Recently in Private Placements Category

January 9, 2012

SEC Adopts Regulations to Preclude the Sale of Private Placements to Small Investors

As repeatedly reported here in the California Securities Fraud Lawyer Blog, we have seen an exponential growth in investor complaints involving the sale of private placements. For those of you unacquainted with the term "private placement," click here.

swim at own risk.jpgIn a nutshell, private placements are illiquid non-publicly traded investments that are exempt from registration requirements under the Securities Exchange Act. For this reason, only wealthy and sophisticated investors, referred to as "accredited investors," are allowed to invest in them. In order to qualify as an accredited investor, an individual must have a net worth of $1 million or more. However, this does not mean that it is fair game for stockbrokers and investment advisors to sell private placements to anyone with a paper net worth of $1 million. See related blog posting: Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule.

In an effort to protect smaller investors whose only significant asset is their home, the Securities and Exchange Commission ("SEC") recently took steps to limit Regulation D of the Securities Exchange Act of 1933 to exclude an investor's primary residence from the $1 million net worth calculation. Although the rule became effective February 27, 2012, the net worth prohibition actually took effect back in July 2010 when President Obama signed off on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. See blog post: Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

The Bottom Line

We recommend extreme caution to anyone contemplating an investment in a private placement that is limited to accredited investors. Don't be fooled by your financial professional's sales pitch. No matter how you slice it, private placements are illiquid and risky investments. As stated in the fine print: These investments are only appropriate if you are willing to lose your entire investment. Still not convinced? I've got a backlog of cases where clients wrongfully assumed that they could get out of their investment anytime they wanted. They are still waiting.

Related Blog Postings:

April 17, 2011

Investor Sues Ameritas Over Recommendation to Use Real Estate Loans to Invest in Private Placements

home loan.jpgOur law firm recently filed a securities arbitration claim before the Financial Industry Regulatory Authority (FINRA) on behalf of a Northern California woman who was encouraged by her investment advisor at Ameritas Investment Corporation to take out real estate loans so that she could invest in the IMH Secured Loan Fund, a private placement that was exempt from Federal securities registration requirements. The mistaken assumption in many of these cases is that the high yield offered by the investment can be used to pay the mortgage. Unfortunately for our client, a few months after she made her investment, the fund stopped making interest payments and accepting liquidation requests from investors.

As our client's case illustrates, using a home loan to make investments is usually a bad idea and, when the investment is a speculative private placement that cannot be publicly traded or easily liquidated, it is never a good idea. [Click here for more information about private placements.] This isn't the first time that Ameritas has run into trouble for inducing customers to take out additional mortgages and home equity loans to invest. In August 2009, FINRA fined Ameritas $100,000 for failing to adequately supervise a broker who used misleading financial plans to recommend that customers refinance their homes or take out home equity loans to pay for the purchase of securities. FINRA fined the broker $60,000 and suspended her for 60 months.

When it comes to investing in securities, always invest within your means and never bet the farm.

Related Blog Posting:

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

July 22, 2010

Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

Today, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. Now, brokers will have a much harder time justifying the sale of private placements to small investors. Effective as of July 21, 2010, an investor's primary residence will no longer be considered when attempting to qualify for the $1 million minimum net-worth requirement for accredited investors under Rule 501(a)(5) of Regulation D. Also, one year from the date of enactment, the SEC will undertake a review of the "accredited investor" definition to determine whether any other requirements should be implemented for the "protection of investors, in the public interest, and in light of the economy."

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July 19, 2010

FBI Reports 105% Increase in High Yield Investment Fraud Investigations

Thumbnail image for FBI Seal.pngAccording to an FBI report on Securities Fraud before the Senate Judiciary Committee, there was a 105% increase in High Yield Investment Program investigations by the Bureau in 2009. My California securities law firm has also experienced a similar surge in investor complaints involving high-yield investments like Medical Capital Notes, which were sold through a network of brokerage firms such as Securities America, a firm that is now the subject of numerous securities fraud lawsuits and class action lawsuits.

