The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Carolina Financial Securities, LLC (Carolina Financial) concerning allegations that the firm failed to conduct proper due diligence on private placements sold by the firm.
Carolina Financial has been FINRA member since 1997 and operates out of Brevard, North Carolina. The firm has 12 registered representatives and derives generates revenues through the sale of private placements. The firm has two other prior disciplinary actions including a FINRA action in July 2010, concerning allegations that Carolina Financial failed to ensure that an escrow account was established for a contingent offering.
NASD Rule 3010 requires brokerage firms to establish, maintain, and enforce a supervisory system reasonably designed to comply with the securities laws and the FINRA rules. As part of a brokerage firm’s responsibility includes conducting due diligence on its securities products in order for the firm to understand the risks of these products and to have a reasonable basis to believe these products are suitable for at least some customers. FINRA stated in its complaint that due diligence is especially important for alternative investments such as private placement offerings under Regulation D where there is no registration of the securities with the SEC.
FINRA alleged that between February and May of 2008, Carolina Financial sold a private placement that was unregistered pursuant under Regulation D, Rule 506 to a total of eleven investors totaling approximately $1.1 million. The private placement’s purpose was to finance the acquisition and operation of a certain apartment complex. FINRA found that Carolina Financial had procedures in place for the supervision of the sale of private placements but did not follow these procedures to review the statements made in the private placement’s offering documents.
For example, FINRA found that Carolina Financial failed to ensure that the private placement memorandum (PPM included all material information for its customers to review concerning the investment. Specifically, FINRA found that Carolina Financial failed to review the final version of the loan agreement for the property and therefore did not discover that the PPM failed to disclose a capital call provision in the loan agreement. FINRA alleged that the capital call provision was a material provision of the agreement. Nonetheless, FINRA determined that Carolina Financial approved the private placement for sale to its customers without independently verifying the representations about the loan agreement made in the PPM.
The attorneys at Gana LLP are experienced in representing investors to recover their investment losses in private placement securities. Our consultations are free of charge and the firm is only compensated if you recover.