The Financial Industry Regulatory Authority said that it expelled Provident Asset Management, a Dallas-based broker-dealer, "for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme," the regulatory organization explained in a press release.
The action is the first produced by a FINRA initiative involving active examinations and investigations of broker-dealers in retail sales of private placement interests, as well as broker-dealers affiliated with private placement issuers.
FINRA is looking at firms' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud.
The initiative came in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights, FINRA says.
In fact, investors' funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors' funds during the contingency period of the offering, according to the regulatory group.
"Provident facilitated the sale of a series of [23] fraudulent private placements that were marketed to unsuspecting customers [from September 2006 to January 2009] as income-producing investments, when it was simply using new investors' money to pay previous investors the promised dividends – a classic Ponzi scheme," said Susan L. Merrill, FINRA executive vice president and chief of enforcement.
"While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics," explained Merrill.
