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Investments - Private

Customers Lose on ‘Leap of Faith’ Into Broker’s Private Investment

May 6, 2020

by Howard Haykin



Broker-dealers and their brokers are required to vouch for the products and securities they sell and to have reasonable basis for believing that recommended transactions or investment strategies are suitable for their customers. Suitability is based on each customer’s investment profile which, in part, includes a customer’s …
  • Investment objectives – e.g., a desire to generate income, to preserve wealth, or to speculate on the market.
  • Investment experience.
  • Investment time horizon – e.g., the expected time available to achieve a particular financial goal.
  • Liquidity needs – i.e., customer’s need to convert investments to cash without incurring significant loss in value.
  • Risk tolerance – i.e., a customer’s willingness or ability to risk losing some or all of the original investment in exchange for greater potential returns.



TAKING A ‘LEAP OF FAITH’ WITH THE BROKER.     What happens when a customer succumbs to a broker’s solicitation and leaves the security of a broker-dealer's platform? Well, if they invest in a private company away from their brokerage account then, for all intents and purposes, the customers and their investments are entirely reliant on the broker’s integrity and business acumen.


Take, for example, a broker with the Independent Financial Group who convinced 2 customers to invest $75,000 in a small limited liability company that supposedly provided brand management and product placement services for athletes and entertainers.

  • Broker controlled the company’s checking accounts; he spent $11,100 on personal expenditures.
  • It’s uncertain whether remaining funds were spent as intended, on general operating expenses.
  • Over a 5-year period, the company never amounted to much – retaining just one client, a professional skateboarder, who endorsed a single energy drink.
  • Investors were never provided with any documentation to memorialize the investments or the terms.
  • Investors lost everything - no return on investment, no repayment of their principal.



CUSTOMER TAKE-AWAYS.    Documentation, Due Diligence and Verification were all lacking in this case. Customers were given no documents to evidence their investments. No comprehensive appraisal of the company was undertaken – particularly to establish its assets and liabilities or to evaluate its commercial potential. Finally, the company had no apparent infrastructure or means to ensure that funds were safeguarded and spent for business-related purposes.


The bottom line for most investors – Avoid Private Investments; Stick to Publicly-Traded Securities.



[For further details, click on … FINRA Case #2019061205201.]