Securities Lawyer Blog | Victim of Fraud?

TAG | failure to provide due diligence

May/12

22

Does Your Broker/Dealer Know Exactly What He Is Selling?

Comments off · Posted by Securities Lawyer in FINRA

In a May 21, 2012 article from the InvestmentNews.com website, Bruce Kelly writes that the SEC is looking at “several areas of high risk” in the securities industry.

Some of the areas they are looking into  include broker-dealer due diligence, net capital levels at broker-dealers and “dark pools” of liquidity, said Julius Leiman-Carbia, associate director in charge of the National Broker-Dealer Examination Program in the SEC’s Office of Compliance Inspections and Examinations.

The definition of a dark pool is a source of liquidity that is nondisplayed, meaning  that  it does not publicly disseminate quotes, according to PriceWaterhouseCoopers LLC. Trading volume of U.S. stocks through dark pools has increased in recent years.

“We’re looking at due diligence,” Mr. Leiman-Carbia said in a panel discussion Monday afternoon at the annual meeting of the Financial Industry Regulatory Authority Inc. in Washington. He said he wonders if brokers truly understand all the products that they are selling.

Kelly writes that the SEC is also focusing on “the division between the investment adviser and broker-dealer sides” of firms that are dually registered, including “what types of controls are in place when money is [placed with] the investment adviser,” Mr. Leiman-Carbia said. Is there a good reason why it’s there, other than the firm can make money this way, he asked.

The SEC is also looking at firms’ levels of net capital, which each broker-dealer must maintain in order to stay open for business. And the commission also is trying to pinpoint investor fraud, Mr. Leiman-Carbia said. Indeed, the SEC is looking at the country as a whole to identify particular areas where fraud is prevalent, he said. One benefit would be to locate regions where senior citizens are defrauded writes Kelly in the InvestmentNews.com article.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide.
For a free consultation with an attorney, please call 888-760-6552, or visit our website at: http://www.securitieslawyer.com.

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Nov/11

30

Due Diligence on Private-Placements Labeled ‘Sloppy’

Comments off · Posted by Securities Lawyer in FINRA

In a November 25, 2011, article in InvestNews.com, Bruce Kelly writes that broker-dealers who sold billions of dollars in allegedly fraudulent private placements failed massively in their due-diligence responsibilities to investors, according to the assessment of forensic accountant and expert witness Gordon Yale, who has worked on more than 50 legal claims brought by investors against broker-dealers stemming from the failed deals. The clients bought private placements issued by DBSI Inc., Medical Capital Financial Corp. and Shale (Provident) Royalties.

The Securities and Exchange Commission, SEC, had charged Medical Capital Financial and Provident Royalties with fraud in 2009; DBSI filed for bankruptcy protection in 2008.

Kelly writes that broker-dealers’ due diligence showed incredible “sloppiness,” according to Mr. Yale, a certified public account and principal of Yale & Co.

“It was basically the same recklessness with which major investment banks conducted their mortgage-backed-securities business, but it was done by middle- or lower-tier firms and [with] a different set of products. You need to understand the underlying business and management’s representations about the performance of that business, and then begin performing due-diligence procedures that are either going to corroborate those representations or not,” Mr. Yale said.

“Another failure was that everyone seemed to rely on the fact that [MedCap] payments had been made in a timely way,” he said.

THEY “PAY TILL THEY DON’T”

“The word was, “They’re paying.’ So what? That’s how all Ponzi schemes work. They pay till they don’t,” said Mr. Yale, who has served as an expert witness for a dozen different plaintiff’s lawyers in lawsuits stemming from more than $100 million in claims. The overwhelming majority were settled, and Mr. Yale testified in only one.

The investor won that claim last year, with an award of $1.2 million in damages and legal fees against Securities America Inc.and an affiliated broker.

The broker-dealers that sold $3.6 billion in MedCap notes, Shale Royalties preferred shares, and DBSI tenant-in-common exchanges, partnerships and notes have said that they performed appropriate due diligence. In several regulatory actions that involved fines or restitution to investors, the B-Ds neither admitted nor denied the findings. Regulators, however, recently have issued fines and sanctions that support Mr. Yale’s assertion.

The InvestmentNews.com article said that in September, for example, the Financial Industry Regulatory Authority Inc. levied a $10,000 fine and a six-month suspension against Brian Boppre, former president of Capital Financial Services Inc. Capital Financial was a leading seller of both Medical Capital Financial and Provident Royalties, and Mr. Boppre “knew of an issuer’s failure to make payments to its investors and was also aware of other indications of the issuer’s problems but approved the offering as a product available for the firm’s brokers to sell to their customers,” according to Finra. Mr. Boppre also “failed to conduct adequate due diligence of the offerings before allowing firm brokers to sell this security,” according to Finra.

WE ARE “SEEING A SHIFT’

One due-diligence executive said that broker-dealers have made some changes in the wake of the private-placement failures and are working more closely with third-party due- diligence analysts. “From an industry standpoint, we’re seeing a shift in trying to bring some standards as it relates to how these deals should be structured,” said Anthony J. Chereso, president of FactRight LLC.

