October 10, 2014

SEC Panel Recommends Changes to Accredited Investor Definition

The SEC Investor Advisory Committee (IAC) is recommending that the agency to make substantial revision to who should be considered a sophisticated investor. This could change who can get involved in private placements as investors.

Currently, there are about 8.5 million accredited investors. The Dodd-Frank Act obligates the SEC to reexamine the accredited-investor definition every four years.

At the moment, accredited investor standard only allows individuals who make a minimum of $200K or have a net worth of $1M—the value of their primary residence not included—to invest in private placement purchases. If a couple’s net worth is $300K together, they may qualify too.

Now, the SEC panel is saying that such criteria for private placement investments merely oversimplifies the process of determining whether an individual has enough money and liquidity to handle the possible risks involved in private offerings. The IAC said that the existing thresholds fail to provide enough protection for investors, whose net worth may have been determined by illiquid holdings or retirement funds. Many retirees regularly depend on their investments to cover their living expenses every month, so those monies can fluctuate.

The committee wants the Commission to get rid of these thresholds. Instead, it wants a sophisticated investor to have had substantial education, professional credentials, and experience in investing. A financial-sophistication test is another method the IAC is suggesting. The committee also doesn’t think that retirement accounts should be included when factoring whether an investor meets the $1 million wealth threshold, were that to remain in place.

The IAC said that if the regulator decides to keep the standards for net worth and income, then the SEC should only allow investors of private placements to put in a certain percentage of their assets or funds. The committee wants third parties, rather than securities issuers, to verify accredited investor status. It also wants the non-accredited investors in private offerings that were recommended by a purchaser representative to get more robust protections.

Aside from the net worth and income thresholds that are criteria for individual accredited investors, federal securities laws also defines accredited investors as:

· A bank, insurer, business development firm, registered investment company or small business investment company

· An employee benefit plan if its assets are over $5 million or its investment decisions are handled by a bank, registered investment adviser, or insurer.

· An executive officer, director, or general partner of the company that is selling the securities.

· A charitable organization, partnership, or corporation with assets above $5 million.

· A business in which all equity owners are accredited investors.

· A trust that was not set up to acquire the securities offered and has assets above $5 million.

The SSEK Partners Group is a securities fraud law firm that helps high net worth individuals and institutional investors to recoup their losses.

Accredited-investor definition revamp backed by SEC panel, Investment News, October 9, 2014

SEC Panel Urges Update of ‘Accredited Investor’ Standard, CFO, October 13, 2014

The Dodd-Frank Act (PDF)

More Blog Posts:
SEC Lifts Ban on General Solicitation, Institutional Investor Securities Blog, September 23, 2013

Investment Opportunities to Get More Advertising Exposure Because of JOBS Act Mandate Lifting Ban on General Solicitation, Stockbroker Fraud Blog, January 29, 2013

FINRA Bars Former Raymond James Adviser for Elder Financial Fraud, Charges SWS Over Variable Annuity Supervision, Stockbroker Fraud Blog, October 7, 2014

July 7, 2014

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny

According to state regulators, non-traded real estate investment trusts, structure products, and private placements, are some of the financial instruments that the states and insurance regulators are watching closely. First Deputy Commissioner of the Iowa Insurance Division Jim Mumford and Alabama Securities Commission director Joseph P. Borg recently spoke at a panel at the Insured Retirement Institute's Government, Legal and Regulatory Conference.

Borg noted that a growing number of agents are now selling unlicensed financial products, with insurance agents selling private placements and getting clients away from insurance products and into Regulation 506 of Regulation D. The rule establishes a safe harbor for securities’ private offerings. Such instruments are only supposed to be made available to accredited investors and non-accredited investors that have enough sophistication to be able to assess this type of investment. Agents, however, have tried to circumvent securities laws by claiming that a (nonexistent) attorney gave them a letter stating that the private offering actually wasn’t a security.


Also up for sale lately are self-directed IRAs and promissory notes. Structured products have also been quite popular, although unfortunately, Borg noted, many agents and brokers don’t even understand what they are selling.

