Broker-dealer agrees to pay $200K to settle Finra allegations it sold unsuitable private placements; SEC charges still pending
A broker-dealer that sold millions of dollars of failed private placements reached a $200,000 settlement with the Financial Industry Regulatory Authority Inc. last month, with the money going to the investors.
According to a Finra letter of acceptance, waiver and consent, Capital Financial Services Inc. of Minot, N.D., “failed to have reasonable grounds to believe that private placements offered by Medical Capital Holdings Inc. and Provident Royalties LLC, pursuant to Regulation D, were suitable for any customer.”
The firm also “failed to conduct adequate due diligence” on the two series of offerings and to put in place a supervisory system to achieve compliance when selling the private placements, according to the Finra letter.
The firm has 332 affiliated registered representatives.
John Carlson, the firm's president, wasn't available to comment today.
By Sept. 1, the firm was to pay $80,000 to the court-appointed receiver for Medical Capital and $120,000 to the court-appointed receiver for Provident Royalties.
The firm consented to the Finra action without admitting to or denying its findings.
Capital Financial has recently drawn attention for its due-diligence policies. In April, the Securities and Exchange Commission alleged that Capital Financial's due diligence on Provident Royalties private placements fell short, and the firm “never conducted independent verification of any of the offering materials provided by Provident.”
The status of that case is still pending, according to the firm's profile on Finra's BrokerCheck system.
According to the SEC, the firm's brokers sold $63 million of Provident Royalties preferred stock from 2006 to 2009. The Finra action focuses on 36 Capital Financial brokers who sold $11.8 million of MedCap notes in 2008 and 2009, allegedly after several “red flags” were raised about those notes.
According to Finra, those potential problems included a custodian's refusing to hold the MedCap notes, a clearing firm's valuing the notes at zero on client account statements; the firm's receiving two third-party due-diligence reports that highlighted Medical Capital's recent failure to pay interest and a communication from a another third-party due-diligence analyst who indicated that MedCap executives weren't allowing the analyst access to all its records.
Another alleged shortcoming of Capital Financial was its failure to look at the financial records of Medical Capital and Provident Royalties. The firm “never obtained financial information about MedCap and its offerings from independent sources, such as audited financial statements,” according to the Finra letter, which uses similar language regarding sales of Provident Royalties.
