Labor & Employment Law

Provident Asset Management Expelled for Marketing Fraudulent Private Placements Offered by Affiliate in Massive Ponzi Scheme

By Dobin & Jenks

The Financial Industry Regulatory Authority (FINRA) expelled Dallas-based broker-dealer, Management, LLC, for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme.

The recent action 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.

According to FINRA, 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. In reality, investors' funds were used by an affiliated issuer and commingled to make dividend and principal payments to other investors. To make matters worse, 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.

FINRA found that Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. from September 2006 through January 2009. 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 is continuing a broader investigation into broker-dealers that sold the Provident and other troubled private placement offerings.

Full post as published by The Law Planet Blog on March 22, 2010 (boomark / email).