FINRA Fines Brokerage Firm for Due-Diligence Failures Related to Provident and Medical Capital

Last week FINRA fined brokerage firm Capital Financial Services, Inc. for failing to conduct adequate due diligence on private placement securities issued by Medical Capital Holdings, Inc. and Provident Royalties LLC.  Both issuers turned out to be massive Ponzi schemes, causing more than $1 billion in investor losses. FINRA fined Capital Financial $200,000, stating that the brokerage firm "failed to have reasonable grounds to believe that private placements offered by Medical Capital and Provident were suitable for any customer." Capital Financial still faces similar charges brought by the SEC, which also has accused Capital Financial of failing to conduct "independent verification of any of the offering materials offered by Provident."

Capital Financial sold more than $50 million in fraudulent Provident and Medical Capital securities to investors, who have lost their money as a result of the two Ponzi schemes.

Capital Financial is among the small handful of brokerage firms that collectively sold hundreds of millions of dollars of fraudulent Provident and Medical Capital securities.  Thousands of investors have filed FINRA arbitration claims based on the brokerage firms' due diligence failures. Specifically, the firms that sold these products utterly failed in their obligations to investigate the securities before approving them for sale by broker to investors. There were myriad red flags that brokerage firms either failed to recognize or ignored, which should have caused the brokerage firms to reject the securities for sale to customers.

These securities, and many other risky Regulation D private placements, paid enormous commissions of 8% and higher. The high fees caused many brokerage firms and brokers to place their own financial interests ahead of their customers and to recommend these risky securities without regard for whether the securities were legitimate or whether there were other, lower-fee securities that were more appropriate for investors.

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