The Wolper Law Firm, P.A., P.A. is currently investigating claims against FINRA registered brokerage firm, HJ Sims & Co., Inc. and other similarly situated brokerage firms, regarding the sale of private placements made pursuant to Regulation D under the Securities Act of 1933.
“Private placements” is a broad term that describes securities that are not offered for sale through a public exchange. These can include promissory notes, private equity offerings, real estate investment trusts, business development companies, etc. Private placements are issued under Regulation D under the Securities Act of 1933. Regulation D provides exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements and allows companies to offer and sell securities without extensive disclosures. The absence of standard disclosure requirements creates an environment where investors do not have transparency either in the initial review of an investment or the ongoing monitoring of its performance.
Securities consulting firm Securities Litigation Consulting Group (‘SLCG”) just completed an analysis of the sale of Regulation D offerings by HJ Sims, titled “HJ Sims Reg D Offerings: Heads, HJ Sims Wins – Tails, Their Investors Lose.” The conclusion of the study found that HJ Sims sold 93 Regulation D offerings in the past 10 years. Of the 93 offerings, 43 have failed to file annual registration forms required by state law and at least 10 have defaulted. https://www.slcg.com/files/blog/HJ%20Sims%20Reg%20D%20Offerings%20on%20Fire.pdf.
This analysis is a symptom of a greater problem in the industry, where brokerage firms are selling private placements to ordinary retail clients at alarming rates because of the remuneration that can be earned by both the brokerage firm and its registered financial advisors. More often than not, these sales cause financial harm to the investor, through declining principal, loss of income, default, or a combination of these outcomes.
FINRA’s Due Diligence Requirements Regarding the Sale of Private Placements
The Securities Exchange Commission, federal courts, and FINRA have all found that brokerage firms have a duty to conduct a reasonable investigation concerning the private placement issuer’s representations concerning the security. A brokerage firm’s due diligence obligation also stems from suitability obligations requiring the broker to have reasonable grounds to believe that a recommendation to purchase, sell or exchange a security is suitable for the customer. In order to meet the due diligence obligation, the brokerage firm and/or financial advisor must make reasonable efforts to gather and analyze information about the private placement, the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer in the offering materials, and the intended use of proceeds of the offering. The failure to determine this and other material information would necessarily preclude a financial advisor from disclosing to a customer the material aspects of a transaction.
FINRA Rules 5122 and 5123 require that member firms that offer or sell their own securities or those of a control entity (i.e., a private placement) file with the corporate finance department a private placement memorandum, term sheet or other offering document prior to making a sale to a customer.
A determination must be made by the brokerage and control entity regarding whether registration of the security is required pursuant to Regulation D. An exemption from registration exists pursuant to Rule 504 of Regulation D if the firm sells less than $5,000,000 of the securities within a 12-month period. An exemption exists pursuant to Rule 506 of Regulation D (known as the “safe harbor”) if the sales are limited to accredited investors.
Before recommending private placements and alternative investments to retail investors, FINRA member brokerage firms have due diligence obligations to ensure that the investments are appropriate for retail clients. These due diligence obligations are codified in FINRA Regulatory Notice 10-22, which “reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommended in offerings.” https://www.finra.org/sites/default/files/NoticeDocument/p121304.pdf. “A BD ‘may not rely blindly upon the issuer for information concerning a company, nor may it rely on the information provided by the issuer and its counsel in lieu of conducting its own reasonable investigation…firms are required to exercise a ‘high degree of care’ in investigating and independently verifying an issuer’s representations and claims.”
NTM 10-22 further states that brokerage firms must conduct due diligence on the following entities/individuals:
- The issuer and its management;
- The business prospects of the issuer;
- The assets held by or to be acquired by the issuer;
- The claims being made; and
- The intended use of proceeds of the offering.
In making these assessments, FINRA Regulatory Notice 10-22 requires that “broker-dealers…conduct a reasonable investigation of the issuer and the securities they recommend….” A “BD may not rely blindly upon the issuer for information concerning a company…nor may it rely on the information provided by the issuer and its counsel in lieu of conducting its own reasonable investigation.” “When presented with red flags, the BD must do more than simply rely upon representations by issuer’s management, the disclosure in an offering document or even a due diligence report of issuer’s counsel.” Importantly, FINRA Regulatory Notice 10-22 also makes clear that broker-dealers that are part of a selling group cannot simply rely on representations made by the issuer or its principals without further inquiry.
Securities Litigation Consulting Group Published Staggering Statistics
SLCG published remarkable statistics regarding the sale of private placements by HJ Sims. As set forth above, HJ Sims sold 93 private placements to retail customers over the last 10 years. Of these 93 private placements, 43 of these offerings have not filed annual registration forms in 2021 and 2022. The absence of state filings suggests that the issuer is not complying with applicable state disclosure requirements in an environment where disclosure is already vague.
In addition, 10 of the offerings made by HJ Sims have already defaulted on either interest or principal payments. It was further analyzed that these offerings in default have virtually no residual value, leaving investors with little recourse. Unfortunately, defaults are common among Regulation D offerings, because of the speculative nature of the investments and the lack of any meaningful regulatory oversight.
