Private Placements Earn Capital Financial Services A Cease & Desist Order

Thursday, April 28, 2011 06:54
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Private Placements Earn Capital Financial Services A Cease & Desist Order

Tags: alternative investments | sec

The fight over what constitutes "due diligence" on alternative investments has led to SEC action against another firm that sold private placements that imploded.

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Capital Financial Securities just got a cease & desist order after the SEC determined that it never actually did the due diligence it told its clients it was conducting -- and charged them for.

 

The North Dakota firm sold an estimated $69 million in notes from Provident Capital and another $100 million from Medical Capital Holdings, the issuer that got Securities America in trouble and destroyed other brokerage companies.

 

However, like many firms, it also charged a 1% "due diligence fee" in addition to the 8% sales load on the instruments, which netted it $600,000 just on the Provident sales.

 

As the SEC notes, it discovered that Capital Financial didn't even get unaudited financials on the companies it was selling until the ninth of 14 Provident offerings. 

 

Ultimately, the SEC calls selling the products "severe recklessness" on the part of Capital Financial principals.

 

Moral: Firms that want to sell any non-vanilla product should at least consider hiring an outside expert to make sure all the due diligence processes are ironclad. After all, these things have proved that they can blow up in clients' faces -- and the blowback can kill firms.

 

 

 

 

 

 

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