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Broker-Dealers Negligent in Their Due Diligence

Provident Royalties and Medical Capital securities were both offered under Regulation D of the Securities Act (or Reg D). Reg D contains exemptions from the registration requirements, allowing some issuer companies to offer and sell their securities without having to register the securities with the SEC.

Because securities offered under Reg D are not registered with the SEC, the transparency of these companies is limited. Broker-dealers must engage in the due diligence process to determine the validity of the offering, the issuer’s operations and suitability of the investments for their clients. Some broker-dealers engage an outside due diligence firm, whereas others perform their own due diligence, or a combination of both.

Many of the broker-dealers that sold Provident Royalties and Medical Capital securities “relied” on reports prepared by outside diligence firms and actually collected a due diligence fee for allegedly reviewing these reports. The problem with relying on such reports, however, are two-fold: 1) the firms preparing the reports are typically paid by the issuer, posing a conflict of interest and 2) the due diligence firms tend to produce only the most rudimentary information, providing only a brief overview of the issuers and their finances.

As reported September 27, 2009 by Investment News, an undisclosed broker-dealer hired and paid a firm to conduct additional due diligence on Medical Capital. Medical Capital “wasn’t very cooperative” and objected that the firm was going to show the report to more than one broker-dealer. This is not surprising, as any meaningful due diligence would have revealed red flags.

Blum Law Group is aggressively pursuing FINRA arbitration claims against broker-dealers for losses incurred based on recommendations to purchase Provident and/or Medical Capital.

If you were sold limited partnership interests and/or preferred stock in Provident or Medical Capital, contact our office.

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