Certain investments just aren’t for everyone. We represent investors that have suffered losses related to fraud involving non-traded REITs, mortgaged-backed securities, alternative investments, collateralized debt obligations, private placements, and other financial products. Contact our complex investment fraud lawyers today.

State regulators on high alert for complex investment and insurance sales, InvestmentNews, July 2, 2014

SEC Regulation 506 of Regulation D


More Blog Posts:
LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments, Stockbroker Fraud Blog, March 25, 2014

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules
, Institutional Investor Securities Blog, March 19, 2014

FINRA Suspends and Fines GlobaLink Securities Principal, Stockbroker Fraud Blog, September 19, 2013

March 5, 2013

Securities Roundup: Venecredit Fined $25K for Working with Foreign Finders, Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges, & BrokersXpress Broker is Suspended Over Private Placement-Related Misconduct

Venecredit Fined $25K for Working with Foreign Finders to Generate Retail Investor Business
According to the Financial Industry Regulatory Authority, Venecredit Securities must pay a $25,000 fine for allegedly using foreign finders to get new retail investor business. The financial firm has now been censured for two years.

The SRO says that the foreign finders served as the primary contacts between Venecredit and the clients and had access to account information via the clearing firm’s platform. These finders worked for a foreign brokerage firm that shares directors and officers with Venecredit and its wholly owned entity. FINRA contends that not only did Venecredit fail to create and put into effect proper supervisory measures that would have allowed it to look at customer complaints about the employees at the foreign brokerage firm, but also it failed to keep electronic correspondence from both the foreign traders and the personal email accounts of its registered representatives.

Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges in Missouri
Missouri Secretary of State Jason Kander has charged former LPL Financial, LLC (LPLA) representative Greg John Campbell with serious misconduct. Prior to working for LPL, Campbell was with Merrill Lynch, Pierce, Fenner & Smith Inc. (MER)

Per the complaint, while registered with both financial firms, Campbell established a line of credit against the brokerage accounts of clients without their knowledge or permission. He then allegedly modified their addresses in their accounts so that they stopped getting their statements and correspondence from the firms and forged account statements for them showing the wrong balances. Using forged signatures, he allegedly moved over a million dollars from these to his accounts without their knowing or consent.

BrokersXpress Broker is Suspended from FINRA and NFA Over Alleged Securities Misconduct
BrokersXpress broker Tracy Morgan Spaeth is suspended from associating with any member of the Financial Industry Regulatory Authority or the National Futures Association. Per FINRA’s disciplinary action, Spaeth failed to ask for or receive the necessary written approval for private placement transactions that occurred between October and December 2010 when he solicited over 100 clients to buy shares in ProfitStars Int'l Corp., raising $8 million in the process. He also allegedly provided a deficient webinar to the investing clients that did not disclose the strategy risks involved and included forecasts about the security’s future performance. Spaeth’s bar from FINRA is two years and he has to pay a $50K fine.

Meantime, the NFA’s suspension of Spaeth comes after his alleged involvement with Profitstars Intl Corp. and International Commodity Advisors, which were both disciplined for using ParagonFX Enterprises, LLC, an unregistered and unregulated company, as a counterparty to the trading of their customers. The organization contends that Spaeth used deceptive and misleading promotional materials to get clients to invest in the companies even though he did not conduct the necessary due diligence on them. NFA says that Spaeth had a deal with a least one of the companies that gave him 50% of gross profits from his clients’ accounts (and perhaps even a referral bonus even if a client suffered a net loss following fees). His bar from the NFA is three years and he has to pay a $5K fine.


