Last week, FINRA announced sanctions against 10 individuals and 8 firms - all for selling interests in private placements without having a reasonable basis for recommending the securities.  [see "FINRA Sanctions Pertaining to ‘Troubled’ Private Placements."] Leroy Henry Paris II was one of the individuals named and we're going to present his story - details behind his alleged violations, which FINRA reported in Disciplinary Actions for August 2011.  In many ways, this case study illustrates that brokers will sell whatever they're told to sell - with the implicit or explicit understanding that firm management has completed its due diligence and deems the offering appropriate and suitable for sale to customers of the firm. Leroy H. Paris II. Paris first entered the securities industry in 1983 with Hagaman and Oates Securities.  He currently holds Series 22 and Series 39 licenses, and in late 2002, he became the CEO at Investlinc Securities, LLC.  In March 2009, Investlinc Securities changed ownership, resulting in Meadowbrook Capital, LLC owning 100% of the broker/dealer - Meadowbrook Securities, LLC.  Paris is the majority owner of Meadowbrook Capital and President and CEO of Meadowbrook Securities. Responsibility for Private Placements. As President and CEO , and as the principal responsible for approving private placement offerings at Meadowbrook Securities, Paris allegedly failed to establish, maintain and enforce a supervisory system at Meadowbrook reasonably designed to achieve compliance with applicable securities rules, laws and regulations. FINRA Findings and Allegations. Paris agreed to settle FINRA charges that, as his member firm’s president, CEO and registered principal, he had overall supervisory responsibilities for the firm, including reviewing and performing due diligence for private placements and for reviewing and approving new products, including the assignment of a new product to a business unit. In that role, Paris signed a sales agreement for a private placement offering and failed to perform due diligence beyond reviewing the private placement memorandum (PPM), and while he had received 3rd-party due diligence reports regarding earlier private placements, he didn't seek or obtain a report for the latest offering and did not conduct any continuing due diligence or follow-up because of the limited time between offerings, the similarity of the deals and representations from the issuer that no additional due diligence was necessary. However, the basis for Paris' decisions, as they pertained to this particular private placement, as well as others, were not accurate, and did not reflect the facts and circumstances underlying private placements offered for sale by the firm's brokers.  According to FINRA, the firm sold Regulation D offerings issued by Medical Capital Holdings and Provident Royalties. [See further discussions about Private Placement Offerings by MedCap, after the jump, below.]

• Unlike earlier offerings, there were serious red flags that Paris could not identify without adequate due diligence.
• In his firm’s sale of several offerings by another issuer, Paris failed to perform due diligence even though his firm received a specific fee related to due diligence purportedly performed in connection with each offering.
• Paris did not travel to the issuer’s headquarters to conduct due diligence and did not seek or request any financial information other than what was contained in the PPM.
• Once Paris had concluded that his firm could sell the offerings, he did not conduct any continuing due diligence or follow-up.
• Due to limited time between the offerings, the similarity of the deals and representations from the issuer that no material changes had occurred, he concluded that no additional due diligence was necessary.
• Paris further did not believe it necessary to pay for due diligence reports for the new offerings because they would say the same thing as previous reports but they did identify numerous red flags.
• Paris, however, should have scrutinized each of the offerings given the high rates of return to ensure they were legitimate and not payable from proceeds of later offerings, as in a Ponzi scheme.
• Paris, acting on his firm’s behalf, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to the offerings.

FINRA Rule Violations and Sanctions. Through his conduct, Paris was charged with violating, at various times, NASD Conduct Rules 3010, 2110 and FINRA Rule 2010.  He accepted a $10,000 fine and a 6-month suspension from serving in a principal. capacity. For further details, go to:   [FINRA AWC #2009019070102].     [Disciplinary Actions for August 2011] Paris's Supervisory Failures Re: Meadowbrook's Sales of Private Placement Offerings by Medical Capital.

Medical Capital Holdings, Inc. (MedCap) was a medical receivables financing company based in Anaheim, CA. MedCap's core business was to provide financing to healthcare providers by purchasing their accounts receivable and making secured loans to the providers.

In 2001, MedCap began raising funds for its operations by selling promissory notes through FINRA-registered firms. These notes were securities that were not registered with the SEC but were sold under the registration exemption provided by Rule 506 of Regulation D of the Securities Act of 1933. Pursuant to that exemption, the notes could be sold only to accredited investors.

From 2001 through 2009, MedCap raised approximately $2,2 billion from over 20,000 investors through 9 Reg D offerings offered through FINRA broker-dealers and other sales avenues.  Each investor purchased a minimum of $25,000 in promissory notes with maturities ranging from 1-7 years.  The notes promised payments at annual interest rates ranging from 8.25% to 10.50%.  During this entire period of time, however, MedCap never obtained any audited financial statements with respect to any of these offerings.

MedCap made all interest and principal payments on these Regulation D offerings until July 2008. At that time, MedCap began experiencing liquidity problems and stopped making payments on 2 of its earlier offerings.  Nevertheless, MedCap proceeded with its last Reg D offering, called MPFC VI, which it offered through an 8/5/08 PPM. In this offering, MedCap sought to sell up to $400 million of promissory notes with 2, 3 and 6-year terms, at annual interest rates ranging from 9% to 9.5%.

MPFC VI differed from some of MedCap's earlier offerings in several respects, including:  it allowed MedCap to use up to 40% of the proceeds raised to invest in businesses other than medical receivables, and it limited the trustees'power to oversee MedCap's operations.

In July 2009, the SEC filed a civil injunctive action in federal district court in which it sought and was granted a preliminary injunction to stop all MedCap sales.  The SEC alleged that MedCap and its executives defrauded investors in MPFC VI by misappropriating approximately $ 18.5 million of investor funds. The SEC also alleged that MedCap had misrepresented that it had never defaulted on or been late in making interest or principal payments, when in fact MedCap had defaulted or was late in paying nearly $1 billion in principal and interest on the notes from its Reg D offerings. The court appointed a receiver to gather and conduct an inventory of MedCap's remaining assets. The SEC action is pending.