Major concerns for individual investors attached to the private placement market include 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 a Ponzi scheme. 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 Ohio plaintiff lawyer representing plaintiffs nationwide in a wide variety of financial fraud and private placement fraud claims.
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.
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.
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:
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.
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:
Business owners should protect themselves and should wait too long to discuss legal disputes with an attorney. It may be natural for some individuals to only confront litigation until a suit is filed. But it benefits business owners to build a case as soon as possible.
Our attorneys represent plaintiffs in a wide range of business law, including the following practice areas:
Below is a summary of the various types of intellectual property laws that are relevant to the permissions process.
Mercantile law is more commonly known as trade law or commercial law—and it describes the body of law that applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, trade, and sales.
Commercial law focuses on the sale and distribution of goods, whereas business law focuses on the other aspects of business, including mergers and acquisitions, shareholder rights, employment disputes and property issues. Business law is regulated by both Ohio law and federal law. The federal government primarily governs finance, workplace safety and employment issues, though state laws can differ slightly.
Non-compete disputes involve contracts in which former employees agree not to compete with an employer for a specified period of time. Most non-compete lawsuits involve former employees soliciting business from the employer’s customers and not disclosing confidential information.
Properly drafted non-compete contracts are critical for enforceability and adequate protection. Even if litigation cannot be avoided, non-compete agreements in place will help make litigation and settlements easier for all parties.
Two common types of breach lawsuits include:
A contract, or any legally binding agreement, presupposes that both parties must fulfill the terms of the contract. If a contract breach occurs, the affected party can seek legal action and compensation for any actual past, current or future losses.
Commercial attorneys negotiate contracts and commercial agreements, and file lawsuits when the following contracts are broken:
Breach of fiduciary duty generally involves allegations that an individual or company breaches a duty to others. A fiduciary duty requires a level of loyalty and there are both legal and ethical implications. A breach of fiduciary duty commonly includes claims of fraud and breach of contracts.
Breach of Duty claims should be addressed as soon as possible with the help of business litigation attorneys experienced in commercial law.
Business fraud occurs through the omission, deception or misrepresentation of a contract, prospect, investment, project or other business entity. Business fraud litigation can result in monetary damages and irreparable damage to the reputation of a company or brand. Victims of fraud should consult an experienced business law professional. Fraud disputes involve various areas of law and may involve:
Our Firm will help you find the answers. The Firm has the experience, resources and dedication to take on difficult and emotional cases and help our clients obtain the justice for the wrong they have suffered.
Experience: Joe Lyon is an experienced Business Litigation Lawyer. The Lyon Firm has 17 years of experience and success representing individuals and plaintiffs in all fifty states, and in a variety of complex civil litigation matters. Business lawsuits can be complex and require industry experts to determine the root cause of an accident or injury. Mr. Lyon has worked with experts nationwide to assist individuals understand why an injury occurred and what can be done to improve their lives in the future. Some cases may go to a jury trial, though many others can be settled out of court.
Resources/Dedication: Mr. Lyon has worked with experts in the fields of accident reconstruction, biomechanics, epidemiology, metallurgy, pharmacology, toxicology, human factors, workplace safety, life care planning, economics, and virtually every medical discipline in successfully representing Plaintiffs across numerous areas of law. The Lyon Firm is dedicated to building the strongest cases possible for clients and their critical interests.
Results: Mr. Lyon has obtained numerous seven and six figure results in personal injury, automotive product liability, medical Negligence, construction accidents, and auto dealership negligence cases. The cases have involved successfully litigating against some of the largest companies in the world