Massachusetts Securities Regulator Targets Brokerages in Private Placement Sales

As recently reported by the Wall Street Journal (WSJ), investments in so-called private placements have experienced a substantial upswing in the wake of the 2008 financial crisis.  In fact, according to a May 7, 2018 WSJ article entitled, A Private-Market Deal Gone Bad: Sketchy Brokers, Bilked Seniors and a Cosmetologist, “In 2017 alone, private placements using brokers totaled at least $710 billion … a nearly threefold increase rise from 2009.”  Of considerable concern, the article indicates that that financial advisors recommending private placements are “six times as likely as the average broker to report at least one regulatory action against them…” and, moreover, that 1 in 8 brokers recommending private placement investments have “three or more red flags on their records, such as investor complaint, regulatory action, criminal charge or firing… .”

In response to growing concerns about the many risks and pitfalls associated with private placements, some securities regulators have stepped up their efforts to combat the problem.  For example, on July 2, 2018, the Massachusetts Securities Division (the “Division”) announced its investigation into sales practices linked to private placement investments.  Pursuant to the Division’s investigation – which will be spearheaded by Mr. William Galvin, the Secretary of the Commonwealth of Massachusetts – a total of 10 broker-dealers will be subjected to regulatory inquiry.  These brokerage firms, which have a demonstrated history of sales practice abuse surrounding private placement investments, include: LPL Financial, Arthur W. Wood Company, Santander Securities, U.S. Boston Capital, Bolton Global Capital, Advisory Group Equity Services, Moors & Cabot, Inc., Detwiler Fenton & Co., BTS Securities, and Winslow, Evans & Crocker.

In connection with its investigation, the Division is seeking to examine firms and advisors with disciplinary reports on file from 2 years ago, when the Division surveyed over 200 brokerage firms regarding their hiring and disciplinary practices.  According to Mr. Galvin: “Private placements are risky investments that reward the salesperson handsomely with high commissions.  Firms offering these to the public, especially seniors, have an obligation to see that they are sold to benefit the investor, not the broker.  Individuals with a history of disciplinary actions magnify the risk of unsuitable sales in connection with private placements.”

As a general rule, investing in a private placement carries with it complexity and considerable risk — including high commissions, lack of transparency, and the illiquid nature of the unregistered offering — and, therefore, is most typically only available to accredited and/or sophisticated investors.  An investor is considered “accredited” if he or she has an annual income of over $200,000 or has a net worth of more than $1 million of assets (excluding one’s primary residence).  It is a financial advisor’s responsibility to ensure that an investor meets this test.

Financial advisors, and by extension their brokerage firm, have a duty to perform adequate due diligence on any investment recommended to customers, including private placement offerings pursuant to Regulation D, as promulgated by the SEC.  Furthermore, financial advisors have a duty to disclose the risks associated with such an investment, as well as conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and associated risk profile.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with private placement offerings, including investments in oil and gas drilling funds, hedge funds, and other exempt offerings.  Investors may contact a securities arbitration attorney at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.