The charges of fraud brought against Medical Capital Holdings Inc. and Provident Royalties LLC by the Securities and Exchange Commission (SEC) has helped bring about a shift in the securities industry. Broker-dealers who were once willing to offer Private Placement deals to their clients with abandon are now more willing to scrutinize such deals than before.
This newfound scrutiny has come at a cost to the relationship between the firms that are looking to gain investment dollars and those that sell these investments to clients. There is a renewed sense of urgency for accurate accounting, as well as transparency on the part of the private placement entity. For the Private Placement industry to survive, such measures are necessary. Provident Royalties is one example of what might have been avoided had such measures been consistently practiced.
Provident had at times made outlandish, “dividend,” promises. Some dividend options were stated by Provident to be as high as 15% to 18%. When the reality is that such dividend payments exceed the potential profit of a business model, questions should have been raised, but were not. However, there is hope that now those questions may start to be asked, and if so, investors will benefit.
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