FINRA Smacks 18 Firms, Workers Tied to Private Placements

Before news of the sale, a Dallas judge gave his final approval of an $80 million class-action settlement over the sale of private placements of shares in Provident Royalties and Medical Capital. (A separate settlement of $70 million involved those who had begun arbitration proceedings against Securities America, Securities America Financial Corp. or Ameriprise.)

In its Nov. 29 announcement, FINRA says that some broker-dealers “did not have adequate supervisory systems in place to identify and understand the inherent risks of these offerings and, as a result, many of the firms failed to conduct adequate due diligence of these offerings.”

Also, according to FINRA, “some of the firms did not have reasonable grounds to believe that the private placements were suitable for any of their customers … [and] the sanctioned principals did not have reasonable grounds to allow the firms’ registered representatives to continue selling the offerings, despite the numerous ‘red flags’ that existed regarding the private placements.”

The regulatory group said Thursday that it imposed sanctions and restitution against the following firms and individuals “for failing to conduct a reasonable investigation or for failing to enforce procedures with respect to the sale of private placements offered by Provident Royalties LLC, Medical Capital Holdings Inc., or DBSI Inc.:

• Houston-based NEXT Financial Group Inc. ($2.05 million);
• Investors Capital Corp. of Lynnfield, Mass. ($400,000);
• Garden State Securities Inc., of Red Bank, N.J. ($335,000);
• Securities America of La Vista, Neb. ($250,000)
• Equity Services Inc., of Montpelier, Vt. ($249,000)
• Capital Financial Services of Minot, N.D. ($210,000);
• National Securities Corp. of Seattle ($185,000);
• Equity Services Inc., of Montpelier, Vt. ($249,000);
• Securities America  of La Vista, Neb. ($250,000);
• Newbridge Securities Corporation of Fort Lauderdale, Fla. ($40,000);
• Leroy H. Paris II of the now-defunct Meadowbrook Securities (Investlinc Securities), of Jackson, Miss. ($10,000); and
• Michael D. Shaw, formerly of VSR Financial Services Inc., of Baton Rouge, La.

According to FINRA, Medical Capital Holdings, a medical-receivables financing company based in Anaheim, Calif., raised roughly $2.2 billion (2001-2009) from over 20,000 investors through nine private placement offerings of promissory notes. In July 2008, it began experiencing liquidity problems and stopped making payments on notes sold in two of its earlier offerings.

From 2006 through 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by an affiliated issuer, Provident Royalties. These offerings were sold to customers through more than 50 retail broker-dealers nationwide and raised about $485 million from over 7,700 investors.

Most of the funds raised were transferred to Provident’s 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 other investors of the situation.

“We are pleased to have put this matter behind us and to have fully cooperated with FINRA in achieving a settlement that returns money to Provident investors,” said John G. Cataldo, Investors Capital’s chief compliance officer and counsel, in a statement.