of broker-dealers involved in retail sales of private placement interests, as well as broker-dealers affiliated with private placement issuers. FINRA is looking at firms’ compliance with suitability, supervision and advertising rules, as well as potential instances of fraud. The initiative was undertaken in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In fact, investors’ funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm 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.
“Provident facilitated the sale of a series of fraudulent private placements that were marketed to unsuspecting customers as income-producing investments, when it was simply using new investors’ money to pay previous investors the promised dividends – a classic Ponzi scheme,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics.”
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, raising over $480 million through approximately 7,700 individual investments made by thousands of investors.
FINRA’s broader investigation into broker-dealers that sold the Provident and other troubled private placement offerings is continuing.
The Provident Royalties private placement memoranda promised investors returns of up to 18 percent per year and said the funds raised through each offering would be used to purchase interests in all aspects of the oil and gas business.
In an effort to market the Provident Royalties offerings, the firm falsely represented that: investors’ funds would be used by each individual Provident Royalties offering to purchase interests in the oil and gas business for that offering; the subscription proceeds of each offering would be deposited into an account for that offering and become assets for that offering; approximately 86 percent of the subscription proceeds would be allocated to acquiring interests in the oil and gas business; and, dividends paid to investors would be derived from revenues, primarily from the sale of oil and gas assets.
In fact, Provident Royalties deposited the investors’ funds from each offering into a separate bank account. Then, in the fashion of a classic Ponzi scheme, the money was either moved freely from one account to another or was swept into one of Provident Royalties’ operating accounts and used to pay dividends and principal to earlier investors.
On July 2, 2009, the SEC filed a civil injunction action in the Northern District of Texas naming Provident Asset Management, Provident Royalties and others, seeking a temporary restraining order and an emergency asset freeze and appointment of a federal equity receiver to take control of the entities and preserve their assets for the benefit of the defrauded investors.
In concluding this settlement, Provident Asset Management neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Posted in Arbitration, Enforcement, FINRA, Fraud, Private Placements, Provident Royalties/Shale Royalties | No Comments »
Tuesday, January 26th, 2010
Massachusetts’ top securities regulator is expected to bring the first state enforcement case against Ameriprise Financial’s (AMP) Securities America unit, raising the stakes in a controversy over so-called private-placements, sales of unregistered securities that are supposed to be marketed only to institutions and sophisticated individuals.
The complaint, expected to be filed today by Secretary of the Commonwealth William Galvin, alleges that the firm knowingly marketed and sold notes issued by Medical Capital Holdings Inc., which entered receivership in July 2009, as secured, fixed-income type investments to unsophisticated customers who didn’t have experience with high-risk products.
“It’s primarily a sales practices case,” said Galvin, who said his office started looking into the case last year after getting complaints from residents. He estimates that about over 60 Massachusetts residents bought $7.2 million worth of the notes, of which Medical Capital issued more than $2.2 billion in all.
Securities America marketed the notes over several years using retail marketing tactics such as seminars, according to Galvin, and continued to sell them even after a top company official raised a red flag and problems about Medical Capital, which is now facing civil fraud charges by the Securities and Exchange Commission, started to surface in recent years. “The registered broker dealer knew based on their own due diligence analysis that…the notes were probably worthless,” said Galvin.
Private placement securities, often issued by small businesses hoping to raise capital outside the stock market, are exempt from rules designed to protect unsophisticated investors. According to guidelines set in 1982, they can be marketed only to “accredited investors,” such as pension funds and to individuals whose net worth, including their home, exceeds $1 million, or who earn $200,000 a year. The threshold for couples is $300,000.
However, with inflation, being a millionaire doesn’t mean what it used to. The SEC considered raising the thresholds as recently as 2007, but relented after complaints from investors and financial advisers.
The Financial Industry Regulatory Authority, the largest independent regulator for all securities firms doing business in the U.S., has also cracked down on private placements, suspending the chief executive of one California brokerage in December as part of a broad investigation. Meanwhile, a proposal in Congress would change the way private placements are overseen, handing more power back to states. Opponents say that move could make raising money too costly for small businesses.
