James Shorris, FINRA’s executive vice president and executive director
of enforcement, recently announced that monitoring Regulation D
private placements and non-traded real estate investment trusts is a “major, major
initiative” for FINRA’s enforcement department (“Private
deals at top of Finra's hit list,”
InvestmentNews, Feb. 2, 2011). The investments are currently the top two areas of focus
for the department.
According to the article, FINRA is primarily concerned with the lack of
due diligence some broker-dealers have shown when recommending private
placement products, such as those offered by Medical Capital Holdings
Inc. and Provident Royalties LLC, as suitable for their clients.
Both Provident Royalties LLC and Medical Capital Holdings, Inc. were sued
by the SEC in 2009. Provident Royalties was charged with the operation
of a $485 million offering fraud and
Ponzi scheme, and Medical Capital was charged with the operation of a $77 million offering
fraud. Since mid-2009, lawsuits and concerns over lack of due diligence
have caused at least a dozen independent broker-dealers to file for bankruptcy
or to run into major problems with FINRA. The organization’s enforcement
department is now committed to closely monitoring the remaining firms
that sell such products.
Non-traded real estate investment trusts typically require that investors
hold the securities for a fixed period of time, in some cases up to 10
years or longer. FINRA’s concern is that many sales representatives
may not have explained the illiquidity of the investments to potential
investors prior to purchase. FINRA’s enforcement department will
be investigating whether the products were sold properly to customers.