Adding insult to injury are the apparent conflicts of interest. HJ Sims was the sole brokerage firm selling 84 of the 93 offerings and participated in the sales of the other 9. This creates a culture at the brokerage firm where financial advisors are pressured to sell private placements so that the brokerage firm is not saddled with high inventory. HJ Sims’ executives also appear to have created and controlled almost all of the issuers of the Regulation D securities it sold.
Below is a list of the HJ Sims Reg D Offerings in the last 10 Years:
- Cleveland Thermal, LLC
- Lake County, Florida
- Fountains Acquisition Finance I, LLC
- Elderwood Acquisition, LLC
- Stuart Lodge Living LLC / Stuart Lodge Properties LLC
- Sims Cathcart Funding, LLC
- Cleveland Thermal, LLC
- HBS Acquisition Finance, LLC
- Orchard View Acquisition, LLC
- DRSN Real Estate GP LLC
- MacKenzie Preferred Funding, LLC
- Fox Ridge Finance, LLC
- Heatherwood Acquisition, LLC
- Sims Merrill Gardens III, LLC
- Discovery Funding Sarasota Bay, LLC
- Athena Acquisition VI, LLC
- Epic Finance I, LLC
- Carmel Acquisition, LLC
- Gryphon Finance I, LLC
- Treeo Funding I, LLC
- Hawkeye Village Finance I, LLC
- Fountains of Hope, LLC
- Tuscan Isle Property Company, LLC
- Tuscan Isle Holdings 1, LLC
- Tuscan Gardens of Venetia Bay Properties, LLC
- Gryphon BH Funding, LLC
- Riverchase Funding, LLC
- HJSI Athena Portfolio Finance, LLC
- Meridian Portfolio Funding I, LLC
- Tuscan Isle ChampionsGate Holdings, LLC
- Tuscan Isle ChampionsGate Prop. Co., LLC
- Cypress Point Funding, LLC
- Wakefield Portfolio Funding I, LLC
- Affinity Portfolio Funding, LLC
- BHCP Acquisition, LLC
- Affinity Portfolio Funding II, LLC
- Affinity Portfolio Funding III, LLC
- Affinity Development Funding I, LLC
- Vantage Point Funding I, LLC
- Sante Funding I, LLC
- Tuscan Gardens of Palm Coast Properties, LLC
- Vita Funding I, LLC
- LW Development Funding I, LLC
- Affinity Funding IV, LLC
- NHG Funding I, LLC
- Affinity Portfolio Funding V, LLC
- Affinity Portfolio Funding VI, LLC
- Monarch Funding I, LLC
- Sims Benchmark V, LLC
- TL Funding I, LLC
- Sims Merrill Gardens V, LLC
- Stonebridge Funding I, LLC
- NHG Funding II, LLC
- Riverview ALF Holdings, LLC
- Civitas Funding I, LLC
- Inspirit Venue Funding I, LLC
- Sims High Income Portfolio, L.P.
- Poet’s Walk Funding I, LLC
- NHG Funding III, LLC
- Monarch Funding II, LLC
- DRSN Real Estate GP LLC
- Monarch Funding III, LLC
- Madison Funding I, LLC
- TL Funding II, LLC
- Monarch Funding IV, LLC
- NREA Southeast Portfolio Three, DST
- Links Funding I, LLC
- Family Health Funding I, LLC
- Sims Benchmark VI, LLC
- NREA Retreat, DST
- Sims Merrill Gardens VI, LLC
- Griffin Capital (South Beach – Vegas) DST
- TL Funding III, LLC
- Caraday Funding I, LLC
- Crown Point Funding I, LLC
- Magnolia Funding I, LLC
- Voralto Funding I, LLC
- Links Funding II, LLC
- ALG Funding IX, LLC
- Watermark FL Funding, LLC
- SAL Funding I, LLC
- Commercial Equipment Finance Income Fund, LLC
- TL Funding IV, LLC
- Elevate Funding I, LLC
- Vinebrook Homes Trust, Inc.
- Parliament Credit Opportunities Fund, LLC
- Comprehensive Care Funding I, LLC
- PPG Funding I, LLC
- Hill Valley Funding I, LLC
- Links Funding III, LLC
- PPG Funding II, LLC
- NexPoint Buffalo DST
- NexPoint Hughes DST
Did you Suffer Financial Losses as a Result of Private Placements from HJ Sims or Another Brokerage Firm?
If you purchased private placements and have either experienced a loss of income principal or income, you may be entitled to recover those losses from the issuing institution.
The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is an experienced trial lawyer who has handled hundreds of securities cases throughout his career, involving a wide range of products, strategies, and securities. Prior to representing investors, Attorney Wolper was a partner at a national law firm, where he represented some of the largest banks and brokerage firms in securities matters. Through this experience, Attorney Wolper developed the command of securities law that he puts behind each of his clients’ cases. Wolper Law Firm, P.A. can be reached at 800.931.8452 or by email at firstname.lastname@example.org.