The Financial Industry Regulatory Authority (Finra) announced it has sanctioned seven individuals and one firm for allegedly selling interests in private placements without conducting a reasonable investigation.
The following sanctions were invoked against individuals and firms that sold private interests of Medical Capital Holdings Inc. (MedCap) and/or Provident Royalties LLC., both of which ultimately failed and are under investigation by the Securities and Exchange Commission (SEC) for allegedly engaging in fraud and Ponzi schemes:
Workman Securities Corp. of Eden Prairie, Minn. was ordered to pay $700,000 in restitution to affected customers. Robert Vollbrecht, Workman's former president, was barred from the securities industry and fined $10,000.
Timothy Cullum and Steven Burks, former CEO and president respectively of Cullum & Burks Securities Inc. of Dallas, a now-defunct firm, were each suspended from the securities industry for six months and fined $10,000.
Jeffrey Lindsey and Bradley Wells, two former executives with Capital Financial Services Inc. of Minot, N.D., were each suspended for six months in from the securities industry and fined $10,000.
Jay Lynn Thacker, former chief compliance officer for Meadowbrook Securities LLC (aka Investlinc Securities) of Jackson, Miss. was suspended for six months from the securities industry and fined $10,000.
David William Dube, former owner, president, chief compliance officer and anti-money-laundering compliance officer of the now-defunct Peak Securities Corporation of Orlando, Fla., was barred from the securities industry for failing to conduct adequate due diligence and detect, investigate and report numerous suspicious transactions in ten customer accounts where "red flags" existed.
Finra says that broker-dealers who sold the MedCap and Provident private offerings did not have reasonable grounds to believe that they were suitable for any of their customers. Also, they failed to adequately investigate the private placements or to establish a system to comply with securities laws and regulations, according to Finra. The sanctioned individuals did not have reasonable grounds to allow the firms' registered representatives to continue selling the offerings despite the red flags that existed regarding the private placements, Finra claimed.
"Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults," said Brad Bennett, Finra executive vice president and chief of enforcement. "Finra will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers."
The SEC filed an injunctive action against Anaheim, Calif.-based MedCap in July 2009, to stop all sales of MedCap private placements. According to the SEC, MedCap and its executives defrauded investors in one of its private placements, MedCap VI, misappropriating about $18.5 million of investor funds. The SEC also says that MedCap lied about defaulting on interest or principal payments, when it had in fact faulted on nearly $1 billion in principal payments from its previous offerings. The action is still pending.
Also in July, 2009, the SEC filed a civil injunctive action in Texas against Provident Royalties LCC, freezing the company's assets for transferring millions of dollars of later investor's funds in order to pay dividends and returns of capital to investors in their earlier offerings. All of the named defendants in the case agreed to a preliminary injunction which remains in effect. In March of last year, Finra expelled Provident Asset Management LLC, parent company of Provident Royalties, from membership for marketing the fraudulent private placements made by Provident Royalties.