As a follow up to our posting from Finra, the following is an article by Bruce Kelly on April 7, 2011, in InvestmentNews.com dealing with the Finra Reg D crackdown. 

Kelly says that Finra has unleashed its first round of fines and sanctions against broker-dealers and executives from firms that sold private placements that have collapsed. In doing so, the industry’s self-regulator cited a lack of due diligence by both firms and executives in selling the high-risk products.

Finra, or the Financial Industry Regulatory Authority Inc. named two series of private placements, notes issued by Medical Capital Holdings Inc. and preferred stock from Provident Royalties LLC, as problematic. Finra imposed the sanctions against the firms and execs for failing to conduct a reasonable investigation of the sale of those products. In 2009, the Securities and Exchange Commission charged both those private-placement sponsors with fraud.

The largest fine — $700,000 — was levied on Workman Securities Corp., which was ordered to pay $700,000 in restitution to clients. InvestmentNews previoulsy reported that sanction.

Finra fined another broker-dealer, Askar Corp., $45,000 for failure to conduct due diligence of private placements from DBSI Inc., a failed real estate syndicator that is now in bankruptcy.

Kelly goes on to say that the firm generated $578,000 in commissions from sales of DBSI’s tenant-in-common exchanges, according to court documents All three products — Medical Capital notes, Provident stock and DBSI tenant-in-common exchanges — were wildly popular products sold by dozens of independent broker-dealers in the last decade. Some of the biggest sellers of the deals, QA3 Financial Corp., GunnAllen Financial Inc. and Okoboji Financial Services Inc., have since shut down, unable to bear the cost of lawsuits stemming from angry clients who bought the products.

Workman’s reps sold a little more than $9 million of Provident Royalties private placements, from last summer in the Northern District of Texas bankruptcy. The amount of Medical Capital notes the firm’s reps sold to investors is not known. Finra specified that the $700K is to go to Workman’s clients as restitution.

Finra’s series of actions,  focused on executives at broker-dealers failing to look into or investigate the private placements their firms sold. The regulator’s crackdown undoubtedly will hit a nerve with many small and midsize independent broker-dealers, many of whom claim they don’t have the resources to investigate the private placements they sell. Instead, the firms tend to rely on outside due diligence professionals, mostly attorneys, to examine and analyze the products. But those due diligence attorneys often take fees to write reports from the product sponsors. Much like sell-side research on Wall Street, the lawyers’ financial relationships with sponsors raises questions about potential conflicts of interest.

Private placements were high-commission products, typically offering reps and advisers a commission of 7% or 8%. Broker-dealers and the executives should have looked at the private-placement offerings much more closely, Brad Bennett, Finra executive vice president and chief of enforcement, noted in a statement.

“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” Mr. Bennett stated. “Finra will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers.”

Finra barred or suspended seven executives as part of its action. Each signed letters of acceptance, waiver and consent, and neither admitted nor denied the findings. The two broker-dealers also signed such letters.

David William Dube, owner of the defunct Peak Securities Corp., was barred.

Timothy Cullum, former CEO of now-defunct Cullum & Burks Securities Inc., was suspended for six months as a principal and fined $10,000. Steven Burks, former president of the B-D, received the same sanction.

Robert Vollbrecht, Workman’s former president, was barred as a principal and fined $10,000.

The InvestmentNew.com article goes on to say that in  addition, two former executives at Capital Financial Services Inc., Jeffrey Lindsey and Bradley Wells, were suspended as principals for six months and fined $10,000 each. Likewise, Jay Lynn Thacker, one-time chief compliance officer at Meadowbrook Securities LLC, which was formerly InvestLinc Securities LLC, was hit with the same suspension and fine.

If you feel you have been a victim of these alleged fraudulent schemes, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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WASHINGTON — It was announced today on FINRA’s website that the Financial Industry Regulatory Authority (FINRA)  has sanctioned two firms and seven individuals for selling interests in private placements without conducting a reasonable investigation. The companies whose securities were sold in these private placements were unrelated to the firms and individuals FINRA sanctioned. The companies ultimately failed, resulting in significant investor losses.

 In their article it was announced that FINRA imposed sanctions against the following firms and individuals for failing to conduct a reasonable investigation of the sale of private placements offered by Medical Capital Holdings, Inc. (MedCap) and/or Provident Royalties, LLC.

