Both FINRA and SEC Bring Actions Regarding Due Diligence on Unsuccessful Private Placements

On April 7, 2011, both FINRA and the SEC announced actions both broker-dealers and supervisory personnel in connection with sales of private placement offerings without adequate due diligence. The actions relate to private placement offerings of Medical Capital Holdings, Inc. (MedCap), Provident Royalties and DBSI – all entangled in various levels of litigation, SEC enforcement or arbitration.

In summary, the FINRA Acceptance, Waiver and Consent involve allegations that the firms, by or through its principals, failed to have reasonable grounds to identify and understand the inherent risks of the offering and the suitability of the offerings for any of their customers, including conducting effective due diligence to investigate potential “red flags,” and therefore could not have a reasonable basis to sell the offerings. The SEC alleges that the firm and its principal failed to perform reasonable due diligence on numerous private placements, while simultaneously receiving significant amounts in due diligence fees, that turned out to Ponzi schemes and offering fraud and thereby violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.

As to FINRA, we have already seen previous actions in regards to due diligence and our firm expects to see more investigations and audits of member firms in regards to both private placements and other non-traded direct investments, including REITs. See FINRA’s targeted examination request regarding “Sale and Promotion of Non-Traded REITs” and the 2011 Examination Priorities Letter. Contact Evans & Kob PC for experienced assistance responding to any regulatory examination or sweep, modifying your written supervisory procedures, due diligence review of a particular product, investment, issuer or money manager or any other regulatory or arbitration related legal advice at

Link: Broker-Dealer Advisory Services

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