Private Placements

Broker Sanctioned Over Unsuitable Sales of Private Placement Securities

October 28, 2013 | by Staff Attorney

All brokers and broker-dealers have an obligation to ensure that their investment or investment strategy recommendation is suitable for the customer. All sales efforts must be reasonable and appropriate for the investor based upon the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, experience, and other facts or information disclosed by the investor.

With respect to the sale of private placements, regulators have found significant problems in the due diligence and sales efforts of some brokerage firms when selling private placements to investors. These problems include fraud, misrepresentations and omissions in sales materials and offering documents, conflicts of interest, and suitability abuses.

In order for a brokerage firm to meet its due diligence obligation, the brokerage firm must make reasonable efforts to gather and analyze information both about the private placement and the customer the security is being sold to. Private Placements are considered “alternative investments” and are inherently speculative. Consequently, a broker must also ensure that an investment recommendation in a private placement is suitable for the particular customer. The broker must ensure that the client can withstand the risk taken and not imperil the client’s account by concentrating their assets in speculative investments.

Advanced Equities and First Allied Sales of Fisker Automotive Private Placements Under Scrutiny – Part II

October 23, 2013 | by Staff Attorney

This article continues my in depth look into how unsuspecting investors are sold speculative private placements.

While investors were told that Fisker Auto’s prospects were fantastic, nothing could have been further from the truth. In February 2012, the DOE loan had been frozen after $192 million had been given to the company because it hadn’t hit certain milestones with its Karma car product. The last payment Fisker had received from the DOE was in May 2011. Yet, according to investors, Advanced Equities and First Allied continued to sell Fisker Auto shares without disclosing that the DOE was no longer backing the venture, presumptively because the auto makers chances of success had grown increasingly slim.

From December 2011 into 2012, Advanced Equities increasing began to run into fundraising problems. As Fisker Auto fell into a increasing number of technical, delivery, and political problems with its cars the car maker’s ability to attract new capital plummeted. Yet, the company still needed money. So the brokerage firms turned to threatening investors by telling them that unless they agreed to invest more money into Fisker Auto their current shares will be diluted and their preferred stock will be converted to common stock.

Advanced Equities and First Allied Sales of Fisker Automotive Private Placements Under Scrutiny – Part I

October 21, 2013 | by Staff Attorney

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?

FINRA Sanctions Broker Over Unsuitable Concentrations in Private Placement Securities

October 14, 2013 | by Staff Attorney

FINRA has barred broker Daniel P. Deighan (Deighan) for seven months and fined him $27,500 over allegations that he recommended private placements to customers that were not suitable given the customers’ net worth, annual income, and the concentration of the private placements in their accounts.

Private placements are securities that do not trade on stock exchanges and are exempt from the regular filing requirements. Private placements are issued under Regulation D under the Securities Act of 1933. Regulation D contains three rules (Rules 504, 505, and 506) that provide the rules required to be followed in order to qualify for the exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements.

The three rules primarily govern the size of the offering and the number of participants that can invest in the private placement. However, under all three rules, with certain limited exceptions, investors must meet the “accredited investor” standard under Rule 501. Rule 501 defines “accredited investor” as any person who has a net worth in excess of $1,000,000, (excluding residence) or annual income in excess of $200,000 (or $300,000 jointly with a spouse) in the two most recent years. While the size of the private placement market is unknown, according to 2008 estimates, companies issued approximately $609 billion of securities through Regulation D offerings.

FINRA Files Amended Complaint Against John Carris Investment LLC for Stock Manipulation and Unsuitable Offerings

October 10, 2013 | by Staff Attorney

On September 30, 2013, FINRA filed an amended complaint against John Carris Investments LLC (JCI), its founder George Carris and others. In the complaint, FINRA alleges JCI engaged in: stock manipulation, unsuitable self-offerings of securities, operating a securities business without sufficient net capital, use of firm funds to pay the expenses of principal officers at JCI, providing false tax documents, and failing to pay payroll taxes.

JCI is a Wall Street Investment Bank and wholly-owned subsidiary of Invictus Capital, Inc. (Invictus). In 2009, Carris formed JCI. Carris has served as JCI’s CEO, President, and Managing Director of Investment Banking since its inception. Shortly after forming JCI, Carris formed Invictus and transferred complete ownership of JCI to Invictus.

FINRA alleges that from May 1, 2010 through September 30, 2010, JCI’s head trader Jason Barter engaged in manipulative trading of Fibrocell Science, Inc. (Fibrocell), a biotechnology company specializing in skin and tissue rejuvenation. During that period, JCI acted as a placement agent for Fibrocell and sold shares of Fibrocell through unregistered PIPE deals. A PIPE deal is a private investment in public equity, which companies pursue when capital markets cannot provide financing and traditional alternatives do not exist for that issuer.

