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FINRA Cracks Down On Deals Involving Private Placements

Private-placements deals in Medical Capital Holdings and Provident Royalties have become a bone of contention for the Financial Industry Regulatory Authority (FINRA), which plans to focus new attention on the broker/dealers responsible for selling the opaque and illiquid private investments to investors.

As reported Feb. 2 by Investment News, private-placements are on FINRA’s hot-button issue list because of the devastating financial losses they’ve caused for investors in the past year. In many instances, the losses are tied to the broker/dealers selling private placements as suitable investments for their clients, yet failing to perform appropriate due diligence on certain private offerings.

Two such offerings include private placements in Medical Capital and Provident Royalties. Both companies were charged with securities fraud by the Securities and Exchange Commission (SEC) in 2009 for misrepresentation and misappropriating hundreds of millions of dollars of investors’ money.

A number of brokers/dealers that sold both products also face lawsuits by regulators, as well as arbitration claims filed by investors.

James Shorris, executive vice president and executive director of enforcement for FINRA, says oversight of private placements will be a “major, major, major initiative” at FINRA in the future. During his remarks at the annual meeting of broker/dealer members of the Financial Services Institute on Feb. 2, Shorris specifically named private placements associated with Medical Capital Holdings and Provident Royalties LLC.

In addition to private placements, Shorris says FINRA also will step up its scrutiny of non-traded REITs, as well as other exotic investments such as reverse convertibles and leveraged exchange-traded funds.

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