The private-placement game is changing, thanks in large part to ongoing legal cases over failed private placements – also known as Reg D offerings – in Provident Royalties and Medical Capital Holdings. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.
Major private-placement players like Securities America are feeling the ramifications of the issues involving Medical Capital and Provident Royalties – including a rash of lawsuits and arbitration claims filed by investors, as well as fraud charges issued by state securities regulators.
For some broker/dealers, the legal troubles stemming to Provident and Medical Capital, as well as to other failed private-placement offerings, have proven too much. Unable to sustain sufficient capital to fight their legal battles, many have gone out of business. Among the broker/dealers that have shuttered: Cullum & Burks Securities Inc., Securities Network, GunnAllen Financial, QA3 Financial Corp. and Jesup & Lamont Securities Corp., among others.
For the broker/dealers that do remain in the private-placement game, it’s likely they will see stricter oversight of the investments they market and sell to investors in the future. Just this week, the head of the Financial Industry Regulatory Authority (FINRA) publicly called upon broker/dealers that sell private placements to engage in a more vigorous due diligence process, “pushing and pulling” for information about the products.
“We want to recognize where there’s limited disclosure and appears to be a speculative investment, you need to push to try to get more information,” said Richard Ketchum, chairman and chief executive of FINRA, at the regulator’s annual meeting in Washington
“It’s not good enough to go to a canned information session. You need to push and pull,” he said of the due diligence process for broker/dealers touting risking private-placement deals.