Pacific Cornerstone Capital and former CEO Terry Roussel face $750,000 in fines by the Financial Industry Regulatory Authority Industry (FINRA) for making misleading statements and omitting facts in connection with sales of two private placements. FINRA also charged the broker/dealer and Roussel with advertising violations and supervisory failures.

According to a statement by FINRA, Pacific Cornerstone sold private placements in two affiliated companies from January 2004 to May 2009 using offering documents and accompanying sales literature that promised to return an investor’s principal in two to four years, along with generating a return of more than 18%. FINRA says it found no reasonable basis for those statements.

In addition, Pacific Cornerstone offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker/dealers and investment advisors. They, in turn, sold the units to the investing public. A total of $50 million worth of private placements were sold to nearly 1,000 investors.

During the same period that the private placements were sold, Roussel periodically sent letters to investors to update them on the progress of their investments. According to FINRA, those progress reports painted a positive – albeit unrealistic – future, as well as failed to provide required risk disclosures. FINRA also found that the offering documents neglected to reveal a complete and accurate financial condition of one or both of the companies.

Private placement claims are on the upswing, prompting new questions on whether these largely unregulated securities are appropriate investments for many individual investors. A number of the claims filed in recent months target smaller broker/dealers that investors say sold them fraudulent private placements. Case in point: Private placements in Medical Capital Holdings.

In July, the Securities and Exchange Commission (SEC) filed civil fraud charges against Medical Capital, alleging that the Tustin, California-based financial services company committed fraud as far back as 2003.

The SEC accuses Medical Capital Holdings of lying to backers as it raised and misappropriated millions of dollars of investors’ money while keeping mum to buyers about the more than $1.2 billion in outstanding notes and the $993 million in notes that had entered into default or resulted in late payments of both principal and interest to investors.

As reported Dec. 10 by the Wall Street Journal, the Medical Capital case has produced a slew of investor claims against smaller brokerages that sold Medical Capital private placements, including Securities America, Capital Financial Services and QA3 Financial Corp.

Investments in private placements carry a considerable amount of risk. To begin, securities sold through private placements are not publicly traded and, therefore, provide less liquidity to investors. Despite these concerns, the SEC has actually lowered the income and asset thresholds required to purchase private placements. In addition, issuers are allowed to sell a percentage of their private placements to individuals who don’t meet suitability standards.

Private placements, or Regulation D offerings, are the subject of several investigations by the Financial Industry Regulatory Authority (FINRA), which is concerned about how various brokerages marketed and sold the offerings to investors. As reported Dec. 13 by Investment News, an increasing number of complaints over private placements have been brought before FINRA in recent months, with investors alleging charges of misrepresentation and breach of fiduciary duty on the part of their brokerage.

FINRA also is investigating whether the brokerage firms and the registered representatives who sold the private placements performed their required due diligence regarding the products they sold. In addition, FINRA wants to know if the brokerages had any affiliation to the issuing companies of the private placements.

“If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product, we have more questions about the access [the brokerage firm] may have had to information about potential wrongdoing about the issuer,” said James Shorris, FINRA’ s executive vice president and executive director of enforcement, in the Investment News story.

FINRA’s interest in private placements comes on the heels of several recent actions taken by the Securities and Exchange Commission (SEC). In July, the SEC filed fraud charges against Provident Royalties over what it alleged was a Ponzi scheme involving a series of securities offerings of oil and gas assets. Five months later, on Dec. 6, a group of investors sued their registered representative, Bradley K. Hofhines and his firm, Summit Retirement Advisors LLC of Meridian, Idaho, in connection to the oil and gas placements sold by Provident. Securities America, the broker/dealer with which Hofhines is affiliated, and Ameriprise Financial, which owns Securities America, also were named in the lawsuit.

In October, Securities America was named in another lawsuit involving private placements. This time, an investor claimed Securities America continued to sell offerings of allegedly faulty private placements after an executive at Securities America voiced concerns about the deals last year. That same lawsuit further alleges that Securities America “offered and sold hundreds of millions of dollars’ worth of securities in the form of notes” of Medical Capital Holdings, a medical-receivables company now facing fraud charges by the SEC.

In July, the SEC charged Medical Capital with fraud in the sale of $77 million of private securities in the form of notes. Since then, a court-appointed receiver has questioned the value of Medical Capital’s assets, raising serious concerns about the structure of the six deals that the company and related subsidiaries orchestrated between 2003 to 2008.