Fraudulent Private Placements – Securities America
Silver Law Group, as a member of a legal team, represented a large group of investors against many brokerage firms, including Securities America (a subsidiary of Ameriprise Financial) concerning a massive Ponzi scheme related to $2.2 billion in “Medical Capital” notes, sold to investors through the use of private placement memorandums (PPM). According to the PPM, the Medical Capital notes would be priced at $1,000 per note and would be offered in several classes, each with a different maturity and different annual interest rate. The note proceeds would be used primarily to purchase healthcare receivables. The notes would be secured by the assets purchased with the note proceeds, which would be monitored by a bank acting as the trustee.
The Medical Capital notes were offered and sold to the public through a nationwide network of more than 60 broker-dealers, by means of the PPMs, in a series of integrated Offerings as unregistered private placements, under Securities Exchange Commission Regulation D. Under Regulation D, private placements can only be solicited and sold to accredited investors who were clients of the brokerage firm subject to certain minimum income and net worth requirements. The brokerage firms failed to meet these requirements through general solicitations of investors through advertisements in newspapers, mailings of postcards that solicited potential investors to attend meetings, and sales pitches delivered at seminars, meetings and dinners to which attendees were invited without regard or inquiry as to the investors’ sophistication or knowledge as investors, or as to whether they were “accredited investors.”
The brokerage firms had a duty to conduct a reasonable due diligence review and investigation concerning the accuracy of the information contained in the private placement memorandums. Even if the private placement review was conducted by a third-party the brokerage firms, including Securities America still had an obligation to investigate and perform an independent due diligence review. As a result of the failure to comply with securities industry rules and regulations investors were bilked for hundreds of millions of dollars from the Ponzi scheme.
The investigations conducted by federal and state regulators uncovered the following investment scam “red flags” for the private placements sold to investors:
- above market interest rate returns;
- guarantees of principal;
- unaudited financial statements;
- lengthy “lock-up” periods and limited repurchase plans;
- extraordinary commissions paid to financial advisors; and
- substantial due diligence fees paid to brokerage firms.
The Financial Industry Regulatory Authority (FINRA) arbitration claims to recover losses from the brokerage firms generally alleged the following violations:
- Negligence and breach of fiduciary duty;
- Violation of Federal and State securities fraud laws;
- Misrepresentations and omissions of material facts; and
- Failure to supervise due diligence review of private placement investments.
The FINRA arbitration claims filed by Silver Law Group, as a member of a legal team, followed a legal path, separate but concurrent with class action lawsuits that had been filed. The class action Court determined the process and framework by which FINRA arbitration claims would be settled which is a confidential matter. With this stipulation, the class action lawsuit settled under the Courts oversight returning plaintiffs’ a significant percentage of their losses.