Related Web Resources:
Ladue advisor took $1.5 million, regulators say, St. Louis Post-Dispatch, February 20, 2013

NFA files complaint against Tracy Morgan Spaeth charging him with multiple misleading forex practices, Forexmagnates.com, November 23, 2012


More Blog Posts:
SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court, Institutional Investor Securities Blog, February 28, 2013

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

November 17, 2012

Institutional Investor Fraud Roundup: 3,001 Whistleblower Tips Sent to SEC in ’12, CFTC Contends with ‘Regulatory Cliff,’ and Private Placement Failures Prompt Insurers to More Closely Examine Alternative Investments

According to the SEC’s Whistleblower Office, during fiscal year 2012 it received 3,001 tips. The categories that received the most complaints involved the areas related to manipulation, offering fraud, and corporate disclosures and financials. Although complaints came from every state, the states with the most complaints were California, with 435 whistleblower tips, 246 from New York, while 202 tips came from Florida. Tips also were sent in from 49 countries.

During this past fiscal year, there were 143 notices of covered enforcement actions that resulted in sanctions of over $1 million—the minimum amount that needs to be collected for a whistleblower to obtain a reward. (A quality, original tip may entitle a whistleblower to 10-30% of what the government recovers). The SEC said that its Investor Protection Fund, which pays these rewards to qualifying whistleblowers, is fully funded and at the end of FY 2012 contained over $435 million. In August, the SEC paid its first whistleblower reward of $50,000 under the program.

In other securities regulator news, Scott O’Malia the CFTC commissioner announced that the agency will have to contend with a “regulatory cliff” next month when the temporary no-action relief stemming from new swaps rules expires. The regulator had put out 18 no-action letters and other guidance on October 12, providing a lot of swap market participants with a brief reprieve from rules that were scheduled to go into effect the next day. The relief for most expires on the last day of the year, and O’Malia wants the agency to take action to resolve this situation. He made his comments at the DC conference sponsored by George Mason University's Mercatus Center.

O’Malia is also pressing the agency to modify the rules it is proposing over swap execution facilities so that they regulations become more flexible. The commission had published the proposed SEF rules nearly two years ago and, if approved, they would mandate for swap execution facilities provide a “basic functionality” that would allow market participants the choice to post “firm and indicative” quotes to more than one party. SEFs would be able to choose whether to deploy any platform or trading system that provides “basic functionality.” At the time, O’Malia had voted in favor of the proposal. However, he is now taking into account the comments that have been received since then, with many expressing concern that the proposed rules would limit the options for making trades.

Meantime, insurers tasked with underwriting brokerage firms’ errors and omissions policies are now being more careful about approving the alternative investments that the latter sell. This greater exercise of underwriter authority comes after the private placement crises involving Provident Royalties LLC and Medical Capital Holdings Inc. in 2009.

Insurance companies have final say on whether they will provide insurance for a product. Alternative investment products that typically don’t get the thumbs up for coverage are ones that lack audited financial statements.

This closer scrutiny can impact the bottom line of a brokerage firm, especially with insurers putting stricter limits on claims resulting from alterative investments, leading to much higher deductibles (up to 50% higher than the standard mutual fund deductible.) Insurers also want brokerage firms to exercise a higher duty of care in terms of when it comes to nontraded REITs.

The insurer underwriter-brokerage firm relationship has changed since the economic crisis of 2008. Disputes have even arisen between both parties over coverage of claims.

Annual Report on the Dodd-Frank Whistleblower Program, Fiscal 2012 (PDF)

O'Malia Says CFTC Faces ‘Regulatory Cliff’ When Temporary Relief Expires in December, Bloomberg/BNA, November 14, 2012

E&O underwriters screen alt products, Private-placement debacles invite more scrutiny, Investment News, October 14, 2012


More Blog Posts:
Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

Top Financial Regulators Speak Out Against Bill They Claim Gives the White House Authority Over Rulemaking, Institutional Investor Securities Blog, November 6, 2012

Ex-MF Global CEO John Corzine Says Bankruptcy Trustee’s Bid to Join Investors’ Class Action Securities Litigation is Hurting His Defense, Institutional Investor Securities Blog, September 5, 2012

November 29, 2011

Sale of Interest in Private Placement Offerings by Medical Capital Holdings, Provident Royalties DBSI Leads to FINRA Order that Investors Get $3.2M in Restitution

The Financial Industry Regulatory Authority has ordered another 10 individuals and 8 financial firms to pay $3.2M in restitution to clients who were sold interest in risky private placements that were issued by DBSI, Inc., Medical Capital Holdings, Inc., and Provident Royalties, LLC. The parties that were sanctioned allegedly sold the interests without having reasonable grounds to recommend the securities to customers. The SRO believes there were inadequate supervisory systems in place.

