The Financial Industry Regulatory Authority continues its crackdown on the sale of troubled private placements, filing sanctions against eight firms and 10 individuals Tuesday and ordering them to pay restitution to investors. According to FINRA, the firms failed to conduct adequate due diligence, and did not have reasonable grounds for recommending the securities. They also didn’t have the adequate supervisory systems in place to identify and understand the risks, FINRA said. The private placements included Provident Royalties and Medical Capital Holdings, which the SEC alleges are fraudulent, and DBSI, which ultimately failed.
The broker/dealers named in FINRA’s complaint include NEXT Financial Group of Houston, Texas, ordered to pay $2 million in restitution and fined $50,000; Securities America in La Vista, Neb., censured and fined $250,000; Investors Capital Corporation of Lynnfield, Mass., ordered to pay $400,000 in restitution; Garden State Securities in Red Bank, N.J., ordered to pay $300,000 in restitution; Capital Financial Services of Minot, N.D., ordered to pay $200,000 in restitution; and National Securities Corporation of Seattle, Wash., ordered to pay $175,000 to customers. Equity Services of Montpelier, Vt., was censured, fined $50,000 and ordered to pay investors $164,000 in connection to the sale of DBSI, and Newbridge Securities Corporation of Fort Lauderdale, Fla., was fined $25,000, for its sale of DBSI and a Medical Capital private placement.
“The fine was attributable to a failure of adequate due diligence, not that we didn’t do any due diligence,” said Arnold Levine, general counsel for Newbridge. “Newbridge did as much due diligence as we thought was necessary and appropriate, as did the other firms also caught up in the scheme. The problem is, in any ponzi scheme, you never have enough due diligence to uncover the activity. That’s because the cover-up is inherent in the fraud.”
At least one recruiter said, however, that a minimum of due diligence would have done it. Jon Henschen, a recruiter with Henschen & Associates, said that if any of the broker/dealers named had brought in a CPA firm to go through the books of the private placements, it would’ve revealed the alleged negligence. “The culmination of all this is a big lesson learned,” he said: Do your due diligence.
Some firms sounded somewhat more contrite than Newbridge. “We are pleased to have put this matter behind us and to have fully cooperated with FINRA in achieving a settlement that returns money to Provident investors,” said John G. Cataldo, chief compliance officer and counsel at Investors Capital. Janine Wertheim, senior vice president and chief marketing officer at Securities America, also said Securities America was pleased to have put the matter behind it.
And Barry Knight, president of NEXT Financial, said he’s pleased to have the issue resolved in a way that will allow the firm to move forward in serving its clients. He added that NEXT had put some extra capital aside about a year ago to cover such settlements and that the firm is in a strong regulatory capital position. The firm is no longer investing in private placements because it’s virtually impossible to manage the risks, he said. Calls to the other four firms were not returned by press time.
In addition to the eight firms, FINRA also sanctioned 10 individuals, including NEXT’s Steven Lynn Nelson, vice president for investment products and services, who was suspended in any principal capacity for six months and fined $10,000; Kevin John DeRosa, co-owner of Garden State Securities, who was suspended for 20 business days in any capacity and for an additional two months in a principal capacity, and fined $25,000; Vincent Michael Bruno, Garden State’s chief compliance officer at the time, who was suspended for one month in a principal capacity and fined $10,000; Brian Boppre, former principal of Capital Financial, suspended in a principal role for six months and fined $10,000; National Securities’ Matthew Portes, director of alternative investments/director of syndications, suspended in a principal role for six months and fined $10,000; Stephen Anthony Englese, senior vice president for securities operations at Equity Services, suspended from association with any FINRA-regulated firm for 30 business days and fined $10,000; Anthony Paul Campagna, an Equity Services rep, who was suspended from association with any FINRA-regulated firm for 30 business days and fined $25,000; and Robin Fran Bush, the former chief compliance officer of Newbridge, who was suspended in any principal capacity for six months and fined $15,000.
Others sanctioned included Michael Shaw, formerly associated with VSR Financial Services, of Baton Rouge, La.; and Leroy Paris II, former president and CEO of Meadowbrook Securities of Jackson, Miss., which went under this summer. Meadowbrook reps sold $635,000 in Medical Capital deals between August and December of 2008, and $2.135 million of Provident Royalties during the same period, according to FINRA filings. Paris, who did not return a call seeking comment, was suspended for six months in any principal capacity and fined $10,000.
“FINRA continues to look closely at sales of private placements to determine whether the selling firms are fulfilling their responsibilities to customers,” said Brad Bennett, FINRA executive vice president and chief of enforcement. “These actions reinforce that any firm or individual who fails to conduct reasonable investigations of these offerings, especially in light of multiple red flags, will not be allowed to shift all the responsibility to the issuers of the fraudulent private placements.”
Many IBDs have been going under due to large liabilities they face related to alternative investments that have gone bust, including Medical Capital, Provident and DBSI. Many are simply blowing up, leaving advisors looking for a new home. Other IBDs, such as Securities America, have been sold off, providing an opportunity for larger firms looking to acquire. SAI was recently sold to Ladenburg Thalmann by its parent Ameriprise Financial (NYSE: AMP).
