Private Placements In FINRA Hot Seat

Private placements tied to issuers like Medical Capital Holdings and Provident Royalties have caused a firestorm of lawsuits and heightened scrutiny by the Financial Industry Regulatory Authority (FINRA). In the past six months, FINRA has levied fines and disciplinary actions against several broker/dealers for their lack of due diligence in marketing the products to investors.

As reported April 7 by Investment News, the biggest fine – $700,000 – goes to Workman Securities Corp. Workman’s representatives sold more than $9 million of private placements in Provident Royalties private placements; the company also sold an unknown amount of private placements in Medical Capital.

Both Provident and Medical Capital Holdings were charged with fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

FINRA also fined Askar Corp. $45,000 for its failure to conduct due diligence regarding private placements from DBSI Inc., a failed real estate syndicator now in bankruptcy protection.

Private placements such as Medical Capital and Provident Royalties, as well as DBSI tenant-in-common exchanges, yield high commission for their sellers – typically in the range of 8%.

According to FINRA, the broker/dealers that sold MedCap, Provident and DBSI private placement offerings did not have reasonable grounds to believe the private placements were suitable for any of their customers.

FINRA says the companies cited failed to adequately investigate the private placements they sold to investors and neglected to establish, maintain and enforce a supervisory system to with applicable securities laws and regulations.