FINRA Sanctions 8 Firms for Insufficient Private Placement Due Diligence
FINRA fined and sanctioned 8 firms and 10 individuals and ordered more than $3.2 Million in restitution for selling private placements without conducting adequate due diligence. FINRA alleges that the firms would not have sold the private placements, which ultimately failed, had the firms conducted adequate due diligence. Due diligence failures included (i) relying solely on reviews of the Private Placement Memorandum and other documents prepared by the issuer, (ii) failing to conduct on-site due diligence visits of the issuer, (iii) failing to verify financial information, use of proceeds, and cash movements, (iv) ignoring red flags raised in third party due diligence reports, and (v) failing to have due diligence procedures or records documenting due diligence activities. Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, warned firms about relying too heavily on issuers: “These actions reinforce that any firm or individual who fails to conduct reasonable investigations of these offerings, especially in light of multiple red flags, will not be allowed to shift all the responsibility to the issuers of the fraudulent private placements.”
OUR TAKE: These cases help firms understand what constitutes insufficient due diligence and outlines some of the steps firms should take. Unclear is how much due diligence is enough. We believe that FINRA should follow the standards set by the courts for underwriters under Sections 11 and 12 of the Securities Act.