Posted in Enforcement, Medical Capital, Private Placements | 1 Comment »
Tuesday, January 26th, 2010
The CEO of Securities America, Steve McWhorter, said he will retire this spring after 22 years at the helm of the independent broker-dealer. He said in an interview late last week that he is leaving simply to enjoy retirement and spend more time with his family, and he stressed that there was no other component to his decision. He will remain in his role until a replacement is found.
This news comes as Securities America is facing numerous securities arbitration claims filed by investors to recover losses sustained in Medical Capital Notes. On July 16, 2009, the Securities and Exchange Commission (“SEC”) filed fraud charges against Medical Capital Holdings in connection with the sale of $77 million of private securities. On the same day, FINRA issued a sweep notice to obtain information from several broker-dealers regarding the sale of Medical Capital securities. Since that time, several arbitration claims have been filed against brokage firms who sold Medical Capital Notes, including Securities America, to recover millions of dollars in losses.
A class action lawsuit was also filed against Securities America in connection with its sales of Medical Capital Notes. The lawsuit alleges that Securities America “did not make a reasonable investigation or possess reasonable grounds to believe that the statements contained and incorporated by reference in the [Private Placement Memoranda] at the time of the MedCap Entities’ offerings were true and without omissions of material fact and were not misleading. Had…Securities America…exercised reasonable care, they would have known of such omissions.” Under NASD Rules, brokerage firms have an obligation to make suitable recommendations to their customers and to conduct adequate due diligence of new products before they are sold to their customers.
FINRA has provided guidance concerning the kinds of questions which should be asked by a brokerage firm before offering a new product, and it has highlighted best practices for reviewing new products. Specifically, FINRA has stressed the need for firms to take a proactive approach in reviewing and improving their procedures for developing and vetting new products. Those procedures should include straightforward guidelines for determining what constitutes a new product, ensure that the proper questions are asked and answered before a new product is offered for sale, and provide for post-approval follow-up and review.
Posted in Medical Capital, Private Placements | No Comments »
Tuesday, January 12th, 2010
The Financial Industry Regulatory Authority (FINRA) has announced that it has fined Pacific Cornerstone Capital, Inc. of Irvine, CA, and its former chief executive officer, Terry Roussel, a total of $750,000 for failing to include full and complete information in private placement offering documents and marketing material. FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.
“Investors rely on offering documents to provide information necessary for them to make informed investment decisions,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “In this case, Pacific Cornerstone targeted returns and the timing of return of principal invested without a reasonable basis.”
From January 2004 to May 2009, Pacific Cornerstone sold private placements in two affiliated companies using 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 a yield on a $100,000 investment in excess of 18 percent. FINRA found no reasonable basis for those statements.
Further, Pacific Cornerstone and Roussel continued to use a similar targeted time period for return of capital and rate of return in successive offering documents, although those targets were not supported by prior performance. FINRA also found that the offering documents failed to disclose the complete financial condition of one or both of the companies.
Pacific Cornerstone also offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker-dealers and investment advisors, which in turn sold the units to the investing public. A total of approximately $50 million worth of units were sold to approximately 950 accredited investors over a period of almost six years. Pacific Cornerstone continued to use the same targeted two-to-four year return of principal and 18 percent rate of return in successive offering documents, despite not having met those targets.
During the same period, Roussel periodically sent letters to the private placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures. Roussel’s letters also failed to disclose the complete financial picture of the two companies.
In addition, FINRA found that Pacific Cornerstone and Roussel failed to establish, maintain and enforce a supervisory system, including written procedures, reasonably designed to review and monitor sales of the private placement offerings.
In concluding this settlement, the firm and Roussel neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Klayman & Toskes is handling numerous claims on behalf of investors who sustained losses in private placements including Medical Capital, Provident Royalties and Shale Royalties. The claims are being filed with FINRA’s Office of Dispute Resolution against full service brokerage firms for misrepresentation, omission, unsuitability and failure to conduct adequate due diligence.
Posted in Enforcement, FINRA, Medical Capital, Pacific Cornerstone Capital, Private Placements, Provident Royalties/Shale Royalties | No Comments »
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