FINRA Continues Nationwide Initiative Investigating Broker-Dealers Engaged in Private Placements
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Provident Asset Management, LLC, a Dallas-based broker-dealer, for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme.
The action announced today is the first produced by a FINRA initiative involving active examinations and investigations of broker-dealers involved in retail sales of private placement interests, as well as broker-dealers affiliated with private placement issuers. FINRA is looking at firms' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud. The initiative was undertaken in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In fact, investors' funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors' funds during the contingency period of the offering.
"Provident facilitated the sale of a series of fraudulent private placements that were marketed to unsuspecting customers as income-producing investments, when it was simply using new investors' money to pay previous investors the promised dividends – a classic Ponzi scheme," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics."
FINRA found that from September 2006 through January 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. Provident Asset Management's only business line was acting as the wholesaling broker-dealer for the Provident Royalties' offerings, which were sold to customers through more than 50 retail broker-dealers nationwide, raising over $480 million through approximately 7,700 individual investments made by thousands of investors.
FINRA's broader investigation into broker-dealers that sold the Provident and other troubled private placement offerings is continuing.
The Provident Royalties private placement memoranda promised investors returns of up to 18 percent per year and said the funds raised through each offering would be used to purchase interests in all aspects of the oil and gas business.
In an effort to market the Provident Royalties offerings, the firm falsely represented that: investors' funds would be used by each individual Provident Royalties offering to purchase interests in the oil and gas business for that offering; the subscription proceeds of each offering would be deposited into an account for that offering and become assets for that offering; approximately 86 percent of the subscription proceeds would be allocated to acquiring interests in the oil and gas business; and, dividends paid to investors would be derived from revenues, primarily from the sale of oil and gas assets.
In fact, Provident Royalties deposited the investors' funds from each offering into a separate bank account. Then, in the fashion of a classic Ponzi scheme, the money was either moved freely from one account to another or was swept into one of Provident Royalties' operating accounts and used to pay dividends and principal to earlier investors.
On July 2, 2009, the SEC filed a civil injunctive action in the Northern District of Texas naming Provident Asset Management, Provident Royalties and others, seeking a temporary restraining order and an emergency asset freeze and appointment of a federal equity receiver to take control of the entities and preserve their assets for the benefit of the defrauded investors.
In concluding this settlement, Provident Asset Management neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2009, members of the public used this service to conduct 18.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business—from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.