Stockbroker Law - Tuesday, March 13, 2012
Ponzi Schemes, Private Placements and Pickpockets

Hundreds of millions of dollars have flowed out of Capital Region households in the past decade for investment into private placement investments.  So, what is a private placement investment, anyway?  Private placements are investments which claim exemption from the registration requirements of the federal securities laws, thereby bypassing the more rigorous, legal, financial, accounting, and regulatory scheme which registered securities are otherwise subject to by law.  This lack of scrutiny can, in turn, provide a perfect opportunity for an unscrupulous peddler of these investments to generate hefty fees, commissions, and other compensation, while recklessly investing entrusted monies, without regard to the more prudent and structural guidelines associated with registered securities.

Private placements typically come with a private placement memorandum, including a subscription agreement and an accredited investor questionnaire, which are supposed to be presented to investors prior to making their investments.  While these written proposals might look official and legitimate, all on nice printed forms and booklets, investor monies may be wholly subject to the whims of one or two individuals who manage the private placement, without any meaningful accountability. Further, many private placement deals usually come with no independent financial backing, professional liability insurance, fidelity bonding coverage, or any other financial recourse in case the investment fails, or in the event of fraud.

The Capital Region has also seen a number of financial advisors and insurance agents, who have loose affiliations with brokerage firms and insurance companies, busy selling dubious life insurance, life settlement, and viatical contracts.  These dubious products, which are essentially a form of gambling on the death of a third-party stranger, are fraught with numerous shortcomings, including illiquidity, non-legitimate oversight, sketchy actuarial assumptions, insolvent vendors, and custodians in distant states.  Largely unregulated sales and underwriting activities, coupled with the simple fact that there is no resale market for individuals seeking to sell these products, is a recipe for disaster.  Oftentimes, life settlement and viatical contracts are peddled through various networks, including affinity groups, faith-based groups and ministries, improperly-supervised insurance agents, and sketchy brokers, oftentimes being sold off the books through what is known as “selling away.”

A common trick played in selling private placements is persuading unsophisticated, inexperienced, and unaccredited investors to part with their hard-earned savings by deliberately falsifying the accredited investor questionnaire or perhaps presenting only the signature page to the unwitting and trusting investor.  The typical private placement investment requires that an accredited investor be one who either has a net worth in excess of one million dollars, exclusive of personal residence, or an individual who has made over $200,000.00 in income each year in the past two years.  These accredited investor requirements, usually attested to by checkmarks made in a number of boxes on the accredited investor questionnaire, have a funny way of ending up as improperly checked for many investors. Unscrupulous brokers routinely fudge these check boxes on the accredited investor questionnaire to improperly indicate that an investor is accredited, when in fact they are not.

Private placements are not subject to the accounting requirements and guidelines of the Sarbanes-Oxley securities reform legislation of 2002 and are rarely passed upon in any in-depth, meaningful fashion by the State of New York or the Securities Exchange Commission, even though there are certain minimal filing requirements for most private-placement-type investments under state and federal law.  Quite simply, they lack transparency.

While the New York State Attorney General’s Office has its own Bureau of Investor Protection, this office routinely declines to investigate the complaints of private placement investors who feel that they have been duped.  Likewise, the Securities and Exchange Commission also routinely declines to make detailed inquiry associated with private placement complaints and is simply too understaffed to address each and every complaint involving private placement investments.

As many unwitting investors have learned, private placement investments are illiquid, which means that in all likelihood you will not be able to withdraw your original, invested monies on demand.  Private placement sales tactics often include rosy and optimistic verbal pitches, including generous and guaranteed returns on untried, unproven, and speculative ventures.  Private placement victimization schemes tend to run in cycles with the economy and often coincide with trendy emerging industries and technologies.  Vendors of private placements oftentimes employ the same sales pitches – hush-hush exclusivity, limited availability, a once-in-a-lifetime opportunity, and a guarantee to beat the returns associated with stocks, bonds, mutual funds, and C.D.s.

The lion’s share of private placements peddled in the Capital Region in the past decade has involved vague, ill-defined, and sketchy business purposes and models and in many instances amounting to a blank check.  Monies have wound up in such open-ended and dubious deals such as sex-themed cruises staffed with prostitutes, failing clothing stores, bad movies, pipe-dream hotel and resort ventures, oil- and gas-drilling projects, ATM machine schemes, and bogus hedge funds.  More disturbingly, a number of different private placements promoted by  one notorious brokerage firm, which touted itself as an “investment broker,” ended up being largely invested in each other’s purportedly legitimate deals, in tail-chasing fashion.

The few truly successful private placement opportunities tend to involve small groups of well-heeled and like-minded business people with hands-on experience of the underlying business opportunity, who share a sink-or-swim attitude towards the project.  When one takes into account all of the management fees, commissions, salaries, perks, benefits, and administrative fees and costs, most private placement deals geared towards a more passive, retail-type customer are doomed from the start.  In the final analysis, poorly managed, excessive, cost-laden and doomed-for-failure private placements are peddled by hucksters who will ultimately hide behind the small print when ill-conceived private placement deals blow up.  While private placements still play an important role in capital-raising for focused, legitimate, industry-specific business models having credible growth and cash flows, this is the exception in a shadow industry known for scams. 

The Financial Industry Regulatory Authority (FINRA), a self-regulatory agency responsible in large part for the oversight of sellers of private placement investments, has issued a number of guidelines and requirements for private placement brokers and has also issued a number of investor alerts designed to protect trusting investors from private placement scams.  Unfortunately, there are a number of shady private placement promoters who operate outside the FINRA rules, utilizing unlicensed brokers and unregistered firms who claim they are not subject to FINRA jurisdiction. 

While underwriters/sellers of private placements in New York State are required to make filings with the New York State Department of Law, Investor Protection Bureau, or their Real Estate Finance Bureau in the case of real-estate-based private placements, such filings do not mean that the private placements have been approved by the state of New York as relates to the legitimacy of their business purpose, accounting, bookkeeping, etc..

The best rule of thumb for the average individual investor? – If you can’t look up the daily market value of an investment in the Wall Street Journal or some other reliable published source, you are probably better off avoiding it.


Blog Posts

Blog Post


Investment & Broker

Investment Misconduct



Private Company

Private Company Disputes


Personal Injury