Articles Posted in Private Placements

The Financial Industry Regulatory Authority has filed fraud charges against Sandlapper Securities. According to the self-regulatory organization, the small brokerage firm created and sold private placements in saltwater disposal wells in Texas while charging undisclosed markups of up to 270% that eventually totaled over $8M on numerous deals.

Also accused of fraud are Sandlapper CEO Trevor Gordon, firm executive Jack Bixler, and two ex-brokers. FINRA contends that in 2011, the four men set up Tiburon Saltwater Reclamation Fund to invest in these wells. They also established a development company to handle the investments in the wells. However, alleges the SRO, between 12/12 and 7/13, Bixler and Gordon utilized the development company to intervene between the fund and the saltwater disposal well deals and they charged markups ranging from 161-270%. Not only were these markups excessive but also they went undisclosed. This occurred even though the fund could have directly bought interest in the wells.

Also, claims FINRA, beginning in 2013, Gordon began using the development company to obtain ill-gotten profits from investors who bought interest in the saltwater disposal wells. The company bought the interests and then resold them to investors, again at high, undisclosed markups of 67% to 376%.

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The Financial Industry Regulatory Authority has expelled the real estate firm formerly called DT Securities and its owner/CEO Markel Newton. According to the regulator, the firm and Newton engaged in negligent misrepresentations involving private placements. Markel is also barred for alleged violations involving two of the firm’s offerings to purchase real estate in Georgia and Florida, as well as a third one involving alcoholic treatment facilities in California.

According to FINRA, in the private placement offerings Fresh Start, DT Atlanta, and DT Florida, Markel and DT should have disclosed that the California Department of Real Estate had submitted a complaint against him in 2010. The complaint against Markel and DT Ventures Real Estate Investments accused them of performing certain activities without the required real estate license, as well as making misrepresentations about deposits made for purchase to sellers. In 2011, Markel consented to a 30-day suspension.

In addition to accusing Markel of not alerting the state, FINRA also accused Markel of improperly releasing escrow proceeds to purchase properties prior to satisfying funding-raising goals that were delineated in two of the private offerings. The settlement document said that although DT Florida had originally aimed to raise at least $3M by the end of November in 2009, that closing date was extended to 1/29/10. The funds were to go back to investors if that figure wasn’t achieved. The private placement offering put into effect by DT Atlanta in 2011 came with the goal to raise a minimum of $1.7M—a figure that was later lowered to $400K. That lower figure was reportedly never properly fulfilled.


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In a voice vote on Tuesday, the U.S. Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies is making a recommendation to broaden the criteria for which investors are eligible to purchase unregistered securities. Currently, an accredited investor that can invest in these securities must have made at least $200K/year for the last two years or have a net worth of at least $1M (the value of one’s main residence not included). Under the recommended broader requirements, investors who have a chartered financial analyst or similar credential, or who have passed the series 82, 65, or 7 securities license exams, would also qualify. The advisory committee wants to create a bigger pool of accredited investor applicants to help small companies raise more funds.

Although the SEC committee’s recommendation isn’t binding, SEC Chairwoman Mary Jo White said that it is important to modify the existing accredited investor definition. The Dodd-Frank Act requires the Commission i to periodically look at the criteria defining an accredited investor.

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Bank of New York Mellon Corp. (BK) has agreed to pay $714 million to settle claims that it bilked pension funds and others by overcharging for currency transactions. The settlements resolve cases by New York Attorney General Eric Schneiderman and Manhattan U.S. Attorney Preet Bharara, as well as both private cases and probes by the U.S. Department of Labor and the U.S. Securities and Exchange Commission.

The lawsuits involve the bank’s “standing instruction” for its foreign exchange program: Clients are supposed to let the bank unilaterally deal with foreign-exchange transactions.

The bank admitted that it notified certain clients that it was determined to obtain them the best rates possible even as the firm gave them the ones that were among the worst interbank rates. The bank had previously denied the claims because the lawsuits were submitted in 2011, not agreeing until the following year to modify pricing disclosures. In February, Bank of New York Mellon said it would modify 4tth quarter results to make room for a $598 million litigation cost as it was getting ready to resolve certain claims, including those involving foreign exchange.

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.

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.

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.

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.

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

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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.