High Yield Investment Programs ("HYIP") may seem like the ideal investment for retirees seeking greater income. However, for most investors, the acronym HYIP really stands for "Hazardous to Your Investment Portfolio." Promising large returns with seemingly no risk, these high yielding investments have raised millions of dollars from unsuspecting investors. In reality, many of these to-good-to-be-true investments turned out to be nothing more than Ponzi Schemes that needed to bring in new investor money in order to continue paying existing investors. During the recent financial crisis, many of these Ponzi schemes ultimately fell apart when the pool of available investors evaporated.

High yield investments are often sold through private placements that can only be purchased by "accredited investors." Because private placements are typically high risk investments with limited liquidity, they are only suitable for wealthy and sophisticated investors who can bear the risk of loss.

See related blog posting:

April 29, 2010

It's Time to Change the Accredited Investor Rule for Private Placements

play at risk.JPGMy California securities law firm has been inundated with inquiries from small investors who were sold unregistered private placements even though they were clearly not wealthy or financially sophisticated. Some of these private offerings--such as those issued by Medical Capital Holdings and Provident Asset Management--turned out to be outright frauds.

The private placements that are causing the most trouble were widely sold by stockbrokers who were only allowed to target wealthy individuals that have the financial capability to bear the risk of investing in unregistered and illiquid securities. These qualified investors are referred to as "accredited investors" under the federal securities laws. As discussed in a previous blog posting about accredited investors, an individual will be considered "accredited" if they have a net worth of $1 million or an annual income in excess of $200,000 (or $300,000 when combined with a spouse). The financial threshold for "accredited investors" was established under "Regulation D" which was adopted back in 1982. These requirements have not been updated since they were implemented 28 years ago. According to an analysis conducted by Businessweek, if adjusted for inflation, the accredited investor net worth requirement would increase from $1 million to $2.25 million and the income requirement would increase to $449,000 (single) and $674,000 (married). It is estimated that there were approximately 1.5 million "accredited investors" back in 1982. By 2008, the estimated number of households that were "accredited" swelled to as much as 7.2 million.

With such a low barrier to entry, many small investors were allowed to unwittingly put their retirement savings at risk--often lured by assurances from their stockbroker of high returns, safety and liquidity. An increase in the accredited investor qualification requirements is necessary to curtail the sale of private placements to individuals who can least afford to lose their investment.

See related blog posting:

UPDATE: Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

April 12, 2010

Medical Capital Update: Stockbroker's License Revoked for Violating the Prohibition Against General Solicitations

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for medcap.jpgOn April 12, 2010, the Colorado Division of Securities revoked the securities license of stockbroker John B. Guyette for his role in the sale of Medical Capital Notes to a number of Colorado investors in violation of Rule 502 of Regulation D, which prohibits general solicitations or advertisements in connection with the sale of private placements. Under Regulation D, sales agents may only target potential investors with whom they have a substantial pre-existing relationship.

The types of general solicitations that are prohibited under Regulation D typically include: (1) newspaper advertisements; (2) radio or television broadcasts; and (3) seminars or meetings. Only when there is a substantive and pre-existing relationship, can a stockbroker target a particular investor to purchase a private placement. One of the purposes of the "preexisting relationship" requirement is to ensure that the selling agent is reasonably certain that the targeted investor is sufficiently sophisticated in financial matters to participate in the offering. According to the Securities and Exchange Commission (SEC), the mere fact that sales are directed only to accredited investors does not mean that the solicitation is in compliance. The Alcala Law Firm is pursuing securities arbitration claims on behalf of Medical Capital investors who were improperly targeted by stockbrokers through general solicitations. Many of these investors were financially unsophisticated and/or did not qualify as accredited investors.

See related blog posting:

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

March 18, 2010

Provident Asset Management is Finally Expelled by FINRA for Securities Fraud in Connection with Massive Ponzi Scheme

Thumbnail image for Thumbnail image for Thumbnail image for provident.jpgThe Financial Industry Regulatory Authority (FINRA) has finally expelled Provident Asset Management for committing outright securities fraud in a Ponzi scheme that involved the marketing of a series of private placements under the names "Provident Energy" and "Shale Royalties." In typical FINRA-fashion, the expulsion was accomplished through a settlement in which the firm neither admitted nor denied any wrongdoing. FINRA's expulsion did not come about until more than 6 months after the Securities and Exchange Commission filed a securities fraud lawsuit against Provident Asset Management in July 2009 and Provident Royalties, LLC filed for bankruptcy in June 2009. Meanwhile, FINRA also announced today that their head of enforcement, Susan Merrill, is stepping down to return to private practice.

