The Financial Industry Regulatory Authority (FINRA) fined NEXT Financial Group for failing to perform reasonable investigations during the due diligence phase of the private placement offering by Provident Royalties. As a result of NEXT’s failure, investors lost hundreds of millions of dollars. NEXT will pay a $50,000 fine and $2 million in restitution to its clients. Furthermore, the SEC has accused Provident of committing fraud, and as least one of Provident’s brokers has admitted to these allegations.
As we discussed last week, due diligence requires a reasonable investigation of all the “material” facts before entering into any agreement with another person or entity. Due diligence is required and regulated in order to prevent unnecessary harm to investors. Typically, a broker is required to analyze the nature and risks of the particular transaction, and advise its clients whether the investment is a legitimate investment for that particular client.
FINRA said that NEXT failed to perform adequate due diligence even though NEXT did review the private placement memorandum. The problem is that NEXT only reviewed the private placement memorandum. FINRA has been clear that reviewing the offering documents alone will not be sufficient to satisfy the reasonable investigation requirements for private placement due diligence.
This isn’t NEXT’s first run in with security regulators. In 2009, FINRA fined NEXT $1 million for supervisory failures that led to churning of customer accounts and excessive markups and markdowns on corporate bond trades.
If you’d like to learn more about FINRA, private placements, or due diligence, please don’t hesitate to contact us today for your free consultation.