Capital Financial Receives Cease and Desist Order from SEC

The Securities and Exchange Commission (SEC) has issued a cease and desist order to Capital Financial Services Inc. related to the independent broker dealer’s sale of private placements that went bust, as reported in Investment News. The firm sold some $63 million of the private placement offerings by Provident Royalties LLC during the time period of 2006 and 2009, through its 332 affiliated representatives. It is alleged that Capital failed to conduct a reasonable investigation into the offerings, while pocketing fees for conducting due diligence. According to the report, the representatives received an 8% commission, or $5 million, for selling the deals and the firm collected due diligence fees of $600,000. In addition to the Provident deals, Capital sold $100 million worth of Medical Capital Holdings private placements.

According to the SEC, “Capital Financial never conducted independent verification of any of the offering materials provided by Provident” and it “also never received audited or even unaudited financial statements for any of the Provident offerings.” Furthermore, “Capital Financial failed to disclose to customers that although it was collecting a due diligence fee, it was not conducting any due diligence.” It was the 1% due diligence fee that drew the scrutiny of the SEC, since firms that do not conduct their own due diligence often hire outside counsel to assess the deals and pay them 1% of the amount of the sales rather than keep it for themselves.

If you have suffered losses in Med Cap, Provident Royalties, DBSI or other private placements, please contact our securities law firm for a confidential consultation at 1-800-259-9010.

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