Private Placements

HFP Capital Markets’ Employees Sanctioned Over Metals Millings and Mining Private Placement Offering

December 18, 2013 | by Staff Attorney

Advisor Thomas Mikolasko, (Mikolasko) of HFP Capital Markets LLC (HFP) was recently suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Mikolasko engaged in the sale of $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (MMM) in a private placement offering. The MMM Notes defaulted and investors were not repaid either principal or the 100 percent return promised. FINRA found that Mikolasko negligently caused material misrepresentations and omissions of material facts to be made in connection with the sale of MMM. FINRA also alleged that Mikolasko facilitated the offering even though he knew or should have known that HFP had conducted inadequate due diligence concerning the offering and that the limited due diligence the firm had conducted identified significant “red flags.”

Metals Millings and Mining LLC was an entity created in 2009 with HFP’s assistance. MMM was formed as a vehicle to aggregate and process certain ore materials. The investment’s sponsor had presented to HFP a plan to extract precious metals from the ore concentrate through a process known as “plasmafication.” HFP’s former chief executive, Vincent J. Puma was primary responsibility for HFP’s involvement in the MMM offering. From December 2009 to February 201l, HFP sold approximately $3 million of MMM Notes to 58 HFP customers. The MMM notes provided for the repayment of principal in one year together with the ownership of ore concentrate.

Pursuant to a repurchase agreement, MMM was then obligated repurchase the ore from the investors at an agreed price so that they would receive a 100 percent return on their investment in addition to the return of principal. There was no private placement memorandum for the transaction and investors were provided only with limited disclosures as forth in a subscription agreement. The MMM notes have defaulted and investors have not been repaid either principal or the promised 100 percent return.

Source Capital Group Employees Sanctioned Over Blue Ridge and Argyle Oil and Gas Private Placements

December 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Source Capital Group (Source Capital) registered representatives Kevin Cline (Cline), Robert Burr (Burr), Vincent Christopher (Christopher), and Thomas Gilleland (Gilleland). FINRA’s findings concerned allegations that the brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

According to FINRA, from at least October 11, 2006, and December 17, 2012, the named brokers violated the federal securities laws and FINRA rules in connection with selling Blue Ridge and Argyle offerings. Cline is the branch office manager for Source Capital’s Bowling Green, Kentucky branch office on Adams Street and Burr managed the Wright Street office where Christopher and Gilleland were brokers. Source Capital’s Adam Street branch office was the sole seller of private placement offerings of oil and gas securities issued by Blue Ridge’s limited partnerships all of which were managed by Blue Ridge Group, Inc. Source Capital’s Wright Street branch office was the sole seller of private offerings of Argyle limited partnerships managed by Argyle Energy, Inc. Blue Ridge and Argyle were both housed at the Adams Street branch office and were owned by Robert “Bob” Burr, the father of Burr as the controlling stockholder and former officer of both Blue Ridge and Argyle.

FINRA alleged that Cline failed to adequately disclose material information in selling Blue Ridge to investors. Specifically, FINRA found that Blue Ridge gave money to Cline that Cline used to pay Source Capital representatives a $2,000 monthly salary in advance of their draws which were not always repaid. FINRA concluded that the failure to adequately disclose that Cline used Blue Ridge funds to pay compensation to Source representatives was a material omission in violation of FINRA Rule 2010 and NASD Rule 2110, and Section 17(a)(2) of the Securities Act of 1 933, 15 U.S.C. § 77q(a)(2).

Former Ryan Beck and Oppenheimer Financial Advisor William Bucci Barred From the Financial Industry

December 5, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred financial advisor William D. Bucci (Bucci) for allegedly accepting 19 personal loans totaling $635,000 from nine customers in violation of FINRA rules. Bucci also allegedly willfully failed to amend his Form U4 to disclose material facts relating to two judgments that were entered against him. In addition, customers have filed complaints alleging that Bucci sold illegal promissory notes.

Bucci has been licensed as registered securities representative since 1983. From April 27, 2002, until April 2007, Bucci was a registered representative with Ryan Beck & Co. (Ryan Beck). Thereafter, and until August 2011, Bucci was registered with Oppenheimer & Co. (Oppenheimer). Finally, from August 2011, until May 2012, Bucci was registered with Financial Network Investment Corp. (Financial Network). Bucci’s public disclosures list that he is involved in a number of companies and other business activities including Delaware Valley Financial Group, LLC, DVFG Advisors, LLC, Chestnut Hill College Board of Trustees, Gennaro Vuono & William Bucci, 3010 Ocean Ave, LLC, 510 Seacliff LLC, 210 Sea Spay LLC, and 216 Sea Spay LLC.