According to FINRA, the self-regulatory agency is conducting a broader investigation into the more than 50 broker-dealers who sold the Provident Energy and Shale Royalties private placements to their customers, which may lead to more settlements and potential fines. Disgruntled investors have already begun filing securities arbitration claims against some of these broker dealers alleging unsuitability, fraud and misrepresentation.

For more information, please visit the following recent blog postings:

March 3, 2010

Even for Accredited Investors, Stockbroker Recommendations to Buy Private Placements Are Subject to the Suitability Rule

In my California-based securities law practice, most of my clients that own a home qualify as "accredited investors" within the meaning of Regulation D which exempts private placements from federal securities registration requirements. Rule 501 of the Securities Act of 1933 defines an accredited investor as any person with a net worth (or joint net worth with a spouse) in excess of $1,000,000 at the time of purchase.

danger sign.jpgFinancial advisors or stockbrokers who sell private placements are subject to the rules and standards promulgated by the Financial Industry Regulatory Authority (FINRA). According to FINRA, stockbrokers who act as selling agents for private placements are required to conduct a due diligence investigation of the offering so that they understand the nature of the investment and its risks. Also, before recommending a private placement to a particular customer, the stockbroker must perform a suitability analysis by examining the customer's overall financial situation and investment objectives. Because a home can represent an investor's largest asset, net worth alone should never be used to determine whether an investment is suitable. A customer's status as an accredited investor does not release a stockbroker from the suitability requirements.

Recently, there has been a surge in investor complaints involving private placements that were sold by broker-dealers who were acting as selling agents. Private placements that are creating a lot of investor complaints include: Medical Capital, IMH Secured Loan Fund, Provident Asset Management, Striker Petroleum and DBSI. Some of the broker dealers who actively sold one or more of these private placements are Securities America, QA3 Financial, National Securities, CapWest, Independent Financial Group, just to name a few. Please contact us if you have any questions about unsuitable private placements.

Related Blog Posts:

Investor Home Equity to be Excluded from $1 Million Minimum Net-Worth Requirement for Accredited Investors

It's Time to Change the Accredited Investor Rule for Private Placements

January 30, 2010

IMH Secured Loan Fund Securities Lawsuit Alert

The Alcala Law Firm was recently contacted by several California investors who invested in the IMH Secured Loan Fund, LLC, a private placement managed by Scottsdale based Investors Mortgage Holdings, Inc. The Financial advisors who sold the IMH Secured Loan Fund to these investors also sold them other private placements, including Medical Capital and Provident Asset Management, two speculative investments that turned out to be ponzi schemes and are now the subject of numerous securities fraud lawsuits.

Before recommending any investment, particularly risky and speculative private placements, financial advisors have a fiduciary duty to adequately disclose the risks involved and also to exercise due diligence in determining whether such investments are suitable for the customer. The Alcala Law Firm is in the process of investigating the possibility of filing securities arbitration claims before the Financial Industry Regulatory Authority (FINRA) to recover investment losses related to these private placements.

Click here for all IMH Secured Loan Fund Blog Postings.

December 22, 2009

California Based Pacific Cornerstone Capital Fined $750,000 Over Private Placements

Pacific Cornerstone Capital, Inc. of Irvine, California, and it's CEO were fined a total of $750,000 by the Financial Industry Regulatory Authority (FINRA) for making false and misleading statements to purchasers of Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC. The two private placements raised approximately $50 million from 950 investors who purchased them either directly from Cornerstone or through a nationwide network of stockbrokers and investment advisers. Without admitting or denying FINRA's charges, the firm and its CEO consented to the following findings:

  • The firm had no reasonable basis for including representations in its offering documents that the targeted yield for a $100,000 investment was in excess of 18 percent over two to four years
  • Periodic update letters from the firm's CEO gave investors unrealistic performance estimates that misrepresented the true financial condition of each company.
  • The firm and its CEO failed to adequately supervise and monitor the sale of the private placement offerings.
FINRA and the SEC have recently stepped up enforcement and oversight activities involving the fraudulent sale of private placement offerings, also known as Regulation D offerings.
December 7, 2009

SEC Strikes at Striker Petroleum for Securities Fraud

Striker debentures can now be added to the growing list of private-placement offerings that were marketed through a network of stockbrokers that have recently become embroiled in securities fraud lawsuits. This week, the SEC alleged that Striker Petroleum, LLC deceived approximately 540 investors into purchasing $57 million worth of fraudulent debentures. The SEC is alleging that Striker was selling the debentures to pay off prior debenture holders and to pay fixed returns to investors who had invested in Legacy oil and gas properties.

