Eight more broker-dealers and 10 individuals have been sanctioned by the Financial Industry Regulatory Authority, or FINRA, and ordered to pay restitution totaling more than $3.2 million for selling interests in allegedly fraudulent private placements without having a reasonable basis for recommending the securities.
FINRA announced its list of firms sanctioned on Nov. 29. The high-risk private placements were issued by Medical Capital Holdings Inc., Provident Royalties LLC, and DBSI Inc., all of which eventually failed, leading to sizeable investor losses.
In April 2011, FINRA announced that it had sanctioned two firms and seven individuals for selling interests in private placements without conducting a reasonable investigation. That round of sanctions resulted in $700,000 in restitution, to be paid by Workman Securities Corp. of Minnesota, plus a total of $105,000 in fines.
The sanctioned broker-dealers that sold private placements issued by the companies above did not have adequate systems in place to identify and understand the risks inherent in these offerings. As a result, many failed to conduct satisfactory due diligence.
A few of the firms lacked reasonable grounds to conclude the private placements were suitable for their customers. The sanctioned principals of the firms lacked reasonable grounds to allow their firms’ brokers to continue selling the offerings, despite numerous red flags.
Allegedly fraudulent private placements were issued by Medical Capital from 2001 through 2009. A medical receivables financing company based in Anaheim, Calif., Medical Capital raised about $2.2 billion from more than 20,000 investors through nine offerings of promissory notes.
The company made interest and principal payments on its notes until July 2008, when it began experiencing liquidity problems and stopped paying on two of them. Despite these problems, Medical Capital made another offering through an August 2008 private placement memorandum.
In July 2009, the Securities and Exchange Commission, or SEC, filed to preliminarily enjoin all Medical Capital sales. The injunction was granted and the court appointed a receiver to gather and conduct an inventory of Medical Capital’s remaining assets. The action was filed in U.S. District Court for the Central District of California, and is pending.
Provident Royalties offered preferred stock and limited partnership interests in a series of 23 private placements that were marketed and sold by its affiliate Provident Asset Management LLC, a Dallas-based broker-dealer.
These offerings, made from September 2006 through January 2009, were sold to customers through more than 50 broker-dealers across the country. They raised roughly $485 million from more than 7,700 investors.
Millions in Investor Funds Unknowingly Transferred
Although a portion of the proceeds were used for the stated purpose of the acquisition and development of oil and gas exploration and extraction, millions in investor funds were transferred from the bank accounts of the later offerings to the Provident operating account. Investor funds were also used to pay dividends and returns of capital to investors in the earlier offerings, without investors being informed.
The SEC filed an action in the U.S. District Court for the Northern District of Texas in July 2009 naming Provident and others for violations of federal securities laws. The court granted a temporary restraining order and an emergency asset freeze. The court also appointed a receiver to take control of Provident to preserve the assets for the defrauded investors. The SEC action is pending.
FINRA expelled Provident Asset Management in March 2010 for marketing the fraudulent Provident Royalties private placements.
Some of the sanctions and fines dished out by FINRA were a result of sales activity involving DBSI, which is now in bankruptcy. DBSI, an Idaho-based commercial real estate investment company, started having liquidity problems as early as 2004.
The company had guaranteed a 7 percent dividend to investors, and to make these payments, it allegedly created two schemes, according to court documents. DBSI allegedly used hidden markups, as well as accountable reserves. The reserves were supposed to be sued for improvements and repairs, but more than 82 percent of the roughly $99 million went into other DBSI funds.
FINRA’s Nov. 29 announcement stated that that the following firms and individuals were sanctioned for their failure to conduct a reasonable investigation or their failure to enforce proper procedures during the sale of private placements offered by Provident Royalties, Medical Capital or DBSI.
Broker-Dealers Ordered to Pay Millions in Restorations
Next Financial Group, Inc. of Houston, Texas, was ordered to pay $2 million in restitution and was fined $50,000 in connection with the sale of three Provident private placements, Steven Lynn Nelson, the firm’s vice president for investment products and services, was fined $10,000 and suspended for six months.
Investors Capital Corp. of Lynnfield, Mass., was ordered to pay about $400,000 in restitution for the sale of two Provident private placements. The firm was also sanctioned in connection with another offering issued by CIP Leveraged Fund Advisors.
Garden State Securities Inc. of Red Bank, N.J., along with its co-owner Kevin John DeRosa, were ordered to pay $300,000 in restitution on a joint-and-several basis to customers sold a Medical Capital private placement.
DeRosa was also fined $25,000 and was suspended for 20 business days in any capacity and for two months in any principal capacity. Garden State’s chief compliance officer at the time, Vincent Michael Bruno, was fined $10,000 and suspended for one month.
Capital Financial Services of Minot, N.D., was ordered to pay $200,000 in restitution to customers who were sold three Provident Royalties private placements and a Medical Capital private placement. Brian W. Boppre, a former principal of the firm, was fined $10,000 and suspended for six months.
For its sale of three Provident private placements and a Medical Capital private placement, National Securities Corporation of Seattle, Wash., was ordered to pay $175,000 in restitution to affected customers. Matthew G. Portes, director of alternative investments and syndications for the firm, was fined $10,000 and suspended for six months.
Equity Services, Inc. of Montpelier, Vt., was censured, fined $50,000 and ordered to pay almost $164,000 in restitution for the sale of a DBSI private placement. Stephen Anthony Englese, the firm’s senior vice president for securities operations, was fined $10,000 and suspended for 30 business days. Broker Anthony Paul Campagna was fined $25,000 and suspended for 30 business days.
Securities America, Inc. of La Vista, Neb., was censured and fined $250,000 for its involvement with the sale of two Provident private placements.
Newbridge Securities Corporation of Fort Lauderdale, Fla., was fined $25,000, and the firm’s former chief compliance officer, Robin Fran Bush, was fined $15,000 and suspended for six months, in connection with the sale of four DBSI private placements and a Medical Capital private placement.
Leroy H. Paris II, former president and chief executive officer of Meadowbrook Securities of Jackson, Miss., was fined $10,000 and suspended for six months for his involvement with the sale of two Provident private placements and one issued by Medical Capital.
Michael D. Shaw, formerly of VSR Financial Services Inc. of Baton Rouge, La., was barred from the industry for his role in the sale of a private placement offered by DBSI, as well as several other private placements. Shaw also falsified customer account documents.
All the broker-dealers and individuals named above settled with FINRA. They consented to the entry of FINRA’s findings, but neither admitted nor denied the charges.
Brad Bennett, FINRA’s executive vice president and chief of enforcement, said these actions show that any firm or individual who fails to conduct due diligence on such offerings, especially when there are multiple red flags, will not be allowed to shift all the responsibility onto the issuers of the fraudulent private placements.
Guiliano Law Group
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