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Private Placement Woes

An increase in fraudulent private placement offerings has state regulators pushing for tougher regulatory reforms that will give them more control and oversight of private placement issuers. In particular, states securities regulators want authority to control those issuers that have prior convictions for securities fraud or other offenses. Case in point: Medical Capital Holdings.

The Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital in July for private placement sales totaling $77 million. In the complaint, the SEC accuses Medical Capital and its principals of defrauding investors and misappropriating about $18.5 million of investor funds. The regulator also alleges that Medical Capital misrepresented the private placements by failing to inform investors that it had defaulted on loans connected to prior offerings, as well as was late in making payments to investors on principal and/or interest.

Following the SEC’s charges, it’s been determined that a number of broker/dealers knowingly marketed and sold unregistered Medical Capital notes to thousands of unsuspecting investors.

As reported Dec. 1 by Investment News, examples of private placement deals like those involving Medical Capital are one reason state regulators are calling for more authority over private-offering issuers with prior convictions for securities fraud. As it currently stands, private placements are generally exempt from review, which means state have no power to shut down issuers with past problems from selling private placements in the future.

“Before the North American Securities Administrators Association (NSMIA), if John Brown wanted to do a private placement but he had been convicted of securities fraud, he couldn’t use the exemption,” said Texas Securities Commissioner Denise Crawford, who is president of NASAA. “After NSMIA, the same John Brown could use the exemption” to sell private placements without registering,” the Investment News article said.

On Jan. 14, 2010, state regulators from across the country appeared on Capitol Hill to voice their concerns over private placements to the Financial Crisis Inquiry Commission. The Commission, which was created in May 2009 by President Obama, has been charged with dissecting the root causes of the nation’s financial meltdown. The consensus among state regulators who provided testimony thus far: Give states back the authority to police private-placement offerings or be prepared to see more private placement frauds down the road.

IIf you were ill-advised about the risks of investing in private placement offerings, contact our securities fraud team. We will evaluate your situation and explain your options.

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