Smaller companies may seek to raise capital from investors through a private placement. A private placement allows issuers to sell unregistered securities, thereby avoiding the expensive and time-consuming process of registering securities with the SEC. However, because companies do not have to undergo the in-depth disclosure process when registering a security, private placements can pose greater risks to investors. Brokers must investigate private placements before recommending them to investors. A broker’s negligent oversight or conscious disregard of material risks may lead investors to invest in a private placement based on misrepresentations about the details or risks of an investment offered through that placement.
If you’ve lost money in a private placement due to fraud, contact the team at Erez Law PLLC to discuss your legal rights and options.
How Can an Investment Fraud Lawyer Help?
Erez Law PLLC has recovered over $300 million for defrauded investors and successfully guided more than 2,000 cases through the Financial Industry Regulatory Authority (FINRA) process to seek compensation after investors have lost significant funds due to the careless actions of broker-dealers and financial advisors. We can help you pursue financial recovery by:
- Prosecuting your claim to obtain evidence of fraudulent activity or material misrepresentations about an investment
- Working with expert witnesses to calculate your investment losses
- Evaluating your legal options for pursuing compensation, including FINRA arbitration for private placement fraud or misconduct
When you are confronting a prominent investment firm, you need experienced legal counsel on your side. Contact Erez Law PLLC today to discuss your situation with a skilled private placement fraud lawyer.
Legal Rights of Private Placement Investors
In a private placement, brokers sell securities that the issuer has not registered with the U.S. Securities and Exchange Commission. Issuers and brokers can sell unregistered securities through one of the various exemptions to registration requirements under federal securities regulations, such as the exemptions under Regulation D. These exemptions permit the sale of unregistered securities, provided that the issuer does not offer the securities to the public. Nevertheless, securities regulations prohibit issuers and brokers from making material misrepresentations about a security when pitching it to an investor in a private placement.
Furthermore, federal securities laws and industry regulations promulgated by FINRA require brokers who recommend private placement to investors to investigate the security and verify any information provided by the issuer, including the information contained in the issuer’s private placement memoranda and any public statements made by the issuer. Under FINRA private placement regulations, broker-dealers must carefully analyze private placements and ensure that they are suitable for individual investors before recommending them. Thus, investors may have legal rights when a broker fails to conduct due diligence before recommending a private placement to an investor or when the broker knowingly conveys false or misleading material information about the security or recommends an unsuitable security.
Legal options for investors who lost money in private placement include pursuing FINRA private placement arbitration against a broker who misrepresented the material facts about an investment opportunity or recommended an unsuitable security.
FINRA Arbitration as a Legal Remedy
One of the primary legal options for private placement fraud victims is to file a demand for FINRA securities arbitration against the broker or brokerage firm that sold or recommended the investment through misrepresentations about the private placement. Due to mandatory arbitration clauses contained in contracts with investment advisors, arbitration is typically the sole method for resolving securities disputes.
An investor can pursue FINRA arbitration against a broker-member of FINRA by filing a Statement of Claim with FINRA, which describes the nature of the investor’s claim and the financial recovery sought from the broker. FINRA will send a copy of the statement of claim to the broker, who may file an answer to respond to the claim.
The parties must select arbitrators to preside over their arbitration by ranking their preferred arbitrators on a list provided by FINRA. The value of the investor’s claim will determine which type of FINRA arbitration hearing they will receive. The lowest-value claims have an arbitration in which a single arbitrator decides the claim based on documents submitted by the parties; middle-value claims have an in-person or telephonic hearing with a single arbitrator; and high-value claims have a three-arbitrator panel, with one arbitrator serving as the chair.
The parties can also exchange documents through discovery and attend a pre-hearing conference, where the arbitrator may discuss mediation as an option. Ultimately, the parties will present their cases either via written briefs or at a hearing through their lawyers.
Under FINRA rules, an investor has six years after the event(s) giving rise to their private placement claims to file a statement of claim for arbitration. In most cases, investors’ client agreements with their brokers require any claims arising from the broker-client relationship to be submitted to FINRA arbitration.
Alternative Legal Options for Recovery
Investors may pursue FINRA arbitration claims against the brokerage firms that employed the brokers who recommended a private placement. An investor may have a negligent supervision claim against a firm that lacked adequate oversight mechanisms or failed to implement proper supervisory procedures, which led to a broker engaging in misconduct, such as misrepresenting an investment opportunity or failing to conduct due diligence on a private placement.
Proving Private Placement Fraud
To prove your claims arising from a fraudulent or misrepresented private placement, you may need various kinds of evidence, such as:
- Offering documents from the issuer or forwarded by a broker
- Copies of written correspondence from an issuer or broker
- Public statements made by an issuer about its operators or about a security offered through a private placement
- Expert testimony, including a financial analysis of an investor’s losses
The need for such complex and detailed evidence underscores the importance of hiring an experienced securities arbitration lawyer.
Steps to Take if You Suspect Private Placement Fraud
Investors who suspect that an issuer or broker has made material misrepresentations regarding a private placement can take proactive steps to put themselves in the best position for pursuing legal claims, including:
- Gather and preserve copies of all correspondence and private placement memoranda you received from your broker or the issuer.
- Keep financial records of your investment, including the price you invested for and the investment’s current price or the price at which you sold your stake.
- Report suspected fraudulent activity to the Securities and Exchange Commission and suspected broker misconduct to FINRA.
- Consult with an experienced attorney to explore your legal options.
Contact a Securities Fraud Lawyer for Private Placements
If you lost money investing in a private placement after a broker failed to adequately advise you on its nature or the potential risks, you might have the option of pursuing FINRA arbitration to seek compensation and hold brokers accountable. Contact Erez Law PLLC today for a confidential consultation with a FINRA private placement attorney to discuss your legal options.