Posted in: Capitol Hill | FINRA | Ponzi Schemes | SEC | Greedy Brokers | Risky Investments | Private Placements |
Massachusetts Secretary of State William Galvin believes sales of private placements in recent years are “going to become a very significant issue” for 2010.
Earlier this year Galvin investigated Ameriprise Financial, which he had accused of selling Medical Capital Notes to investors, many of whom were “unsophisticated and elderly,” according to Galvin. Medical Capital Holdings, the issuer of those promissory notes, had defaulted on over $400 million in investor returns in 2009.
For the modern Ponzi schemer, private securities have been an easy means to defrauding many average investors - including the elderly - to the tune of billions of dollars.
This is true for two reasons. First, a loophole in SEC rules allows firms to raise unlimited capital with the sale of private securities. Second, no entity of the federal government is even monitoring the sales of private securities, which is alarming considering the sheer number of investors that are affected.
Through the “Rule 506” offering, firms can issue and sell promissory notes to what the SEC considers to be “sophisticated” investors- those with a net worth over $1 million or an income of $200,000. This might include your retired father with his house mortgage paid, or your friend with a good salary who knows little about investments.
Second, as Galvin pointed out in an interview with the Boston Globe, there is no federal entity even monitoring the marketing or sales of private securities. Even though there are restrictions attached to “Rule 506” offerings, they are not necessarily enforced because companies usually do not have to register these transactions with the SEC.
Medical Capital issued more than $2.2 billion worth of promissory notes over five years, and six separate offerings, before they were halted by the SEC in August of last year. The SEC waited until last week to open criminal investigations into Medical Capital CEO Sidney M. Field and President Joseph J. “Joey” Lampariello, even though Field was booted from the auto insurance industry in the early 1990’s for fraud.
Both the SEC and FINRA have pledged to increase their scrutiny on private securities, but this comes in response to a high number of investors who have lost their savings.
Adrian Cross of Laguna Niguel, California, invested more than $1 million of her “nest egg” money in private-placement securities issued by Medical Capital and Provident Asset LLC in 2007, the Wall Street Journal said. The former schoolteacher had trusted her Amerirprise Broker, who had pushed the private holdings as a safe alternative to stocks. Cross, 64, would see her investment wiped out after both companies collapsed in 2009.
Hopefully Congress will include provisions in their proposed financial regulatory reform bill to address private securities. Until the SEC learns to proactively target firms and brokers that profit from the improper sale of private securities, they can only react to investors losing money.
If you have lost money on Medical Capital Notes, or any private securities, do not wait for the SEC to recover your money for you. Contact us for a free consultation of your case.
