Private-Placement Claims Surge
(Dow Jones) A surge in arbitration claims over private placements is raising a good question: Shouldn't someone raise the income and asset thresholds that were designed to ensure that these largely unregulated securities are marketed only to institutions and well-heeled, sophisticated investors? The answer would seem obvious, considering that these thresholds were set more than 20 years ago.

Private placements--the sale of securities directly to a select group of investors who generally agree not to resell them--have long been a mainstay of institutional investors. The securities, often referred to as "Reg D offerings," are typically exempt from Securities and Exchange Commission registration because they're not intended for public sale.

Increasingly, however, some lawyers say they're reaching a crowd of individual investors for whom they were never intended. These investor attorneys say they're handling three to five times the number of private-placement cases they did even just a year ago. Many are against smaller broker-dealers who investors say sold them private placements that, according to regulators' charges, are fraudulent.

SEC guidelines set in 1982 allow the sale of private placements to "accredited investors."  That includes individuals whose net worth exceeds $1 million, including the value of their home, or who earn $200,000 in individual income. In 1988, the rules were amended to include couples with $300,000 in joint income.

Back then, those requirements basically meant that only wealthy people were eligible. In the years since, average income and home values have easily more than doubled.

The SEC proposed in late 2006, and again in 2007, to increase the thresholds to $2.5 million in investments and $400,000 in individual income or $600,000 in joint income. It also proposed an automatic adjustment for inflation every five years.

The reaction was overwhelmingly negative. The agency received hundreds of comment letters, many from investors and advisors who said the increases would limit their options. Not only have the thresholds been easier for more investors to reach, but issuers also are allowed to sell a small percentage of their private placements to investors who don't meet the standards. That exemption has exposed some mom-and-pop investors to unsuitable investments, say attorneys.

Andrew Stoltmann, a Chicago-based lawyer, says he recently filed a claim on behalf of a couple in their 60s who were sold $586,000 in private placements and other illiquid alternative investments--representing about a third of their entire portfolio. One of those private placements included notes in Medical Capital Holdings Inc., which is now facing civil fraud charges by the SEC.
The SEC says Medical Capital had raised more than $2.2 billion through offerings of notes in associated corporations since 2003, and that five of the corporations were in default or late in making payments on $992.5 million of the notes. Several phone numbers for Medical Capital Holdings are not working, and the company is being liquidated, says Stoltmann.

The case has spawned numerous investor claims against small brokerages that attorneys say sold the securities, including Securities America in La Vista, Neb.; Capital Financial Services Inc. in Minot, N.D.; and QA3 Financial Corp. in Omaha, Neb. A spokesman for Securities America declined to comment on the Medical Capital case, but said the brokerage takes its clients' risk management seriously. A Capital Financial Services spokesman didn't immediately return a call for comment. A person who answered the phone at QA3 Financial said a spokesman wasn't available.

Copyright © 2009 Dow Jones & Company, Inc.

First « 1 2 3 4 » Next