In its first action stemming from the blowup of private placements sold through independent broker-dealers, Finra said this morning it had kicked out a broker-dealer at the center of the problem.
Provident Asset Management LLC has been expelled from the industry, the
Financial Industry Regulatory Authority Inc. said in a statement.
Provident marketed a series of fraudulent private placements through an affiliate, Provident Royalties LLC, in a massive Ponzi scheme, Finra said.
Provident Royalties' offerings were sold through 50 retail broker-dealers and raised over $480 million through 7,700 individual investments by thousands of investors, Finra said.
Finra said that a broader investigation into the broker-dealers that sold Provident and other troubled private placements is continuing. In its statement, the financial industry watchdog said it is looking at firms' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud.
According to Finra, Provident Asset Management essentially lied when it told investors that funds raised through the offerings would be used to purchase interests in the oil and gas business. Instead, investors' funds were commingled and used by an affiliated issuer to make
dividend and principal payments to other investors, Finra said.
Such recycling of investor cash is a hallmark of a Ponzi scheme.
Investors need to be wary of high-risk private placements, a Finra official said. “While the private-placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics,” Susan Merrill, Finra's chief of enforcement, said in a statement.
“The Provident Royalties private-placement memoranda promised investors returns of up to 18 percent per year, and said the funds raised through each offering would be used to purchase interests in all aspects of the oil and gas business,” the Finra statement said.
The Securities and Exchange Commission sued Provident Asset Management for fraud last July.
Provident Asset Management neither admitted nor denied the charges, but consented to the entry of Finra's findings.
