Finra has unleashed its first round of fines and sanctions against broker-dealers and executives from firms that sold private placements that have collapsed. In doing so, the industry's self-regulator cited a lack of due diligence by both firms and executives in selling the high-risk products.
The Financial Industry Regulatory Authority Inc. named two series of private placements, notes issued by Medical Capital Holdings Inc. and preferred stock from Provident Royalties LLC, as problematic. Finra imposed the sanctions against the firms and execs for failing to conduct a reasonable investigation of the sale of those products. In 2009, the Securities and Exchange Commission charged both those private-placement sponsors with fraud.
The largest fine — $700,000 — was levied on
Workman Securities Corp., which was ordered to pay $700,000 in restitution to clients.
InvestmentNews previously reported that sanction.
Workman's reps sold a little more than $9 million of Provident Royalties private placements,
according to U.S. bankruptcy court filings from last summer in the Northern District of Texas. The amount of Medical Capital notes the firm's reps sold to investors is not known. (To see a list of more than 50 B-Ds that sold Provident, as well as the commissions earned on these sales,
click here.)
Finra specified that the $700K is to go to Workman's clients as restitution.
Finra fined another broker-dealer, Askar Corp., $45,000 for failure to conduct due diligence of private placements from DBSI Inc., a failed real estate syndicator that is now in bankruptcy.
The firm generated $578,000 in commissions from sales of DBSI's tenant-in-common exchanges, according to court documents.(See a list of B-Ds that sold these private placements, as well as the commissions generated from the sales,
here.)
All three products — Medical Capital notes, Provident stock and DBSI tenant-in-common exchanges — were wildly popular products sold by dozens of independent broker-dealers in the last decade. Some of the biggest sellers of the deals, QA3 Financial Corp., GunnAllen Financial Inc. and Okoboji Financial Services Inc., have since shut down, unable to bear the cost of lawsuits stemming from angry clients who bought the products.
Finra's series of actions, which were announced this morning, focused on executives at broker-dealers failing to look into or investigate the private placements their firms sold. The regulator's crackdown undoubtedly will hit a nerve with many small and midsize independent broker-dealers, many of whom claim they don't have the resources to investigate the private placements they sell. Instead, the firms tend to rely on outside due diligence professionals, mostly attorneys, to examine and analyze the products. But those due diligence attorneys often take fees to write reports from the product sponsors. Much like sell-side research on Wall Street, the lawyers' financial relationships with sponsors raises questions about potential conflicts of interest.
The private placements were high-commission products, typically offering reps and advisers a commission of 7% or 8%.
Broker-dealers and the executives should have looked at the private-placement offerings much more closely, Brad Bennett, Finra executive vice president and chief of enforcement, noted in a statement.
“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” Mr. Bennett stated. “Finra will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers.”
Indeed, the regulator said, its investigation into broker-dealers that sold these three and other troubled private placements will continue.
Finra barred or suspended seven executives as part of its action. Each signed letters of acceptance, waiver and consent, and neither admitted nor denied the findings. The two broker-dealers also signed such letters.
Robert Vollbrecht, Workman's former president, was barred as a principal and fined $10,000.
David William Dube, owner of the defunct Peak Securities Corp., was barred.
Timothy Cullum, former CEO of now-defunct Cullum & Burks Securities Inc., was suspended for six months as a principal and fined $10,000. Steven Burks, former president of the B-D, received the same sanction.
In addition, two former executives at Capital Financial Services Inc., Jeffrey Lindsey and Bradley Wells, were suspended as principals for six months and fined $10,000 each. Likewise, Jay Lynn Thacker, one-time chief compliance officer at Meadowbrook Securities LLC, which was formerly InvestLinc Securities LLC, was hit with the same suspension and fine.