FINRA fined the following parties for allegedly failing to reasonably investigate the private placement offerings to ensure that the firms making the sales were fulfilling their obligation to customers.

• NEXT Financial Group, Inc.: $2 million in restitution and a $50,000 fine. VP Steven Lynn Nelson was fined $10,000 related Provident Royalties private placements sales.

• Investors Capital Corporation: About $400,000 in restitution over Provident Royalties private placement sales and a CIP Leveraged Fund Advisors-offering.

• Garden State Securities, Inc.: $300,000 related to a Medical Capital private placement. Kevin John DeRosa was fined $25,000. Vincent Michael Bruno, who is chief compliance officer, will pay a $10,000 fine.

• Capital Financial Services: Clients will get $200,000. Ex-principal Brian W. Boppre is fined $10,000. Private placements from both Medical Capital and Provident Royalties were involved.

• National Securities Corporation: $175,000 in restitution related to the sale of Provident Royalties and Medical Capital private placements. Director Matthew G. Portes was suspended and fined $10,000.

• Equity Services, Inc.: Nearly $164,000 in restitution and a $50,000 fine. Sr. VP Stephen Anthony Englese was fined $10,000 while representative Anthony Paul Campagna must pay $25,000.

• Securities America, Inc.: Fined $250,000.

• Newbridge Securities Corporation: A $25,000 fine related to private placements sold by DBSI and Medical Capital. Ex-Chief Compliance Officer Robin Fran Bush was fined $15,000.

• Former Meadowbrook Securities CEO and President of LLC Leroy H. Paris II must pay a $10,000 fine related to the sale of Medical Capital and Provident Royalties private placements.

• Michael D. Shaw was barred from the securities industry. He was previously associated with VSR Financial Services, Inc.

Between ’01-’09, Medical Capital Holdings was able to raise about $2.2 billion through the private placement offerings of promissory notes. Over 20,000 investors participated. Meantime, from September ’06 to January ’09, Provident Asset Management, LLC sold and marketed limited partnerships and stock in 23 private placements issued by Provident Royalties. More than $485 million was raised from over 7,700 investors who made their purchases through over 50 retail broker-dealers. Last year, however, a number of the private placement deals soured, causing a number of broker-dealers that sold them to shut down, while the investors sustained financial losses.

FINRA Sanctions Eight Firms and 10 Individuals for Selling Interests in Troubled Private Placements, Including Medical Capital, Provident Royalties and DBSI, Without Conducting a Reasonable Investigation, FINRA, November 29, 2011

FINRA fines eight firms for private placement sale, Reuters, November 29, 2011


More Blog Posts:
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

Boogie Investment Group Inc. Fails Because of Fraudulent Private Placements by Provident Royalties LLC and Medical Capital Holdings Inc., Stockbroker Fraud Blog, October 27, 2011

Ban on Private Securities Offerings Solicitations Could Be Revised by SEC or Congress, Says Ex-Official, Institutional Investor Securities Blog, July 11, 2011

Continue reading "Sale of Interest in Private Placement Offerings by Medical Capital Holdings, Provident Royalties DBSI Leads to FINRA Order that Investors Get $3.2M in Restitution" »

July 11, 2011

Ban on Private Securities Offerings Solicitations Could Be Revised by SEC or Congress, Says Ex-Official

According to ex- SEC's Office of International Corporate Finance chief Sarah Hanks, there is the strong possibility that Congress or the Securities and Exchange Commission will modify the agency’s ban on the general solicitation for private securities offerings and the number of shareholders that trigger reporting requirements. Hanks says that comments made by lawmakers and SEC Chairman Mary Schapiro indicate congressional intent to loosen the requirements, as well as “regulatory momentum.” Such changes could happen in the next couple of years.

