Finra's settlement with ex-Provident execs 'slap on the wrist,' says lawyer

Couglin, Harrison fined $50K each, suspended for two years; 27 firms that sold preferred shares have closed

Jun 1, 2012 @ 10:59 am

By Bruce Kelly

Finra
+ Zoom
Provident co-founders not barred

Two co-founders of Provident Royalties LLC, which turned out to be a $485 million Ponzi scheme that caused severe losses for investors and wiped out dozens of independent broker-dealers, have been fined $50,000 each and suspended from the securities industry for two years, according to a settlement with the Financial Industry Regulatory Authority Inc.

The two executives, Brendan Coughlin and Henry Harrison, also were managing partners of Provident Asset Management LLC, the wholesaling broker-dealer that distributed a series of Provident Royalties private placements, and therefore are under Finra's jurisdiction.

About 60 broker-dealers and investment advisory firms sold the Provident deals, which promised annual returns of up to 18%. The money raised for the offerings between 2006 and 2009 was to purchase oil-and-gas interests such as real estate, leases and mineral rights.

Twenty-seven of the firms that sold Provident private placements have since shut down, according to a review of Finra's BrokerCheck system — many failing because of the cost of investor lawsuits and complaints stemming from the failed Provident private placements.

According to the Finra order of settlement, which was submitted by Mr. Coughlin and Mr. Harrison in April and accepted by Finra's National Adjudicatory Council and Office of Disciplinary Affairs, the two executives failed to make various disclosures regarding where the money came from for payments and distributions to investors in the private placements. They also failed to disclose the extent of the involvement of Provident co-founder Joseph Blimline, who was convicted of running two oil-and-gas Ponzi schemes, including Provident, between 2003 and 2009, according to the Justice Department.

Under the settlement, Mr. Coughlin and Harrison did not admit or deny any Finra allegations. Their attorney, John Carney, was not available to comment.

‘SLAP ON THE WRIST'

To some, Finra's settlement with the two ex-Provident executives falls short, considering the scope and damage of the Provident fraud. In July 2009, the Securities and Exchange Commission said Provident was a Ponzi scheme that affected 7,700 investors.

“The punishment should fit the crime, and this doesn't,” said Philip Aidikoff, a plaintiff's attorney and partner with Aidikoff Uhl & Bakhtiari. “In my view, suspensions are the ultimate slap on the wrist. When someone engages in this type of conduct they should be barred from the industry for life. The people who engineer [the investment product] and distribute it can always go back out and sell this kind of stuff again.”

Mr. Aidikoff said his firm represented investors with more than $1 million in claims against broker-dealers that sold Provident preferred shares. “Based on my knowledge of this deal, it's a travesty that these guys weren't barred from the industry.”

Others disagreed, saying the penalty was significant and not just a slap on the wrist.

“A two-year suspension is typically the maximum penalty Finra will consider, short of being barred,” said Jeffrey Zeisman, a former Finra attorney now with Bryan Cave LLP.

Mr. Coughlin and Mr. Harrison are “functionally barred” from the securities industry, he said. Neither has worked at a broker-dealer since the Provident matter was revealed in 2009, and the earliest they will be able once more to work in the securities industry is 2014. “It's going to be virtually impossible for them to re-enter the business,” Mr. Zeisman said.

20-YEAR SENTENCE

The settlement, which was finalized May 25, is in stark contrast to the 20-year prison sentence that Mr. Blimline received earlier in the month in U.S. District Court for the Northern District of Texas.

He received millions of dollars in unsecured loans from investor funds and also directed the purchase by Provident of worthless assets from an earlier Ponzi scheme, which was based in Michigan, according to a statement by the Justice Department. “In the Provident scheme, funds from later investors were also consistently used to make payments to early investors, resulting in the collapse of the scheme in 2009,” the Justice Department said.

Mr. Coughlin and Mr. Harrison were not criminally charged in the matter. The SEC filed a civil suit against the two in July 2009. That matter has been settled but the details have not yet been released.

The settlement between Finra, Mr. Coughlin and Mr. Harrison also imposes a monetary penalty much lower than the millions in restitution that several broker-dealers have paid to investors who bought Provident preferred stock.

Next Financial Group Inc. alone has paid $2 million in restitution to clients as part of a Finra settlement. That firm's CEO, Barry Knight, declined to comment.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 31

Conference

Spring Excell—Peak Advisor Alliance

Members of the InvestmentNews Research team will be presenting new adviser benchmarking data and providing strategies that can help accelerate the growth of your business. In this exclusive three-hour workshop, InvestmentNews will... Learn more

Featured video

INTV

Advisor Group's Jamie Price: The real reason why most advisers don't have a succession plan in place

Eighty percent of advisers do not have a succession plan in place, though about half of them already know they will need to transition their businesses within the next 10 years, according to Jamie Price, president and CEO of Advisor Group.

Latest news & opinion

Wells Fargo will ramp up spending to lure brokers

Wirehouse, after losing 400 brokers in first quarter, is bucking trend among rivals who have said they are going to cut back on spending big bucks recruiting veteran advisers

Wells Fargo Advisors restricting investments for retirement accounts

Mutual fund sales will be limited to T shares, while municipal bonds, preferred stock and international debt will be prohibited.

Investments that advisers should look at in an overheated market

Cash, alternatives, international all beckon, but all have pros and cons.

Morgan Stanley joins competitors in cutting back on recruiting

Wirehouse said it intends to increase its investment in existing talent.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print