Private Offerings Scuttle Another Brokerage Firm

 

The drum beat goes on for broker-dealer closings, as MCL Financial Group Inc. of Santa Ana, California, another small broker-dealer that sold a lot of illiquid alternative investments, has gone the way of QA3 Financial Corp., Jesup & Lamont Securities Corp., GunnAllen Financial Inc., Securities Network LLC, Omni Brokerage Inc., and WFP Securities, according to the latest in Bruce Kelly’s series on the subject for InvestmentNews, “MCL Financial: Another big seller of alternative investments goes under.” These firms folded under the legal costs of their failure to perform proper due diligence on the private placements.

MCL Financial had 44 registered representatives. It filed its withdrawal of registration with the Financial Industry Regulatory Authority Inc., making it at least the sixth such firm to close this year.

According to the article, 26% of MCL’s revenue in 2010 derived from the sale of (presumably nontraded) REITs, and 15% from the sale of LLCs and other private placements.

Last year, the bankruptcy receiver for DBSI Inc. sued MCL and others to claw back $210,000 in commissions from the sale of private real estate deals called tenant-in-common (TIC) exchanges. DBSI was a leading seller of TIC exchanges.

Private offerings are also known as Reg D offerings, a reference to the exemption from registration that is commonly used. Many of these offerings are very high-risk, and involve high commission payments and high fees. Serious concerns have developed about whether such investments are sold to investors because they generate high commissions, regardless of their unsuitability for the investors. FINRA has proposed to cap commissions at a hefty 15% and require that 85% of investors’ money be placed in the investment.

Perhaps because of these incentives, broker-dealers often fail to perform adequate due diligence on the investments they sell. This is extremely risky for the broker-dealers as well as their clients.

Investor attorney J. Boyd Page, the senior partner at Page Perry, based in Atlanta, observed: “This just shows how risky these private placements are. Not only have they destroyed investors’ life savings, they are destroying the firms that sold them without doing the proper due diligence.”

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 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving private placement or Reg D securities. For further information, please contact us.