• Workman Securities Corp., of MN, was ordered to pay $700,000 in restitution to affected customers. Robert Vollbrecht, Workman’s former President, was barred in any principal capacity, and fined $10,000.
• Timothy Cullum, former Chief Executive Officer, and Steven Burks, former President, of Cullum & Burks Securities, Inc., of Dallas, TX, a now-defunct firm, were each suspended in any principal capacity for six months and fined $10,000.
• Jeffrey Lindsey and Bradley Wells, two former executives with Capital Financial Services, Inc., of ND, were each suspended for six months in any principal capacity and fined $10,000.
• Jay Lynn Thacker, former Chief Compliance Officer for Meadowbrook Securities, LLC (fka Investlinc Securities, LLC), of MS, was suspended for six months in any principal capacity and fined $10,000.
• David William Dube, former Owner, President, Chief Compliance Officer and Anti-Money Laundering (AML) Compliance Officer of (now-defunct) Peak Securities Corporation, of FL, was barred for failing to conduct adequate due diligence, as well as a failure as AML Compliance Officer to detect, investigate and report numerous suspicious transactions in 10 customer accounts where “red flags” existed.

Additionally, FINRA fined Askar Corporation, of MN, $45,000 for its failure to conduct due diligence on a private placement from DBSI, Inc., another company that defaulted on its obligations. FINRA found that Askar only reviewed the offering documents and sales materials provided by DBSI before approving the product for sale, without independently verifying DBSI’s representations in the offering documents.

 It was reported that FINRA found that broker-dealers who sold the MedCap, Provident and DBSI private placement offerings did not have reasonable grounds to believe that the private placements were suitable for any of their customers. Also, they failed to engage in an adequate investigation of the private placements and failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations. Without performing proper due diligence, the firms could not identify and understand the inherent risks of these offerings. The sanctioned principals did not have reasonable grounds to allow the firms’ registered representatives to continue selling the offerings despite the red flags that existed regarding the private placements.

 Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults. FINRA will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers.”

 In July 2009, the SEC filed a civil injunctive action in federal district court in which it sought, and was granted, a preliminary injunction to stop all MedCap sales. The SEC alleged that MedCap and its executives defrauded investors in MedCap VI by misappropriating approximately $18.5 million of investor funds. The SEC also alleged that MedCap misrepresented that it had never defaulted on or had been late in making interest or principal payments, when in fact, MedCap had defaulted on or was late in paying nearly $1 billion in principal and interest on the notes from its previous Regulation D offerings. The court appointed a receiver to gather and conduct an inventory of MedCap’s remaining assets. The SEC action is pending.

 From 2001 through 2009, MedCap, a medical receivables financing company based in Anaheim, CA, raised approximately $2.2 billion from over 20,000 investors through nine MedCap private placement offerings of promissory notes. MedCap made interest and principal payments on its promissory notes until July 2008, when it began experiencing liquidity problems and stopped making payments on notes sold in two of its earlier offerings. Nevertheless, MedCap proceeded with its last offering, MedCap VI, which it offered through an August 2008 private placement memorandum.

 On July 2, 2009, the SEC filed a civil injunctive action in the Northern District of Texas naming Provident and others, and the Court granted its request for a temporary restraining order and an emergency asset freeze and appointment of a receiver to take control of the entities, and marshal and preserve the assets for the benefit of the defrauded investors. All the named defendants subsequently agreed to the entry of a preliminary injunction, which remains in effect. In March 2010, FINRA expelled Provident Asset Management, LLC from membership for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC. (FINRA Case No. 2009017497201.)

From September 2006 through January 2009, Provident Asset Management, LLC marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by an affiliated issuer, Provident Royalties. The Provident offerings were sold to customers through more than 50 retail broker-dealers nationwide and raised approximately $485 million from over 7,700 investors. Provident Royalties’ business plan included the acquisition of a combination of producing and non-producing sub-surface mineral interests, working interests and production payments in real property located within the United States. Although a portion of the proceeds of Provident Royalties’ offerings was used for the acquisition and development of oil and gas exploration and development activities, millions of dollars of investors’ funds were transferred from the later offerings’ bank accounts to the Provident operating account in the form of undisclosed and undocumented loans, and were used to pay dividends and returns of capital to investors in the earlier offerings, without informing investors of that fact.

It is noted that FINRA’s investigation of broker-dealers that sold the MedCap, Provident, DBSI and other troubled private placement offerings continues.

If you feel you have been a victim of these alleged fraudulent schemes, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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