FINRA sanctioned a Registered Principal in North Dakota, who was associated with Capital Financial Services and a member of its new product committee, for allegedly failing to conduct adequate due diligence. Brian Wade Boppre entered the securities industry in August 1996.  From 11/3/04 through 5/19/10, he was associated with Capital Financial Services.  He was registered as a General Securities Rep, a General Securities Principal, a FinOp, a Muni Securities Principal and an Options Principal.  At Capital Financial, Boppre served as a member of his firm’s new product committee, which was responsible for conducting due diligence and approving new products at the firm. FINRA's Allegations. With regard to a private placement offering that the firm considered selling to customers, Boppre allegedly knew of an issuer’s failure to make payments to its investors and also was aware of other indications that the issuer was encountering financial difficulties. Nevertheless, Boppre approved the offering as a product available for his firm’s brokers to sell to their customers.  Subsequently, he suspended sales of the offering, but then reopened it after discussions with issuer executives.  He allowed his firm’s brokers to continue selling the offering despite the issuer’s ongoing failure to make principal and interest payments, and despite other red flags. FINRA found that Boppre, acting on his firm’s behalf:

• failed to conduct adequate due diligence of the offering before allowing firm brokers to sell this security;
• which prevented the firm personnel from being able to identify and understand inherent risks of the offering;
• which meant firm personnel lacked a reasonable basis for selling it;
• failed to reasonably supervise firm brokers’ sales of the offering, because he had not conducted adequate due diligence.

Private Placement by Medical Capital Holdings. Medical Capital Holdings, Inc. (MedCap) was a medical receivables financing company based in Anaheim, CA.  It's core business was to provide financing to healthcare providers by purchasing their accounts receivable and making secured loans to the providers. From 2001 through 2009, MedCap raised approximately $2.2 billion from over 20,000 investors through 9 Reg D offerings, principally with sales of promissory notes through FINRA-registered firms.  Each investor purchased a minimum of $25,000 in promissory notes with maturities ranging from one to seven years, and annual interest rates ranging from 8.25% to 10.50%. MedCap made all interest and principal payments on these Reg D offerings until July 2008, when began experiencing liquidity problems and stopped making payments on 2 of its earlier offerings.  Problems continued, and 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. Introduction and Start of Sales by Capital Financial Services ("CFS"). CFS began selling the MedCap offerings in July 2003.  From July 2003 through Jury 2008, CFS representatives visited MedCap's offices in Anaheim several times to review records and meet with MedCap's executives. CFS also received numerous 3rd-party due diligence reports for MedCap's offerings - but never obtained financial information about MedCap and its offerings from independent sources - e.g., audited financial statements. On 7/30/08, CFS received an email from MedCap containing a draft PPM for a new offering, along with a selling agreement for CFS to sign.  CFS signed the selling agreement without  conducting due diligence on this latest offering - even though it differed from some of MedCap's earlier offerings.  On 8/5, the PPM (Private Placement Memorandum) was finalized and CFS brokers began offering it to their customers. Two days later, on 8/7, CFS received a letter from MedCap, which stated that the company was experiencing liquidity issues.  MedCap further stated that it had not repaid principal to some clients but it expected to correct this problem within 30 days.  Sales were suspended, but were restarted after a visit to MedCap offices and some cursory reviews. In addition to MedCap's ongoing delays in making payments to its investors, CFS received other red flags relating to MedCap's problems throughout the fall of 2008.  To read further, see link below to FINRA's AWC. FINRA Sanctions. Boppre agreed to a $10K fine and 6-month suspension as a principal.   [Disciplinary Action for November 2011]   For further details, go to:   [FINRA AWC #2009019125904].