Securities Lawyers Blog
In August, I wrote an article about how the brokerage firm Advanced Equities, Inc. (Advanced Equities) and First Allied Securities, Inc. (First Allied) sold nearly $1 billion in private placement offerings linked to clean technologies (clean-tech) to investors that have since become nearly worthless. Some of those investors have now come forward alleging that the brokerage firms did not conduct proper due diligence for selling the private placements. The private placements sold by the two brokerage firms include Advanced Equities GreenTech Investments, LLC, AEI 2007 Venture Investments, LLC, AEI 2010 Cleantech Venture, LLC, and AEI Fisker Investments, LLC.
One of the most prominent underlying investments in Advanced Equities private placement offerings portfolio was Fisker Automotive, Inc. (Fisker Auto). How Fisker Auto was sold to investors offers an unflattering view into how some in the brokerage industry still peddle worthless and speculative securities to unsuspecting investors to enrich themselves at investor’s expense.
Fisker Auto spent over a billion dollars, much of it from investors and a government loan, to invest and develop its cars. Ultimately Fisker Auto delivered only 2,000 cars and is on the verge of bankruptcy. Recently, the U.S. Department of Energy (DOE) started an auction on its loan made to Fisker Auto back in 2010. The DOE is still owed $168 million under the loan terms but put the loan on the auction block after “exhausting any realistic possibility” that Fisker Auto could repay the loan. The question is how did Fisker Auto receive $1 billion in the first place?
The idea behind Fisker Auto was to design an attractive modern car and have suppliers provide the technology and off-the-shelf parts in order to keep the costs of production low. When Fisker Auto first showed off its Karma car design at a Detroit auto show in January 2008 investors poured more than $10 million into the company. But these initial funds were just a drop in the bucket for what Fisker Auto needed to produce its dream car. In the following years, Fisker Auto went to several venture funds and was able to raise approximately $150 million. But building an electric car costs much more than $150 million so Fisker Auto looked elsewhere for its capital needs.
Enter Advanced Equities and First Allied. According to investor complaints, over the course of three years brokers at the brokerage firms raised somewhere between $600 million and $800 million of Fisker Auto’s $1 billion plus in funding. In total, Advanced Equities and First Allied sold Fisker Auto private placements to over one thousand investors.
According to investor complaints, the brokerage firms created sales materials that touted the private placements as “late stage equities” or companies that were 12-36 months from going public through an initial public offering (IPO). The private placement offerings, such as Fisker Auto, were also represented to investors as providing “higher near-term investment returns than the public equity markets” while possessing “greater short-term liquidity and lower risk profiles.” However, the investors claim that the brokerage firms failed to conduct the necessary due diligence on Fisker Auto in order to make the claims the firms made that induced investors to buy Fisker Auto shares.
Investors claim that given Fisker Auto’s troubles and lack of operating history, Advanced Equities’ and First Allied’s sales tactics were misleading. Unlike a lot of venture capital investors, investors in Fisker Auto private placements aren’t professional investors that are used to taking on startup risk. As Forbes reported in an article back in 2008, “[r]ather than billionaires, say former [Advanced Equities] brokers, many clients are doctors, lawyers and dentists who lack the sophistication of typical institutions and ultrarich VC investors.”
Advanced Equities and First Allied brokers made millions of dollars in sales commissions from the sales of Fisker Auto private placements. According to Forbes, Advanced Equities promised brokers “lush sales commissions” for their efforts. Under Advanced Equities’ compensation package brokers allegedly receive 5% on assets invested and 30% to 40% going to its brokers once the venture startup company is sold. While brokers were seeking high commission sales, investors have claimed they were sold a promising car company that was on the verge of taking off and with little foreseeable downside risk.
Read the rest of the Fisker Auto story in Part II.