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PRIVATE PLACEMENT FRAUD

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Major concerns for individual investors attached to the private placement market include the risks of financial fraud, illiquidity, phony valuation figures, sales practice abuses, and inaccurate statements or omitted information.

Fortunately, forensic accountants and financial experts can track billions of dollars in fraudulent private placements sold to individual investors. Broker-dealers often fail to meet their due-diligence responsibilities, but plaintiff  lawsuits may be able to recover much of what has been lost.

A broker-dealer is a brokerage firm that buys and sells securities on its own account as a principal before selling the securities to customers.

According to the U.S. Justice Department, many private placement firms operate like Ponzi schemes. Broker-dealers who fail to carry out their due-diligence responsibilities can be liable to investors for damages and losses from a private placement investment.

The Securities and Exchange Commission (SEC) holds broker-dealers responsible for recommending private placements and a failure to carry out certain duties could result in a violation of anti-fraud provisions and federal securities laws. Investors who have suffered damages in a private placement offering can bring forth claims against their broker-dealers to recover financial losses.

Joe Lyon is a highly-rated lawyer representing plaintiffs nationwide in a wide variety of financial fraud and private placement fraud claims. 

What Are Private Placements?

Private placements are securities sold off-market, without an initial public offering, making them exempt from registration under an exception to the Securities Act of 1933. A typical private placement is sold to select and well-educated investors.

That was the original idea behind the instrument. Nevertheless, private placements have gone beyond old borders, and as a result, dozens of broker-dealers are involved in litigation stemming from sales of allegedly fraudulent private placements in a variety of industries—many of the broker-dealers now have declared bankruptcy.

Often, investors are told their money will be invested in specific fields, though it can be mixed in with other investment money, paid out in classic Ponzi scheme fashion as “dividends” or “returns on capital” to earlier investors, according to reports from the Securities and Exchange Commission (SEC). The SEC has charged many firms with related fraud charges.

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ABOUT THE LYON FIRM

Joseph Lyon has 17 years of experience representing individuals in complex litigation matters. He has represented individuals in every state against many of the largest companies in the world.

The Firm focuses on single-event civil cases and class actions involving corporate neglect & fraud, toxic exposure, product defects & recalls, medical malpractice, and invasion of privacy.

NO COST UNLESS WE WIN

The Firm offers contingency fees, advancing all costs of the litigation, and accepting the full financial risk, allowing our clients full access to the legal system while reducing the financial stress while they focus on their healthcare and financial needs.

What Constitutes Investment Fraud?

  • Sloppy Due Diligence
  • Reckless investments
  • Failure to create readable financial reports for investors
  • Non-compliance with federal securities laws or regulations

Other risks associated with private placement fraud:

Inadequate disclosure: marketing materials may be issued with inaccurate statements or omitted information.

Lack of liquidity: Private placements are not liquid investments. Redemption of funds are usually restricted. Since they are not publicly traded, there is no secondary market where the securities can be sold.

Imprecise valuation: Valuation is left up to mathematical models which can be unreliable.

Lack of Private Placement Regulation

Private placements are a form of security fund-raising—private shares, bonds, promissory notes—and under U.S. law, these issues are exempted from financial reporting requirements that govern public offerings. Oversight is scant and the risks of financial fraud are high. Issuers of private placements may provide only basic information to the U.S. Securities and Exchange Commission.

FINRA (Financial Industry Regulatory Authority), on the other hand, has brought several regulatory actions against broker-dealers connected with these private placement that involved fines or restitution to investors. FIRNA is dedicated to investor protection and market integrity through effective regulation of broker-dealers by the following:

  • Writing and enforcing rules governing activities of around 3,700 broker-dealers
  • Encouraging market transparency
  • Educating individual investors of risks

In response to severe financial crime private placement fraud, FINRA filed a new rule proposal with the SEC which would impose new notice and disclosure requirements on private placements, including requirements for transparency regarding the use of the proceeds, as well as full disclosure of expenses and compensation.

Obligations of Broker Dealers & Private Placement Fraud

If a broker-dealer lacks important information about securities it is recommending, the agent must disclose this fact along with the risks that arise from a lack of information. Furthermore, broker-dealers are required to investigate and verify an issuer’s representations and claims.

Even if customers are well-educated investors, they still have a duty to conduct a reasonable investigation. It is recommended that brokers provide information to accredited and non-accredited investors alike to help avoid liability for financial fraud.

Additional responsibilities of broker-dealers are required to fulfill when recommending private placement investments include:

Suitability obligations: An analysis of any investment should consider an investor’s knowledge and experience, not merely net worth or income. Broker-dealers must perform a customer suitability analysis that considers the investor’s holdings, financial well-being, tax status, and investment objectives. Investors should fully understand the risks involved.

Conduct investigations: broker-dealers should conduct a reasonable investigation concerning the private placement issuer, the business prospects of the issuer, the assets held, and the intended use of proceeds of the specific offering. Broker-dealers should retain records documenting the process and results of their investigation.

No conflicts of interest: If a broker-dealer is an affiliate of an issuer, it must ensure that its affiliation does not compromise its independence or a conflict of interest that could hinder its ability to conduct a detailed and independent investigation.

Identify red flags: broker-dealers must note information that could be considered a “red flag” that would encourage further inquiry. Investigation responsibilities obligate it to follow up on any red flags as well as any adverse information about the issuer.

Supervision procedures: Broker-dealers that engage in private placement offerings must have supervisory procedures designed to ensure that the firm:

  • Engage in an inquiry that complies with legal and regulatory requirements
  • Perform any analysis required FINRA rules
  • Qualify customers as eligible to purchase private placement securities
  • Does not violate antifraud provisions of the federal securities laws or FINRA rules

Questions about Private Placement Fraud Cases

Can I sue my stockbroker?

If your financial advisor has been misleading about certain financial instruments, has improperly executed trades, has overcharged in fees, has placed you in unsuitable investments, or has been negligent in managing your finances, you may file a claim and recover losses. 

Is my financial advisor stealing from me?

If you suspect any form of financial fraud or securities fraud, contact your attorney to begin an investigation. We have the resources to review your case and seek financial restitution. 

can i sue for bad investment advice?

If your stockbroker or financial advisor was misleading and failed to disclose everything involved with an investment choice, a legal claim may be considered to recover investment losses. 

can i recover investment losses?

If you believe that you have been defrauded by a brokerage firm or an individual stockbroker, The Lyon Firm can assist in filing a lawsuit to recover as much of the losses as possible. 

How do I prepare for a financial advisor negligence case?

First, question your stockbroker about any transaction or behavior that you do not understand or did not authorize, which resulted in losses. 

If you are not satisfied with your stockbroker’s explanation, contact the Lyon Firm. If you lost money or there was an unauthorized trade made on your behalf, complain in writing and retain copies of your letter and of all other correspondence with the brokerage firm or advisor. 

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