Corporate & Securities Law

Private Placements, Reg D Offerings Under New Scrutiny By FINRA

By Steven Caruso

Private placements, or Regulation D offerings, are the subject of several investigations by the Financial Industry Regulatory Authority (FINRA), which is concerned about how various brokerages marketed and sold the offerings to investors. As reported Dec. 13 by Investment News, an increasing number of complaints over private placements have been brought before FINRA in recent months, with investors alleging charges of misrepresentation and breach of fiduciary duty on the part of their brokerage.

FINRA also is investigating whether the brokerage firms and the registered representatives who sold the private placements performed their required due diligence regarding the products they sold. In addition, FINRA wants to know if the brokerages had any affiliation to the issuing companies of the private placements.

?If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product, we have more questions about the access [the brokerage firm] may have had to information about potential wrongdoing about the issuer,? said James Shorris, FINRA? s executive vice president and executive director of enforcement, in the Investment News story.

FINRA?s interest in private placements comes on the heels of several recent actions taken by the Securities and Exchange Commission (SEC). In July, the SEC filed fraud charges against Provident Royalties over what it alleged was a Ponzi scheme involving a series of securities offerings of oil and gas assets. Five months later, on Dec. 6, a group of investors sued their registered representative, Bradley K. Hofhines and his firm, Summit Retirement Advisors LLC of Meridian, Idaho, in connection to the oil and gas placements sold by Provident. Securities America, the broker/dealer with which Hofhines is affiliated, and Ameriprise Financial, which owns Securities America, also were named in the lawsuit.

In October, Securities America was named in another lawsuit involving private placements. This time, an investor claimed Securities America continued to sell offerings of allegedly faulty private placements after an executive at Securities America voiced concerns about the deals last year. That same lawsuit further alleges that Securities America ?offered and sold hundreds of millions of dollars’ worth of securities in the form of notes? of Medical Capital Holdings, a medical-receivables company now facing fraud charges by the SEC.

In July, the SEC charged Medical Capital with fraud in the sale of $77 million of private securities in the form of notes. Since then, a court-appointed receiver has questioned the value of Medical Capital?s assets, raising serious concerns about the structure of the six deals that the company and related subsidiaries orchestrated between 2003 to 2008.

Full post as published by Representing Investors on December 16, 2009 (boomark / email).