Restricted securities are securities that did not go through the SEC’s registration and public processes. Requirements don’t allow issuers of nonpublic offerings relying on Section 4(2) of the 1933 Act or its safe harbor—Rule 506 of Regulation to use advertising or general solicitation to draw investors to their placements. The 1934 Securities Exchange Act’s Section 12(g) mandates that an issuer register securities “held of record” by at least 500 individuals and if the issuer’s total assets are over $10 million.

It was just recently that it became known that the SEC was investigating Goldman Sachs Group Inc.'s (GS)’s reselling of Facebook-issued securities to investors. Earlier this year, the investment bank made the decision to limit the offering to offshore investors over concerns that the degree of media attention might result in a violation of US securities laws. According to The Wall Street Journal, although Facebook executives had to restructure the deal, the private offering of up to $1.5 billion in Facebook shares stayed on track. As of January, more than $7 billion in orders came through from foreign investors.

Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd notes, “Private placements have always been the source of many problems for investors. Special treatment of these investments is nothing more or less than loopholes in the regulation of securities sales. Over the past decade there has been constant erosion of the roadblocks designed to prevent sales of such investments without at least some modicum of safeguards for investors. The only reason to lower the bar is to allow those manufacturing and selling these securities to make more money faster.”

Related Web Resources:
SEC, Congress Could Revise, in Near Future, Private Placement Rules, Former Official Says, BNA Securities Law Daily, June 8, 2011

Goldman Sachs limits Facebook deal, Skepsi News, January 26, 2011

1933 Securities Act


More Blog Posts:
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

National Securities Corp., Independent Financial Group LLC, & Centaurus Financial Inc. among broker-dealers sought by Massachusetts securities regulators over private placements, Stockbroker Fraud Blog, April 19, 2010

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investor Securities Blog, May 29, 2011

May 29, 2011

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings

In a 3-2 vote, the Securities and Exchange Commission has agreed to propose a rule (mandated by Congress) that exempts Felons and Bad Actors” from private offerings pursuant to Rule 506 of Regulation D under the 1933 Securities Act. The SEC has also agreed—again in a 3-2 vote—to adopt final rules to set up a whistleblower bounty program.

Under the financial reform legislation’s Section 926, the SEC must bar the sales and offerings of securities by recidivist violators that are subject to certain disciplinary proceedings and sanctions or have a misdemeanor or a felony related to the sale or purchase of a security from being able to avail of the safe harbor act’s Rule 506. The rule lets issuers avoid the reporting requirements of the 1933 Act. It also makes up for approximately 93% of private securities that Reg D. offers.

The proposal would prevent a private placement from taking advantage of the rule if the issuer or individual covered by the rule had a disqualifying event, such as a criminal conviction, restraining order, court injunction, certain commission disciplinary orders, U.S. Postal Service false representation orders, commission “stop orders” to suspend exemptions, suspension or expulsion from membership in a “self-regulatory organization” (or from association with an SRO member), or final orders of insurance, state securities, banking, or credit union regulators. Covered persons include officers, directors, managing members of the issuer, 10-percent beneficial owners, and promoters of the issuer.

SEC Chairman Mary Schapiro has said that the proposal would advance the goal of decreasing the “danger of fraud” in private offerings. She also said that by covering events that took place before Dodd-Frank was enacted, the proposal fulfills the intent of Congress to protect investors from bad actors. She says that to address any concerns, the SEC is seeking comment until July 14.

Regarding the SEC proposal, Shepherd Smith Edwards founder and securities fraud attorney William Shepherd says, “What took you so long?”

Throughout the US, contact our securities fraud attorneys today.

Related Web Resource:
SEC Proposes Rule to Disqualify Felons and Bad Actors From Securities Offerings, SEC.gov, May 25, 2011

1933 Securities Act (PDF)


More Blog Posts:

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011

SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011

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