The Financial Industry Regulatory Authority (Finra) announced today that it has sanctioned eight firms and ten individuals-including $3.2 million in restitution-for selling interests in private placement offerings without conducting a reasonable investigation before recommending the securities.
The firms and individuals sold interests in several high-risk private placements, including those issued by Provident Royalties, LLC, Medical Capital Holdings, Inc. and DBSI, Inc., which ultimately failed, causing significant investor losses.
Finra, the non-governmental regulator for securities firms doing business in the U.S., sanctioned two firms and seven individuals in April 2011 for selling private placements in the same three companies without conducting a reasonable investigation.
In the settlements concluded today, the firms and individuals neither admitted nor denied the charges, but consented to the entry of Finra's findings.
Finra claims that from 2001 through 2009, Medical Capital Holdings, a medical receivables financing company based in Anaheim, Calif., raised about $2.2 billion from over 20,000 investors through nine private placement offerings of promissory notes.
Finra alleges Medical Capital made interest and principal payments on its promissory notes until July 2008, when it began experiencing liquidity problems and stopped making payments on notes sold in two of its earlier offerings. Nevertheless, Medical Capital proceeded with its last offering, Medical Provider Funding Corporation VI, offered through an August 2008 private placement memorandum.
In July 2009, the SEC filed a civil injunctive action in Federal District Court in Southern California, which granted a preliminary injunction to stop all Medical Capital sales. The court appointed a receiver to gather and conduct an inventory of Medical Capital's remaining assets. The SEC action is pending.
Finra claims that from Sept. 2006 through Jan. 2009, Provident Asset Management LLC, marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by an affiliated issuer, Provident Royalties. The Provident offerings were sold to customers through more than 50 retail broker-dealers nationwide and raised about $485 million from over 7,700 investors.
Finra alleges that although a portion of the proceeds of Provident Royalties' offerings was used for the acquisition and development of oil and gas exploration and development activities, millions of dollars of investors' funds were transferred from the later offerings' bank accounts to the Provident operating account in the form of undisclosed and undocumented loans, and were used to pay dividends and returns of capital to investors in the earlier offerings, without informing investors.
In July 2009, the SEC filed a civil injunctive action in the Northern District of Texas naming Provident and others for violations of the federal securities laws. The court granted the SEC's request for a temporary restraining order, an emergency asset freeze and appointment of a receiver to take control of Provident and preserve the assets for the benefit of the defrauded investors. The SEC action is pending.
On March 18, 2010, Finra 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.
Finra officials claim that the broker-dealers in question did not have adequate supervisory systems in place to identify and understand the inherent risks of these offerings and, as a result, many firms failed to conduct adequate due diligence of these offerings. In addition, some firms did not have reasonable grounds to believe that the private placements were suitable for any of their customers.
Additionally, the sanctioned principals did not have reasonable grounds to allow the firms' registered representatives to continue selling the offerings, despite the numerous "red flags" that existed regarding the private placements, according to Finra.
Finra imposed sanctions against the following firms and individuals for failing to conduct a reasonable investigation or for failing to enforce procedures for sale of private placements offered by Provident Royalties, Medical Capital Holdings or DBSI.
Houston-based NEXT Financial Group Inc. will pay $2 million in restitution to customers and fined $50,000; Steven Lynn Nelson, the firm's vice president for Investment Products and Services, was suspended for six months and fined $10,000 for the sale of three Provident Royalties private placements.
Lynnfield, Mass.-based Investors Capital Corp. will pay $400,000 in restitution to customers in the sale of two Provident Royalties private placements. It was also sanctioned for an additional offering issued by CIP Leveraged Fund Advisors.
Red Bank, N.J.-based Garden State Securities Inc. and firm co-owner Kevin John Depose will pay $300,000 in restitution to customers in connection with the sale of a Medical Capital private placement. Depose was also suspended for 20 days in any capacity and an additional two months in any principal capacity, and fined $25,000. The firm's chief compliance officer, Vincent Michael Bruno, was suspended for one month in a principal capacity and fined $10,000.
Minot, N.D.-based Capital Financial Services will pay $200,000 in restitution to customers and former company principal Brian W. Boppre was suspended from any principal capacity for six months and fined $10,000 for the sale of three Provident Royalties private placements and a Medical Capital private placement.
Seattle.-based National Securities Corp. will pay $175,000 in restitution to affected customers and company director of alternative investments/syndications, Matthew G. Portes, was suspended in any principal capacity for six months and fined $10,000 for the sale of three Provident Royalties private placements and a Medical Capital private placement.
Montpelier, Vt.-based Equity Services Inc. was censured and fined $50,000 and ordered to pay nearly $164,000 in restitution in connection with the sale of a DBSI private placement. In addition, company senior vice president for securities operations, Stephen Anthony Englese, was suspended from association with any Finra-regulated firm in any capacity for 30 business days and fined $10,000. Anthony Paul Campagna, a registered representative, was suspended from association with any Finra-regulated firm in any capacity for 30 business days and fined $25,000.
La Vista, Neb.-based Securities America Inc. was censured and fined $250,000 in connection with the sale of two Provident Royalties private placements.
Fort Lauderdale, Fla.-based Newbridge Securities Corp. was fined $25,000. Former company chief compliance officer Robin Fran Bush was suspended in any principal capacity for six months and fined $15,000 in connection with the sale of four DBSI private placements and a Medical Capital private placement.
Leroy H. Paris II, former president and CEO of now-defunct Jackson, Miss.-based Meadowbrook Securities LLC, was suspended for six months in any principal capacity and fined $10,000 in connection with the sale of two Provident Royalties private placements and a Medical Capital private placement.
Michael D. Shaw, formerly associated with Baton Rouge, La.-based VSR Financial Services Inc., was barred from the industry in connection with the sale of a private placement offered by DBSI and several additional private placements offered by other issuers. In addition, Shaw falsified customer account documents, according to Finra.