FINRA alleged that between May 2004 and December 2010, Bucci accepted 19 personal loans from nine brokerage customers totaling $635,000. FINRA found that all of the personal loans paid annual interest of at least 10 percent and had terms of up to five years. In one instance, Bucci was accused of borrowing $425,000 in ten loan transactions from an elderly retired couple who were customers of Bucci at Ryan Beck and Oppenheimer. FINRA alleged that none of the elderly couple’s loans have been repaid. Further, according to FINRA, the elderly couple loaned Bucci a portion of the $425,000 by withdrawing money from their brokerage accounts and securing a second mortgage on their home. FINRA found that Bucci’s conduct violated NASD Rules 2370 and 2110 and FINRA Rules 3240 and 2010.

Coker & Palmer Broker Sanctioned Over Allegations of Failure to Conduct Due Diligence on Private Placement Offering

November 26, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Michael A. Barina (Barina) over allegations that Barina failed to conduct reasonable due diligence into the offering a private placement security. In addition, FINRA alleged that the broker commingled certain funds.

Barina first became registered with FINRA in 1999. Barina was registered from November 13, 2009, through November 14, 2011, with Coker & Palmer, Inc. (Coker & Palmer). In November 2011, Barina became registered with Aegis Capital Corp. until May 2013. Thereafter, Barina was registered with Merrimac Corporate Securities, Inc. until October 2013.

Brokerage firms and brokers are responsible for conducting due diligence on all securities recommended by a broker. The due diligence requirement is heightened where the investment recommendation is a private placement offering or other type of non-public offering where there is no public information available and brokerage firm is acting as the underwriter of the securities.

FINRA Bars Broker Richard Manchester of Girard Securities Over Private Placement Sales

November 7, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Richard Manchester (Manchester) over allegations that his participation in several private placements caused his employing firm to fail to establish an escrow account for several contingency offerings, broke escrow before the minimum contingency amounts were met, and made unauthorized use of offering proceeds by lending offering proceeds to other private placements. FINRA found that Manchester’s acts violated of Section 10(b) of Securities Exchange Act of 1934 and Rules 10b-5 and 10b-9 thereunder, NASD Rule 2110, and FINRA Rules 2020 and 2010.

From July 2004 through December 2010, Manchester was associated with Girard Securities, Inc. (Girard Securities). During this time Manchester was involved in the offering of several private placement offerings. One offering was Pacific Yogurt Partners, LLC (Pacific Yogurt) a limited liability corporation formed in 2007 to acquire franchise rights from Golden Spoon Frozen Yogurt. The Pacific Yogurt private placement offered Series B and Series C Units in a contingency offering requiring the raising of a minimum amount of funds for the offering to proceed. FINRA alleged that even though the private placement memorandum stated that funds received would be returned to investors if the minimum sales contingency was not met the funds were released to the issuer. In addition, under the securities laws investor funds received before the satisfaction of the minimum sales contingencies were required to be deposited into a bank escrow account. Instead, FINRA found that the funds provided directly to Pacific Yogurt, the issuer. FINRA alleged that Manchester’s conduct constituted a willful violation of Rule 10b-9, and a violation of NASD Rule 2110 and FINRA Rule 2010.

Another private placement Manchester was involved in offering was WaveWise, LLC (WaveWise). WaveWise was created to acquire interest in IdeaEdge, Inc. (IdeaEdge). The offering sought to purchase up to 2,625,000 shares of IdeaEdge common stock, at $0.80 per share, with warrants to purchase a share of common stock at $1.00 per share for every four shares of common stock purchased at $.80 per share. Thereafter, IdeaEdge changed its name to Social Wise, Inc. (Social Wise), which subsequently changed to Bill My Parents. Like Pacific Yogurt, FINRA alleged that investor funds received before the satisfaction of the minimum sales contingency were required to be deposited into a bank escrow but instead were deposited into a bank account in the name of WaveWise.

What are Tenants-in-Common Securities?

October 30, 2013 | by Staff Attorney

Tenants-in-common real estate investments (“TIC”) are a more than $1-billion a year industry. However, with all innovative investment products, TIC investments receive their share of complaints from unhappy investors who bought them through a private placement. In FINRA arbitration, these complaints materialize as suitability claims and allegations of negligent misrepresentation. Usually, one or more of the following claims are made:

Investing in a TIC was not appropriate for me because of my needs, experience, or risk tolerance.
My broker did not perform adequate due diligence on the,offering materials of the TIC, appraisals of the underlying properties, persons promoting the TIC.

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.