A New York-based broker-dealer and two of its leaders were found liable for fraud and related charges when raising capital from clients for a private credit placement LLC that was previously found to be liable for lying to investors.

The case involves broker-dealer Portfolio Advisors Alliance (PAA)—as well as Howard J. Allen, PAA’s indirect owner, and Kerri L. Wasserman, its president. The B/D and both individuals were found liable for fraud last week in U.S. District Court for the Southern District of New York.

The U.S. Securities and Exchange Commission charges against PAA, Allen and Wasserman revolve around the sale of American Growth Funding II, a private placement offering that provided loans to businesses. American Growth Funding II and its owner, Ralph C. Johnson, were found liable earlier this year for lying to investors in promising 12 percent annual returns and claiming that its financial statements were being subjected to annual audits.

PAA, Allen and Wasserman were alleged to have known that the American Growth Funding II offering documents were inaccurate, yet continued to use them anyway.

A jury found the three defendants liable on counts of violating antifraud provisions of the Securities Act of 1933 as well as sections of the Securities Exchange Act of 1934. The jury furthermore found that Wasserman and Allen aided PAA’s antifraud provision violations and that the pair were liable as control persons for PAA’s violations.

The SEC is seeking disgorgement of gains with payment of prejudgment interest and the payment of civil penalties by PAA, Allen and Wasserman.

In 2013, the North American Securities Administrators Association warned of the risks associated with private placement offerings in an investor alert:

• Private placements are exempt from registration requirements, and regulators do not review the offerings for adequate risk disclosures.
• There won’t necessarily be background checks of the sellers, managers and officers of companies issuing the investments.
• Private placements often offer higher returns, but this signifies that the risks of the underlying investments are higher.
• Private placements are generally illiquid, and investors may be forced to hold the investment indefinitely.
• Investors in private placements are usually provided with fewer disclosures—private placements are more opaque than public offerings.
• Traditionally, private placement offerings have been sold through peer or advisor recommendations, but today more offerings are being sold via high-pressure sales tactics, cold calls, lunches and seminars.