“It’s an absolute necessity. There also needs to be some clarity as to what Finra and the regulators are expecting of the broker-dealers,” Mr. Chereso said. “We need to have the broker-dealers more involved in the process of managing the due diligence.”

“We encourage the broker-dealers to participate in the on-site visits [to companies issuing private placements] with us, to walk along with us in the due-diligence process. That way, they will know firsthand what some of the potential issues are,” said Yale.

After the SEC in July 2009 alleged that Medical Capital and its leading executives had committed fraud, executives with Securities America insisted that they performed “industry-leading” due diligence on private placements that they sold.

“It’s untrue, because basically what Securities America did, I believe, was to rely on management representations made by Medical Capital or rely on third-party due diligence that relied on management representations,” he said.

“Securities America continually enhances its policies and procedures in order to best serve its customers,” said Janine Wertheim, senior vice president and chief marketing officer of Securities America, who didn’t directly address Mr. Yale’s comments.

“One of the problems is that many of the firms relied on third-party due-diligence vendors,” Mr. Yale said.

“They viewed those reports as the end of the process, rather than the beginning. There’s a notice to [Finra] members, 05-48, that basically says you can outsource any function, but you can’t outsource your responsibility for compliance with federal securities laws or regulations,” Mr. Yale said.

“In many instances, the issuer paid those third-party due-diligence providers,” he said. “To believe that due-diligence functions stops with some independent — or purportedly independent — provider is a mistake.”

ACCOUNTANTS

To perform true due diligence, firms must use accountants to dig into the offering documents, Mr. Yale said.

“Why didn’t Securities America impose a third-party, independent CPA firm to verify the results of the [MedCap] loan pool histories? That was supposedly the primary business,” he said. “Or why didn’t they hire a CPA to look at the loan files? That’s state-of-the-art due diligence.”

“That’s what any private-equity firm would do and a whole lot more,” Mr. Yale said. “Neither Securities America nor any other firm whose documents I’ve seen ever did that.”

One third-party due-diligence analyst who wrote reports about Medical Capital Financial was “almost wringing his hands over Medical Capital investments in health-care-related businesses, particularly owner-occupied real estate,” Mr. Yale said.

The analyst, whom Mr. Yale declined to identify, “stated in his reports that this was not their expertise. The next-most-obvious question is: What did the financial statement say about those investments, and how are they performing?” he asked.

“So you need to go look at the investments that are disclosed in the footnotes to the financial statements, and you see a bunch of them are delinquent. Where was the follow-up?” Mr. Yale said as written by Bruce Kelly for InvestmentNews.com.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with these or other stockbrokers/brokerages, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Nov/11

29

Next Financial Group, Inc., Ordered to Pay $2M to Clients Over Provident Royalties Private Placements

Comments off · Posted by Securities Lawyer in FINRA

In a November 28, 2011 article for InvestmentNews.com, Bruce Kelly writes that Next Financial Group, Inc. has agreed to pay $2 million in restitution to clients who bought oil and natural gas private placements of Provident Royalties LLC, which the Securities and Exchange Commission in 2009 accused of fraud.

In a Financial Industry Regulatory Authority Inc. letter of acceptance, waiver and consent, Next Financial sold $20 million of three separate Provident private placements from July 2008 to January 2009. Over that time, the firm’s due diligence was lacking, according to the Finra.

“Despite the fact that Next received a specific fee related to the due diligence that was purportedly performed in connection with each offering, beyond reviewing the private-placement memorandum for the offerings, [Steven Nelson, vice president of investment products and services] did not perform adequate due diligence on the [Provident] offerings,” according to the AWC, which was finalized last month.

Next Financial reported $136.1 million in gross revenue last year and has 866 affiliated reps and advisers, writes Kelly.

Next Financial and Mr. Nelson’s due diligence on Provident fell short in several areas, according to Finra. Mr. Nelson “did not travel to Provident’s headquarters in Texas to conduct due diligence on three separate offerings,” according to the AWC. He also “did not see any financial information regarding Provident Royalties, other than the information contained in the private-placement memorandum. Further, once [Mr.] Nelson had concluded that Next could sell [the three offerings], he did not conduct adequate continuing due diligence.”

The InvestmentNews.com article adds that outside due-diligence reports highlighted a number of red flags of the Provident offerings, and Mr. Nelson “should have scrutinized each of the [Provident] offerings, given the purported high rate of returns,” according to the AWC.

Next Fincancial’s $2 million in restitution to investors is part of a larger case brought by the receiver for Provident in federal court in Dallas. While at least 20 broker-dealers that sold Provident private placements have shut down or declared bankruptcy, others, now including Next Financial, have had the funds to pay the claims and remain open for business. About 50 broker-dealers in total sold Provident, which raised $485 million from 7,700 investors from 2006 to 2009.

Finra censured and fined Next $50,000, and fined Mr. Nelson $10,000 and suspended him as a principal for six months. Next Financial also failed to supervise adequately a registered rep’s sale of fraudulent life settlement products from 2007 to 2009, according to the AWC. The rep, who was not identified, sold $3.5 million in life settlement contracts to 35 clients.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with Next Financial Group, Inc., call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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