Conrad Bautista Barred From Financial Industry for Alleged Private Placements Sales

September 23, 2013 | by Staff Attorney

Conrad Tambalo Bautista (Bautista) resolved charges brought by the Financial Industry Regulatory Authority (FINRA) concerning the sale of private securities and possible involvement in a fraudulent investment scheme by accepting a bar from the securities industry.

Bautista has been associated with seven FINRA member firms including his most recent employer, CUSO Financial Services, L.P. (CUSO) from January 2010 to March 2013. Prior to CUSO, Bautista was associated with SWBC Investment Services, LLC, Financial Network Investment Corporation, and Wells Fargo Investments, LLC. Bautista obtained Series 6, 7, and 63 securities licenses.

Bautista’s public records do not disclose any businesses, other than CUSO, that Bautista was involved in. However, in February 2013, a customer allegedly filed a complaint against Bautista involving potential securities related misconduct. Subsequently, FINRA sent Bautista requests for information concerning the substance of the customer complaint. The FINRA letter sought information into whether Bautista may have engaged in fraudulent investment schemes. In addition, FINRA had information that suggested that Bautista may have been involved in undisclosed outside business activities and private securities transactions that may have involved borrowing money from customers.

VSR Financial Services, Inc. and Donald J. Beary Fined Over Alternative Investment Sales

September 23, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.

VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.

According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.

Private Placements – FINRA Warns Evaluate the Risks Before Investing

September 21, 2013 | by Staff Attorney

Every year, companies across the United States raise hundreds of billions of dollars selling securities in non-public offerings that are exempt from registration under the federal securities laws. These offerings, known as private placements, can be a tremendous source of capital for both small and large business. However, according to FINRA, investors should be aware that private placements can be illiquid and are very risky with the potential to lose most or all of your investment.

Fraud and Sales Practices Abuses

For over three years, FINRA has been investigating private placements and has uncovered fraud and sales practice abuses related to private placements that resulted in sanctions of individual brokers and financial institutions for providing investors inaccurate information relating to private placements. In addition, some materials omitted information necessary for investors to make informed investment decisions. Finally some firms failed to conduct adequate investigations into whether the private placements were suitable for customers.

SEC Approves Advertising for Private Placements

September 20, 2013 | by Staff Attorney

In a 4-1 vote, the Securities Exchange Commission (SEC) approved a rule that would now allow broker-dealers, hedge funds, and private equity firms to advertise to the general public for private placement securities offerings. Firms are still limited to sales to accredited investors. Accredited investors are defined as those who have a net worth of $1 million, excluding the value of the investors primary residence, or earning at least $200,000 annually. According to Investment News, there are 9 million homes in the United States that meet this standard.

The SEC’s new rule will require that private-placement issuers take reasonable and appropriate steps to assess an investor’s qualifications and ability to meet the accredited investor standard. According to the SEC, the broker may have to independently verify that the client meets the appropriate standards.

The new rule will give funds the ability to publicly solicit private investments. The SEC’s rule is an implementation of the Jumpstart Our Business Startups Act enacted by Congress in April 2012. Will the law help entrepreneurs raise capital or will investors lose another level of protection? Only time will tell.

Centaurus Financial, Inc Broker Ralph Saviano Barred From Securities Industry

September 15, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred Ralph Saviano (Saviano) from the securities industry after the broker failed to respond to FINRA’s requests for information and an interview concerning unreported tax liens, a civil judgment, and a customer complaint involving the misuse of funds.

During a routine investigation of Centaurus, FINRA discovered information regarding certain undisclosed liens, judgments, and possible customer loans. Thereafter, in June 2012, Centaurus filed a regulatory tip disclosing that a customer had provided Saviano with a cashier’s check for approximately $66,000 that was made payable to Saviano. Saviano’s transactions with the customer concerned a possible misuse or conversion of funds.

Saviano has been associated with several brokerage firms in the past decade. Until 2004 Saviano was a registered representative of Royal Alliance Associates, Inc. From April 2004 until December 2006, Saviano was associated with USAllianz Securities, Inc. Thereafter, from December 2006 until July 2007, Saviano was a registered representative of Questar Capital Corporation. Finally, Saviano was registered with Centaurus Financial, Inc. (Centaurus) until his termination in June 2012. According to Saviano’s FINRA disclosure records he is also the president of Saviano Financial Group.