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Sloppy Due Diligence Behind Private-Placement Deals

Private placements have been a ongoing source of controversy – not to mention financial losses for investors – this year, with regulators filing fraud charges against issuers like Medical Capital Holdings and Provident Royalties.

Now a well known forensic accountant says that the broker/dealers behind the doomed private-placement deals failed miserably in their due-diligence responsibilities to investors.

As reported Nov. 25 by Investment News, Gordon Yale, a certified public account and principal of Yale & Co., contends that broker/dealers’ due diligence showed incredible “sloppiness” when touting private placements in Medical Capital and Provident. According to Yale, the actions by the broker/dealers exhibited the “same recklessness with which major investment banks conducted their mortgage-backed-securities business, but it was done by middle- or lower-tier firms and [with] a different set of products.”

Over the past year, regulators have issued several fines and sanctions against various broker/dealers that sold private placements in Medical Capital Holdings, Provident Royalties, and DBSI tenant-in-common exchanges. In September, the Financial Industry Regulatory Authority (FINRA) imposed a $10,000 fine and a six-month suspension against Brian Boppre, former president of Capital Financial Services. Capital Financial was a top seller of both Medical Capital and Provident Royalties notes. Both companies were charged with fraud by the Securities and Exchange Commission in 2009.

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