A Financial Industry Regulatory Authority Arbitration Panel is ordering AOG Wealth Management chief executive and president Frederick Baerenz to pay Roger and Barbara Bond $331K in compensatory damages. The panel found Baerenz liable for unsuitable trading because he allegedly misled the Bonds about the risks involved in the direct private placements they invested in from ’06 to ’09. At the time, Baerenz was affiliated with Pacific West Securities.
The Bonds invested about $941K in private placements. Their legal team contends that these were not suitable investments for them.
Private placements are offerings of a company’s securities that are not registered with the SEC. They are not offered to the general public.
Investors typically have to be “accredited investors.” To qualify for this category, an investor must have a net worth greater than $1M—their main residence not included—and an yearly income greater than $200K over the last two years ( $300K if the investor is married). The investor also must reasonably expect to make the same amount this year. However, investors who don’t meet the accredited investor criteria can be asked to invest as a non-accredited investor.
Private Placements Come with Risks
The challenge of investing in private placements is that there might not be a lot of information (if any) available about the company’ business. Companies that issue private securities generally don’t have to file financial reports, which can make it hard to determine how well an investment will do. Because private placement securities are restricted securities, they cannot be resold unless they are registered or exempted from registration. They are illiquid and difficult to sell. Issuers don’t have to buy back the securities from investors.
Unfortunately, private placement fraud happens. According to FINRA, financial firms or representatives may provide potential investors with sales collateral or memoranda with misstatements and omissions that can make it hard discern whether an investment choice is a good one for them. Some firms have done an inadequate job of investigating an issuer to be certain that a private placement is appropriate for a customer. Not all investors can handle the risks.
Finra arbitration panel orders broker to pay $331,000 for unsuitable investments, InvestmentNews, July 13, 2016