Private investments (also known as private placements or Reg D offerings) have been the subject of a growing number of fraud charges by the U.S. Securities and Exchange Commission and some states. Such deals, including oil and gas ventures and real estate partnerships, have historically been capitalized by sales to individual investors through independent broker-dealers. Promoters of these investments depend upon this channel to raise money and the broker dealers reap rich commissions on the private placements with loads up to 30%.
Private investments are touted as being “exclusive” (not for ordinary “unaccredited” investors) with promises of higher returns, and as vehicles for diversification having no correlation with the stock market. The downside (never explained as fully) is that these investments are complex, opaque, illiquid, and virtually unregulated.
In July, as noted, the SEC leveled charges of fraud at two highly popular private deals ? involving Medical Capital Holdings Inc. and Provident Royalties LLC ? that raised $2.7 billion. According to at least one industry executive, some promoters “baited” potential investors with promises of impossibly high dividend payouts that hid the true yield of the company. Since the SEC charges, broker-dealers have started to question the suitability of private placement deals. This new scrutiny has reportedly created some “friction” with the promoter firms.
FINRA requires (or purports to require) that its members firms perform a two-tiered suitability analysis on any investment recommended by the firm. The first tier involves due diligence to determine whether the investment is suitable for anyone. The second tier has to do with whether the investment, even if it suitable for some, is suitable for the particular investor in question, based on that investors investment objectives, experience and risk tolerance.
The article quotes Carrie Wisniewski, president of B/D Compliance Associates Inc., which provides consulting services to broker-dealers and investment advisers, as saying: “Unregistered offerings can blow up on a firm fast. Executives and reps with broker-dealers often think such disasters will never happen to them. In the past, brokers could talk firms into selling deals. Now firms are much more timid.”
“Many of these private investments are simply structured to pad the pockets of promoters and have a high probability of failure,” says J. Boyd Page, senior partner of Page Perry in Atlanta. “Investors are urged to proceed with great caution in considering such investments. We have an awful lot of angry investors that have contacted us about these types of investments.”
Investors who have lost money in private placements may have strong claims to recover their losses from the broker dealers who sold them.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors in securities cases. For further information, please contact us.