New concerns have risen over investors being misled about the facts and risks of private placement offerings (Reg D offerings) often recommended by financial advisers in smaller towns that are outside the financial industry mainstream. While misrepresentations about high-risk private offerings are by no means limited to small towns, small town residents with nest eggs have been disproportionately victimized by unscrupulous offerings.
Recent plant closings in many communities have resulted in early retirement packages being offered by employers, putting large lump sums into the hands of those who are not always sophisticated about investments. Financial planners and financial advisers often move in, sometimes with the blessing of the employer or a labor union, to provide assistance?sometimes in good faith and sometimes not.
Unlike public offerings, most private placements are not registered with the SEC, and because state laws and enforcement capabilities vary widely, many of these investment offerings fly beneath the regulatory radar until a scandal erupts. Two examples that have garnered considerable public attention lately are Medical Capital Holdings, Inc. and Provident Royalties LLC ? both of which have resulted in lawsuits and arbitration claims by regulatory agencies and investors alleging that they invested in these firms based on false and misleading statements. Many claims have been brought against investment firms for passing along misrepresentations that they should have known were untrue, and for recommending the investments without fully disclosing their risks.
In addition to being liable for misrepresenting or omitting to disclose material facts, a financial adviser has a duty to recommend suitable investments. In many cases, depending upon the circumstances of the relationship, that duty is a fiduciary duty, meaning that the adviser has a duty to act in the best interest of the investor and not just a duty to recommend investments that are reasonable. Before recommending a private stock offering, a limited partnership, or any security for that matter, a financial adviser must fully understand the investment objectives of the client and recommend investments that conform to those objectives. Part of the suitability analysis is determining the proper asset allocation for the investor’s portfolio?for example, making sure that the client’s money is not overly concentrated in a single investment category like high-risk private placements. Accordingly, claims can be based upon outright fraud and dishonesty, or upon mere carelessness and neglect on the part of the adviser recommending an unsuitable investment.
According to Craig T. Jones, an attorney with the law firm of Page Perry, “we are getting calls from all over the country about private securities offerings that have not lived up to their promises. Many investors been recommended to us by their personal lawyers, accountants, and financial consultants who recognize that their clients were victimized and want to see that they are compensated for their losses.” Jones’ firm, Page Perry, is based in Atlanta but represents investors in arbitrations and lawsuits all over the country.