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Tough Times Ahead For Small Broker/Dealers

GunnAllen Financial. Cullum & Burks Securities. Okoboji Financial Services. Jesup & Lamont Securities. All are independent broker/dealers that have either faced net-capital violations or been shut down by regulators after their capital levels were deemed too inadequate to continue doing business.

Jesup & Lamont Securities is one of the latest broker/dealers facing a capital crunch. On June 18, FINRA ordered the company and its 300 reps to cease business operations other than liquidating transactions. According to a June 27 Investment News article, the problem may stem to pressure from the SEC regarding sales of $11 million in private shares of Jesup & Lamont’s stock.

Jesup & Lamont is not alone. As reported in the Investment News story, a number of broker/dealers are dealing with capital requirement issues these days as a result of the market downturn of 2008 and early 2009. Broker/dealers also share something else in common: Many are facing legal liabilities from private-placements deals that have gone bust. Two of the most prominent cases involve Medical Capital Holdings and Provident Royalties LLC.

Last summer, the Securities and Exchange Commission (SEC) brought a fraud lawsuit against Provident Royalties and its related business entities. In the complaint, the SEC charged Provident with selling fraudulent private-placement offerings from September 2006 through January 2009. According to SEC documents, Provident raised $495 million from at least 7,700 investors throughout the country.

That same summer the SEC also initiated a fraud lawsuit against Medical Capital Holdings. In its fraud complaint, the SEC alleges that Medical Capital had more than $543 million in phony receivables on its books and had lost more than $315 million on various loans. Meanwhile, the company reportedly collected $323 million in fees for managing the money-losing loans.

The SEC also accuses Medical Capital of running a Ponzi scheme operation. According to the SEC complaint, Medical Capital was selling receivables at a markup among the various funds it controlled and then using money from newer investors to pay investors in the older funds.

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