Wrongdoing in Reg D Offerings and Other Private Investments Becomes a Growing Concern
Investors’ problems with private investments and Reg D offerings appear to be growing at an alarming pace. According to a recent InvestmentNews article by Sara Hansard (“Finra to get tough on Red D offerings,” Dec. 13, 2009), FINRA says it is “getting tough” and plans to file regulatory actions against brokerage firms involved in selling private-placement offerings next year. “We have a number of investigations under way involving allegations of wrongdoing arising from the sales of these Regulation D private placements,” James Shorris, executive vice president and executive director of enforcement at FINRA, was quoted as saying in the article.
Private investments that claim to be exempt from registration with the Securities and Exchange Commission are a hot topic these days. Since issuers have been mostly unable to access the IPO market for the last two years, most offerings are being filed under Regulation D. Reg D offerings usually are made by small companies with little or no track record of profitability. Examples include oil and gas ventures and real estate partnerships. Such companies have historically been capitalized by sales to individual investors through independent broker-dealers. Promoters of these investments depend upon this channel to raise money and the broker dealers reap rich commissions on the private placements - 5% to 8%, compared with 1% to 4% for selling a mutual fund. There were reportedly 26,485 of Reg D offerings in 2008 ($609 billion) compared with 11,000 in 1996.
In this low interest rate environment and with suspicions about the stock market still prevalent, sales of Reg D offerings, which are often promoted as not being tied to the stock market or interest rates, have increased. Reg D offerings are often further touted as being “exclusive” (not for ordinary “unaccredited” investors) with promises of higher returns. The downside (never explained as fully) is that these investments are complex, opaque, illiquid, and virtually unregulated. Due to the virtual absence of regulatory oversight, unscrupulous promoters have had free reign to defraud thousands of unsuspecting investors.
Public securities offerings must be generally be registered under the Securities Act of 1933. Registration protects investors, at least in theory, by requiring disclosures, including audited financial statements, and review of those disclosures by a gatekeeper, the U.S. Securities and Exchange Commission, which can prevent an offering from being made when there are deficiencies in the registration.
Regulation D provides a number of exemptions from the registration requirement, thus removing that gatekeeper protection.
State securities regulators have been pushing for a rollback of a federal statute that preempts their authority to regulate these investments. Experts say that local regulators are in the best position to scrutinize these local offerings for compliance with state “blue sky” securities laws. But as we have seen, many other regulatory bodies have been jockeying to preserve and expand their turf in the changing regulatory landscape. This includes the brokerage industry’s self-regulatory organization, the Financial Industry Regulatory Authority (FINRA).
FINRA has been receiving an increasing number of complaints of misrepresentations and unsuitability from investors in recent months concerning sales of Reg D offerings, according to the article. FINRA reportedly questions whether brokerage firms and registered representatives who sold the private placements did due diligence on the products they sold, as well as whether some brokerage firms had a conflict of interest with the issuers. FINRA is looking into this, has been increasing the resources it devotes to investigations of Reg D offerings, and expects to begin bringing cases “soon,” according to the article.
This reminds many of the circumstances that led to the Prudential Securities Limited Partnership scam in the late 1980s, where more than 100,000 people invested $1.4 billion in limited partnerships that were misrepresented as being safe and turned out to be worthless. These problems were chronicled in a best-seller called “Serpent on the Rock,” by Pulitzer prize winning author Kurt Eichenwald.
J. Boyd Page, senior partner of Page Perry, LLC in Atlanta, whose limited partnership cases were featured in “Serpent on the Rock,” said: “High oil prices and an unstable real estate market have provided unscrupulous promoters an opportunity to take advantage of investors with the result that real estate and oil and gas investment scams are flourishing. Investors should seek legal advice before they commit their hard earned money to one of these ventures.”
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors in private investment (Reg D) cases. For further information, please contact us.
