Investor Lawyers Blog
Oil and gas private placements use some of investors’ money to drill and operate oil and gas wells. Oil and gas DPPs are sponsored and managed either by investment companies or oil and gas exploration companies, each of which may suffer from its own conflicts of interests in structuring the investments due to the very high fees and commissions associated with such investments.
Brokerage firms that sell private placements must conduct due diligence on the investment before recommending it to their clients. The due diligence rule stems from FINRA Rule 2310 the so-called suitability rule, which requires that a brokerage firm must have reasonable grounds to believe that a recommendation to purchase a security is suitable for the customer. This principle is further explained in National Association of Securities Dealers Notice to Members 03-71, which elaborates that a brokerage firm must perform significant due diligence before recommending a private placement investment to any customer(s). By recommending a security to customers, the brokerage firm effectively represents that a reasonable investigation of the merits of the investment has been made.
The following private placements could give rise to an arbitration claim against a stockbroker or financial advisor if the recommendation to purchase them lacked a reasonable basis, or if the investments were sold based on misrepresentations or omissions of material fact: