The Hammer is Coming Down on Private Placement (Reg D) Offering Scams


Private placement offerings (also known as Reg D offerings), such as Medical Capital Holdings Inc. and Provident Royalties LLC, have devastated unsuspecting investors. Such offerings, as well as the unscrupulous broker-dealers who pushed them, have wound up in the crosshairs of state securities regulators. See “Cracking Down on ‘Private Placement’ Investments,” March 27, 2010, Wall Street Journal, by Jane J. Kim.

Public securities offerings must be generally be registered under the Securities Act of 1933. Registration protects investors, at least in theory, by requiring disclosures, including audited financial statements, and review of those disclosures by a gatekeeper, the U.S. Securities and Exchange Commission. The SEC can prevent an offering from being made when there are deficiencies in the registration statement. Regulation D provides certain exemptions from the registration requirement, thus removing that gatekeeper protection.

Despite the brokers who downplay or omit to disclose the risks, many private placement/ Reg D offerings are hazardous and should be avoided by ordinary investors. Conservative income investors with as little as $200,000 in annual income and $1 million in net worth are often “pitched” these offerings by broker-dealers or investment advisers peddling what are often high-commission scams. Brokers and advisers have been known to falsify investors’ annual income and net worth so that the investors appear to be “accredited” and the deal appears to qualify for the Reg D exemption from registration and consequent lack of regulatory scrutiny.

Brokers often pressure and rush investors into signing paperwork that they do not understand in order to take advantage of a hot opportunity. Adding insult to injury, after the investor has been scammed, these broker-dealers and advisers try to portray the victims as financially saavy “millionaires” who understood the undisclosed risks and got what they deserved.

As an example, the article describes Adrianne Cross, a former schoolteacher in Laguna Niguel, Calif., who relied on Ameriprise Financial/ Securities America to manage her nest egg and the proceeds from her recent divorce settlement. Her Ameriprise/ Securities America broker persuaded her to invest more than $1 million in private-placement securities issued by Medical Capital Holdings Inc. and Provident Royalties LLC in 2007. Both companies failed in 2009, wiping out Ms. Cross’s investment. “I felt gutted like a fish,” says Ms. Cross, 64 years old. “He had pushed it as a safe alternative to stocks.”

In an all-too-typical response, Ameriprise spokeswoman Janine Wertheim, said Ms. Cross was a “multimillionaire who signed multiple documents that acknowledged she was an accredited investor who understood the risks associated with the products.”

The concern about lack of disclosure in Reg D offerings is echoed by Pratt H. Davis of Page Perry, “Medical Capital’s implosion has brought the lack of disclosure in many Reg D investments to the forefront.”

On July 16, the SEC charged Medical Capital Holdings Inc. with fraud related to the sale of private securities in the form of notes. In wake of the collapse, the Commonwealth of Massachusetts Securities Division filed a Complaint against broker/dealer Securities America related to its sales of Medical Capital Notes. The complaint contains allegations that Securities America failed to disclosed certain material risks to it customers. The collapse of the Medical Capital investments has left investors nationwide in the hole to the tune of about $1 billion. According to Mr. Davis, “thousands of investors in the Medical Capital offerings do not appear to have received the requisite disclosure of the risks involved.” Many observers, including Mr. Davis, believe that the hammer will fall on other Reg D offerings in the near future.

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 corporate investors in private placement/Reg D offering securities cases. For further information, please contact us.