According to one industry news source, the Striker debentures were sold through a nationwide network of stockbrokers, including CapWest Securities. As a result, many investors who purchased Striker debentures may also have been sold interests in Provident Asset Management and Medical Capital--two private placements that are already the focus of SEC and investor lawsuits. As we noted in a recent blog posting on this very subject: Brokers who recommended these investments have a lot of explaining to do.

Click here for related blog postings.

December 4, 2009

Medical Capital Holdings & Provident Asset Management Securities Fraud Update

Since my last two blog postings about the Medical Capital securities class action lawsuits pending in California, I have heard from several investors that were defrauded into purchasing not only Medical Capital Holdings, but also Provident Asset Management. Brokers who recommended either one of these private placement investments have a lot of explaining to do. Before recommending any investment, brokers have a fiduciary duty to exercise due diligence in determining whether an investment is appropriate and suitable for their customer. Defrauded investors interested in recouping their investment losses should consider all of their legal options, including the filing of a securities arbitration claim against their stockbroker or investment advisor that recommended the investment.

Below is a brief overview of the Provident Asset Management and Medical Capital securities fraud matters.

Provident Asset Management

Thumbnail image for provident.jpgOn July 1, 2009, the SEC charged Provident Royalties LLC, Provident Asset management, and its founders with securities fraud for running what is alleged to be a $485 million Ponzi scheme involving at least 7,700 investors. The complaint also names as defendants numerous entities through which Provident raised funds: Provident Energy 1, LLP; Provident Energy 2, LLP; Provident Energy 3, LLP; Shale Royalties II, Inc.; Shale Royalties 3, LLC; Shale Royalties 4, LLC; Shale Royalties 5, LLC; Shale Royalties 6, LLC; Shale Royalties 7, LLC; Shale Royalties 8, LLC; Shale Royalties 9, LLC; Shale Royalties 10, LLC; Shale Royalties 11, LLC; Shale Royalties 12, LLC; Shale Royalties 13, LLC; Shale Royalties 14; LLC Shale Royalties 15, LLC; Shale Royalties 16, LLC; Shale Royalties 17, LLC; Shale Royalties 18, LLC; Shale Royalties 19, LLC; and Shale Royalties 20, LLC.

In addition, a consolidated securities class action is currently pending in the U.S. District Court for the Northern District of Texas against brokerage firms Next Financial Group, Inc.; QA3 Financial Corp. and Securities America, Inc. for their role in recommending these investments to their brokerage clients. Customers who were defrauded by these firms can participate in the class action or, in the alternative, pursue their own independent securities arbitration claim.

Medical Capital Holdings

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for medcap.jpgOn September 18, 2009, a class action lawsuit was filed in the Central District of California against the following brokerage firms Securities America, Inc., Ameriprise Financial, Inc., CapWest Securities, Inc, and Cullum & Burks Securities, Inc on behalf of investors that invested in Medical Capital Notes issued by Medical Provider Financial Corp. III, IV, V and/or VI.

On November 13, 2009, a separate class action lawsuit was filed in the Central District of California against National Securities Corporation for their involvement in recommending Medical Capital Notes to their customers.

There are also many other brokerage firms who aggressively sold Medical Capital Notes and Provident/Shale interests to their customers who were omitted from the various class action lawsuits, including some large brokerage firms and smaller regional firms. In addition to the class action defendants discussed above, I have heard from investors who invested in Medical Capital through brokers working with Okoboji Financial Services, Redwine Securities and others that are still being reviewed.

Related Blog Posts:

Medical Capital Class Action or Arbitration: Investors Should Consider Their Options

Is Mass-Arbitration in the Client's Best Interest?

Are Securities Arbitration Cases More Financially Rewarding for Investors than Class Actions?