Massachusetts’ top securities regulator is expected to bring the first state enforcement case against Ameriprise Financial’s (AMP) Securities America unit, raising the stakes in a controversy over so-called private-placements, sales of unregistered securities that are supposed to be marketed only to institutions and sophisticated individuals.
The complaint, expected to be filed today by Secretary of the Commonwealth William Galvin, alleges that the firm knowingly marketed and sold notes issued by Medical Capital Holdings Inc., which entered receivership in July 2009, as secured, fixed-income type investments to unsophisticated customers who didn’t have experience with high-risk products.
“It’s primarily a sales practices case,” said Galvin, who said his office started looking into the case last year after getting complaints from residents. He estimates that about over 60 Massachusetts residents bought $7.2 million worth of the notes, of which Medical Capital issued more than $2.2 billion in all.
Securities America marketed the notes over several years using retail marketing tactics such as seminars, according to Galvin, and continued to sell them even after a top company official raised a red flag and problems about Medical Capital, which is now facing civil fraud charges by the Securities and Exchange Commission, started to surface in recent years. “The registered broker dealer knew based on their own due diligence analysis that…the notes were probably worthless,” said Galvin.
Private placement securities, often issued by small businesses hoping to raise capital outside the stock market, are exempt from rules designed to protect unsophisticated investors. According to guidelines set in 1982, they can be marketed only to “accredited investors,” such as pension funds and to individuals whose net worth, including their home, exceeds $1 million, or who earn $200,000 a year. The threshold for couples is $300,000.
However, with inflation, being a millionaire doesn’t mean what it used to. The SEC considered raising the thresholds as recently as 2007, but relented after complaints from investors and financial advisers.
The Financial Industry Regulatory Authority, the largest independent regulator for all securities firms doing business in the U.S., has also cracked down on private placements, suspending the chief executive of one California brokerage in December as part of a broad investigation. Meanwhile, a proposal in Congress would change the way private placements are overseen, handing more power back to states. Opponents say that move could make raising money too costly for small businesses.