Posted in: FINRA | Ponzi Schemes | SEC | Risky Investments |
The Financial Industry Regulatory Authority (FINRA) yesterday expelled Provident Asset Management from the securities industry, nine months after the Securities Exchange Commission filed suit against the company and its founders in connection with $485 million worth of private placements sold to at least 7,700 investors.
When investors thought they were investing in oil and gas private placements through Provident Asset, which is based in Dallas, their money was being cycled through a “massive Ponzi scheme,” as FINRA detailed in its statement:
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In fact, investors’ funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors’ funds during the contingency period of the offering.
“Provident facilitated the sale of a series of fraudulent private placements that were marketed to unsuspecting customers as income-producing investments, when it was simply using new investors’ money to pay previous investors the promised dividends - a classic Ponzi scheme,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics.”
FINRA found that from September 2006 through January 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. Provident Asset Management’s only business line was acting as the wholesaling broker-dealer for the Provident Royalties’ offerings, which were sold to customers through more than 50 retail broker-dealers nationwide, raising over $480 million through approximately 7,700 individual investments made by thousands of investors.
As the New York Times noted, Provident is one of more than a dozen firms FINRA is regulating relating to the fraudulent sale of private placement securities. Private placements are not publicly traded; the SEC allow small businesses to sell these securities, which are the same as promissory notes, to individual investors as a way of generating revenue.
The SEC restricts the selling of private placements to investors with a net worth exceeding $1 million, because the federal regulator believes this weeds out unsophisticated investors. There are many within the securities industry who believe this rule is badly in need in of revision-the millionaire is not as rare as decades prior.
A person’s net worth does not necessarily indicate his or her sophistication, or knowledge of investments. With regards of Ponzi schemes, no amount of broker knowledge can prevent a broker’s deception. When investors believed their investments were going towards legitimate oil and gas private placements with returns of up to 18 percent per year, when their investments were instead being used to pay off other investors, net worth was irrelevant.
FINRA will also be cracking down on “blind pools,” in which private placement investors back a management team without having a say over specific investments. Medical Capital Holdings was another firm embroiled in private placement controversy last year. Investors purchased $2.2 billion worth of Medical Capital notes from 2003 to 2009, unaware that the firm was investing outside of expertise and had never been financially audited. The final offering of Medical Capital notes, MPV, had $401 million in outstanding notes as of March 2009. In addition to the firms that have distributed private placement holdings, including Medical Capital, lawsuits will likely be filed against dozens of brokers and firms that sold these notes.
Ponzi schemers have used private securities to defraud investors because these investments are not under the same scrutiny from federal regulators. If you have invested in Provident Asset, Medical Capital Notes, or any private placement that did not provide the returns you were promised, contact us immediately for a free case evaluation.
