Rep and his practice sued, in apparent first
In an apparent first, a group of investors have sued their registered representative and his individual practice in a potential class action stemming from oil-and-gas private placements that the SEC claims were fraudulent.
In an apparent first, a group of investors have sued their registered representative and his individual practice in a potential class action stemming from oil-and-gas private placements that the SEC claims were fraudulent.
The lawsuit, filed last week in U.S. District Court in Boise, Idaho, alleges that Bradley K. Hofhines and his firm, Summit Retirement Advisors LLC of Meridian, Idaho, failed to disclose that returns from investments in Provident Royalties LLC securities were a Ponzi-like commingling of investor funds and proceeds of later offerings — not profits generated by actual investments in oil-and-gas properties.
The investors filing the suit were C. Richard Toomey, Sally Crevier, Elizabeth Mirams, Gillian Mursell and Richard Yerkes.
The tactic of suing an adviser in this matter has potentially profound legal implications for Securities America Inc., the broker-dealer with which Mr. Hofhines is affiliated, and Ameriprise Financial Inc., which owns Securities America, industry attorneys said. Those two firms are also named in the lawsuit, which is seeking class action status.
Naming the broker in such a suit ties the case to the “deep pockets” of the broker-dealer and parent company, and therefore could increase those firms’ liability for a failure to supervise the rep, attorneys said. The tactic also could drive a rift between Mr. Hofhines and Securities America, attorneys said.
“I think they’re trying to goad the adviser into saying, “I didn’t do anything wrong; all I did was follow the marching orders,’” said David Jarvis, an industry attorney. “They want him to puke all over his firm.”
Lawyers noted, however, that few of these suits gain class action status.
Mr. Hofhines did not return repeated calls seeking comment last week. However, he told a local newspaper that he too was a victim of the Provident Royalties LLC investments.
The Securities and Exchange Commission this summer charged Provident with fraud, and many investors have begun legal action to get money back.
In his statement to the Idaho Statesman in Boise, Mr. Hofhines does not name Securities America but said he did the right thing when he sold the Provident shares.
“I will say that I sold the product properly, given the information I had and the due diligence that was performed on this company,” he told the Statesman. “I certainly had no way of predicting or uncovering the alleged intentional fraud at Provident, nor how the economic collapse has magnified the problems.”
Securities America has been named in at least two other potential class actions stemming from a series of private placements that went afoul. This could be the first time an adviser has been named, however.
Mr. Hofhines, Securities America and Ameriprise “were all involved,” said plaintiff’s attorney Elizabeth Leland, a partner at Keller Rohrback LLP. “The degree of participation” will come out over time and in discovery, she said.
In July, the Securities and Exchange Commission charged Provident and several affiliates with committing fraud in the sale of $485 million of preferred stock and limited partnership offerings in oil and gas deals.
Exceeding the limit?
Also of note: The lawsuit alleges that Mr. Hofhines and Securities America sold the Provident securities to more than 35 non-accredited investors.
Under federal securities laws, most investors who buy private placements must be “accredited” individuals with more than $1 million in assets. However, a typical private, or “Reg D,” deal makes room for 35 or fewer investors who don’t meet the high-net-worth standard.
Ms. Leland said that “at least 35, if not a significant amount more,” non-accredited investors bought the Provident securities.
According to Janine Wertheim, Securities America’s executive vice president and chief marketing officer, the firm does not comment specifically on pending legal matters. The firm vets its private-placement sales carefully, she wrote in an e-mail.
“Each private-placement transaction of this type is reviewed on an individual basis to determine accredited investor status and requires evidence of eligibility to purchase the product,” Ms. Wertheim wrote.
A spokesman for Ameriprise, Chris Reese, declined to comment.
E-mail Bruce Kelly at [email protected].
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