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Finding out that your stockbroker may have misled you or used your relationship for his or her own benefit can be extremely devastating, especially if it involves substantial financial loses. The lawyers at Ajamie LLP have decades of experience in securities law and understand exactly what it takes to hold a negligent or reckless broker responsible. We proudly represent clients throughout Texas, including Dallas, Fort Worth, San Antonio and Austin. Call us now at 713-860-1600 or email firstname.lastname@example.org to set up your free consultation now.
Negligence and Fraud Involving Private Placements
A private placement is an investment offering that is only available to a small group of investors and not available to the general public. They pay the broker very high commissions, are not sold on the exchanges, and can be difficult, or impossible to sell. They are also known as 506 offerings or Reg. D offerings. A private placement can include preferred stock, common stock, and other types of exotic investments including warrants, hedge fund interests, promissory notes, debentures, and bonds. They are commonly used in the venture capital world and implemented through various rounds. These types of investments are inappropriate for most investors, and certainly for those who lack extensive experience with investments or sophistication with financial concepts.
Private placements are also frequently touted as safe havens. But regardless of what happens in publicly traded markets, being in private placements is still only suitable for experienced, accredited investors. And to compound the problem, the standards for what constitutes an accredited investor have not been modernized in decades. With inflation, the threshold for qualifying as an accredited investor is easily attainable for normal working people without any particular investing expertise or advanced education. As a result, many more people qualify as “accredited,” but it isn’t because we have more savvy investors- it’s just because of inflation.
Although these offerings must comply with various disclosure requirements, the offered securities do not have to be registered with the Securities and Exchange Commission if the offering meets one of the exemptions. As a result, private placements are typically offered through a Private Placement Memorandum (PPM) instead of a prospectus. The PPM must include all material facts regarding the investment. Any misrepresentations about the material facts or misleading information may prompt an investor to invest in the security to his or her financial detriment.
There are many different ways that a private placement can involve negligence or fraud on behalf of a broker. In addition to fraud in the PPM, a broker can mislead an investor about the prudence of investing in this security. Because brokers have a sophisticated level of knowledge, the law views them as fiduciaries and requires them to exercise the highest duty of care in advising clients. If a broker fails to use this level of care, or intentionally misleads an investor for his or her own financial gain, the investor can sue the broker for negligence and/or fraud. If the broker works for a brokerage firm, the investor would also have a claim against the firm based on a doctrine called vicarious liability. Under this doctrine, an employer is liable for the tortious acts of his or her employees committed during the course and scope of employment. If the plaintiff is successful in proving his or her claim, he or she may be entitled to the difference between the actual value of his or her accounts and the estimated value of his or her accounts had the broker adhered to the duty of care.