Securities regulators in Massachusetts on Monday sent subpoenas to two broker-dealers seeking information about investment products executives at the firms claim they never sold.
Executives at the two broker-dealers, Independent Financial Group LLC and Centaurus Financial Inc., were befuddled when they received subpoenas from Massachusetts Secretary of the Commonwealth William Galvin. Mr. Galvin's office, which is looking into soured private placements marketed by Medical Capital Holdings Inc. and Provident Royalties LLC, subpoenaed four other broker-dealers as well.
David Fischer, a managing director at Independent Financial Group LLC, said Massachusetts regulators told him that the basis of the subpoena was a search on Google.
But Brian McNiff, a spokesman for the Massachusetts Securities Division, said that a subpoena of a broker-dealer would not be based on a simple Google search. “They may have looked at Google,” he said. “But they did more than that.”
Nevertheless, in a note to Independent Financial Group's 346 reps Monday afternoon, the firm's CEO, Joe Miller, said the firm had never approved for sale any offerings from Medical Capital or Provident Royalties.
“We were, however, subpoenaed without any prior contact from the state of Massachusetts,” Mr. Miller wrote. “With one call from our compliance department, the matter was laid to rest, [and] Massachusetts agreed that there was no reason for IFG to be involved in their inquiry.”
Centaurus Financial also did not approve the sale of either sets of offerings, said Ron King, the firm's CEO. He did note that the firm may have recruited a rep who sold the product at a prior broker-dealer.
But Mr. McNiff defended sending subpoenas to firms that never sold either MedCap or Provident private placements.
“One of the purposes of the subpoenas is to determine the level of due diligence” the firms gave the offerings, he said, “including firms that sold them and firms that didn't.”
Besides Independent Financial and Centaurus, the Massachusetts Securities Division sent subpoenas to QA3 Financial Corp., National Securities Corp., CapWest Securities Inc., and Investors Capital Corp. The regulator requested information from all six firms on due-diligence efforts, suitability data and promotional materials related to the sale of the MedCap and Provident private placements — private-placement sponsors that the Securities and Exchange Commission last summer sued for fraud.
Tim Murphy, CEO and president of Investors Capital, said that the firm did not enter into a selling agreement with Medical Capital. The firm had a limited distribution of Provident Royalties, however, and is responding to the Massachusetts Securities Division subpoena, Mr. Murphy said.
Dale Hall, the CEO of CapWest, said that the firm has done a preliminary search of its records so far, and it appears that it had one client in Massachusetts. The information that Massachusetts regulators are looking for about the sale of private placements is similar to what the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc. requested, he said.
Like CapWest, QA3 was hit up last summer by Finra and the SEC for similar information regarding the private placements, the firm said in a statement. Based on its review, it had two clients in Massachusetts who bought Provident offerings of $175,000 but did not sell any Medical Capital to Massachusetts investors.
Mark Goldwasser, CEO of National Securities, on Monday afternoon said he had yet to see the subpoena and therefore could not comment.
The Massachusetts regulator has been ramping up its scrutiny of sales of private placements by independent broker-dealers. In late January, the Securities Division slapped Securities America Inc. with a lawsuit, alleging that the firm misled investors who were sold high-risk private placements.
Specifically, the agency charged that Securities America advisers sold $7.2 million in promissory notes to Massachusetts investors without disclosing all the risks involved. That case is pending.
In announcing the subpoenas Monday, Mr. Galvin's office stated that Medical Capital and Provident issued billions in notes and other securities sold by a number of broker-dealers.
“It also has become apparent that Securities America Inc. was not the only broker-dealers selling these” private placements, the statement said.
