In most instances, investment professionals solicit private placement purchases from investors that usually know little to nothing about the proposed investment or issuer. Although banks and brokerage firms are aware of their obligations under NASD Notice to Members 03-71, to conduct extensive due diligence, perform reasonable basis and customer specific suitability analysis, provide balanced disclosures, maintain supervisory provisions for selling private placements, and adequately train its investment professionals to sell private placements within industry rules. At a minimum, FINRA expects members to discuss the following with potential private placement investors: liquidity concerns, credit risk of the issuer, presence of collateral backing the deal, forecasts for the return of principal investments and payment of timely interest/dividends, tax consequences, and the costs and fees associated with the investment. In many of FINRA’s fines and suspensions below, FINRA emphasized that a member’s due diligence requirement must go well beyond reviewing the private placement memorandum (PPM). In the past few months, FINRA issued the following enforcement rulings:
FINRA fined and censured Brookstone Securities and Principal David William Locy $25,000 for failing to conduct adequate due diligence prior to approving 3rd party private placements to be sold to Brookstone clients. Brookstone also failed to have written supervisory procedures in place for 3rd party private placement sales.
FINRA suspended Leroy Henry Paris II, former Meadowbrook Securities, Jackson, MS principal from acting as a principal for 6 months. Mr. Parris was responsible for conducting the firm’s due diligence on private placement prior to allowing its financial advisor’s to sell these risky investments. FINRA charged Paris with failing to conduct due diligence on a third party private placement “beyond reviewing the private placement memorandum” (AWC 2009019070102)
FINRA made findings that Timothy Camarillo failed to conduct adequate due diligence on a private placement sold to investors. FINRA found that Camarillo did not sufficiently understand the product’s risk, which was sold to investors seeking capital preservation. Camarillo was suspended for 4 months, fined $10,000, and ordered to pay restitution to clients.
FINRA fined Garden State Securities and Kevin DeRosa, principal (AWC 2009018819201) for failing to ensure that it established written supervisory procedures designed to comply with industry rules and standards regarding private placement sales. Due diligence would have found that misrepresentations were made in the PPM.
FINRA fined National Securities Corporation and Matthew G. Portes for failing to conduct due diligence prior to selling private placements, and for failing to supervise the sale of private placements. (AWC 200901968201).
FINRA fined Brewer Financial Services, and barred Adam Gary Erickson Principal, and Steven John Brewer for failing to conduct due diligence on private placement sales to clients (AWC 201002405701).
FINRA fined Newbridge Securities $25,000 for failing to conduct adequate due diligence prior to selling private placements and for failing to have adequate supervisory system in place regarding private placements (AWC 200901659401)
FINRA fined and suspended Penena Karpel McRoberts (AWC 2009017606101) for failing to conduct due diligence and for having no reasonable basis that these private placements were suitable for clients.
FINRA fined and suspended Robin Fran Bush (AWC 2009016159402) for failing to conduct adequate due diligence beyond PPM and for failing to visit the site of the issuer.
FINRA barred Alvin Waino Gebhart and suspended Donna Traina Gebhart for failing to perform due diligence and making misrepresentations regarding private placements. (C0220020057)
FINRA fined Workman Securities (AWC 2009018818401) $700,000 for failing to conduct due diligence and for having no supervisory system in place to sell private placements to clients.
FINRA fined Puritan Securities (AWC 2008012927503) for failing to have a supervisory system in place for selling private placements to firm clients.
FINRA fined Vincent Michael Bruno (AWC2009018771701) for failing to supervise private placement sales.
FINRA fined and suspended Bobb Arthur Meckenstock for failing to conduct adequate due diligence and supervision of a private placement.
For many of the underlying private placement sales that led to FINRA’s fines and suspensions, investment professionals also recommended that investors hold the risky investments, despite patent indications that these investments would never recover. An investor’s reliance upon the investment professional’s expertise regarding a recommendation to hold a declining private placement that was recommended to them is certainly reasonable. Many investors are now contacting attorneys to assist them in recovering losses for fraudulent private placement investments.