Securities Law Blog

In its first action as part of its initiative of active examinations and investigations, the Financial Industry Regulation Authority (FINRA) expelled Provident Asset Management, LLC from the securities industry on March 18, 2010. The regulator said it expelled the Dallas-based broker/dealer for selling allegedly fraudulent private placements offered by its affiliate, Provident Royalties, LLC in a “massive Ponzi scheme.”

FINRA claims that Provident Asset Management misrepresented the sale of private placement offerings. The broker/dealer allegedly told investors that funds raised through the offerings would be used to purchase interests in the oil and gas business. They would include funding exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In memoranda issued by Provident Royalties, investors were promised returns of up to 18 percent per year produced by revenues generated primarily from the sale of oil and gas assets. Instead investor funds were allegedly pooled together in order to make dividend and principal payments to earlier investors, in classic Ponzi style.

From September 2006 to January 2009, Provident Royalties raised more than $480 million from thousands of investors, by allegedly marketing and selling preferred stock and limited partnership interests in a series of 23 private placements.

Provident neither admitted nor denied FINRA’s allegations, but consented to their findings and are no longer allowed to sell securities. The lawyer representing two Provident executives, Brendan Coughlin and Henry Harrison, said they “vigorously deny any claim of wrongdoing.”

FINRA began its initiative in response to an increase in investor complaints regarding private placements and following the Securities and Exchange Commission’s (SEC) actions surrounding the sale of certain private placement offerings.

According to FINRA, they will continue to dig deeper in their investigation into the broker-dealers that sold Provident and other questionable private placements. Their attentions will be focused on firms’ compliance with suitability, supervision and advertising rules, as well as the possibility of fraud.