Excited about offering the latest private placement to your clients? Curb your enthusiasm.
FINRA and the SEC are actively examining private placements and the firms that sell them. If the regulators believe that something is amiss, they won't hesitate to impose severe fines on everyone involved in the sale.
As part of its ongoing sweep of firms that sold interests in failed private placements—including MedCap, Provident Royalties and DBSI—FINRA has issued sanctions against two firms and seven individual principals of those firms.
FINRA accuses them of causing significant investor losses by failing to conduct a reasonable investigation before offering the private placements for sale to investors.
MedCap,a medical receivables financing company, raised a healthy $2.2 billion between 2001 and 2009—all through promissory notes offered in private placement. MedCap satisfied its interest and principal payment obligations through July 2008.
But when it started suffering from liquidity problems, MedCap stopped making payments on some of the earlier issued notes, defaulting on almost $1 billion of its obligations. Despite its difficulties, MedCap made, and brokers willingly sold, a final offering through a private placement memorandum.
In Mid-2009, the SEC moved against MedCap, accusing MedCap of misappropriating $18.5 million in investor funds and successfully suing to stop further offerings from the company.
In this latest action, FINRA says that firms that sold the failed private placements didn't have reasonable grounds to believe the investments were suitable for any of the customers to whom they were sold.
