Reg D and Other Private Offerings are Dangerous for Brokerage Firms as well as their Clients

 

The list of independent broker-dealers that sold private offerings and are now out of business, is impressive. The private offerings include Provident Royalties LLC, Medical Holdings Inc., and DBSI Inc. So far, the list of B-Ds that have closed since 2010 includes, but is not limited to, QA3 Financial Corp., Jesup & Lamont Securities Corp., GunnAllen Financial Inc., Securities Network LLC, Omni Brokerage Inc., and most recently, WFP Securities. See series of InvestmentNews articles by Bruce Kelly entitled “Securities Network latest B-D to close its doors,” “Omni present no longer: Brokerage latest B-D to close,” and “WFP Securities bites the dust.”

This underscores how one serious mistake in due diligence can sink a firm. Securities Network sold just $215,000 of Provident preferred stock and had no history of regulatory fines, according to the article.

Broker-dealers reportedly sold $485 million of Provident shares. This suggests that the list of shut downs may not end with WFP Securities.
In fact, WFP Securities and twelve other firms were recently sued by Bank of New York Mellon over sales of Medical Capital notes.

DBSI was a leading seller of private real estate deals called tenant-in-common exchanges or TICs, and is now bankrupt. The SEC charged Provident and Medical Capital with perpetrating fraudulent ponzi schemes, and regulatory investigations into broker-dealers’ sales practices ensued. Legal bills for dealing with the litigation fallout, both private and regulatory, can crush small firms.

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, 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.

J. Boyd Page, the senior partner at Page Perry, an Atlanta-based law firm, 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.