As a financial analyst and legal expert with over a decade of experience, I’ve seen my fair share of cases where broker-dealers fail to perform their due diligence on investments. The recent sanctions against Cova Capital Partners LLC by the Financial Industry Regulatory Authority (FINRA) serve as a stark reminder of the importance of thorough investigation and compliance with regulations.
According to public documents, Cova Capital Partners allegedly recommended three private placements to retail customers without conducting proper due diligence between June 2018 and December 2021. The offerings in question include:
- Offering 1 (2018–2020): Over $2 million in pre-IPO shares of Company A sold without verifying the issuer’s rights to the shares or assessing markups.
- Offering 2 (2019–2021): More than $1.7 million in a private placement sold without investigating the issuer’s CEO’s history of regulatory violations.
- Offering 3 (2021): Over $9 million in pre-IPO shares of Company B sold without investigating SEC charges against individuals linked to the fund sourcing the shares.
These alleged failures to perform reasonable due diligence violate Exchange Act Rule 15l-1(a)(1) and FINRA Rules 2111 and 2010. As an investor, it’s crucial to understand the potential consequences of such violations and how they may affect your investments.
Cova Capital Partners’ Background and Past Complaints
Cova Capital Partners, based in Syosset, New York, is a FINRA-registered broker-dealer that engages in private placements, private investments in public equity, and retail sales of equity securities. It’s essential for investors to research a firm’s background and any past complaints before entrusting their money to them.
While the details of any previous complaints against Cova Capital Partners are not readily available, the recent sanctions by FINRA highlight the importance of due diligence and compliance with regulations. Investors can check a firm’s FINRA BrokerCheck report to gain more information about its history and any disciplinary actions.
Understanding FINRA Rules and Regulation Best Interest
FINRA, the self-regulatory organization for broker-dealers, has established rules to protect investors and maintain market integrity. FINRA Rule 2111 requires broker-dealers to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer based on their investment profile.
Additionally, as of June 30, 2020, broker-dealers must comply with Regulation Best Interest (Reg BI), which obligates them to act in the best interest of retail customers when making recommendations, without prioritizing their own financial interests. The Care Obligation under Reg BI requires broker-dealers to exercise reasonable diligence, care, and skill in understanding the risks, rewards, and costs associated with a recommendation.
Consequences and Lessons Learned
The sanctions against Cova Capital Partners serve as a reminder of the potential consequences for broker-dealers who fail to perform adequate due diligence and comply with FINRA rules and regulations. In this case, the firm faces a censure and a $30,000 fine, but the implications for investors who relied on their recommendations could be far more severe.
As the famous investor Warren Buffett once said, “Risk comes from not knowing what you’re doing.” This quote underscores the importance of investors educating themselves about the risks associated with various investments and the responsibilities of the professionals they entrust with their money.
According to a study by the North American Securities Administrators Association (NASAA), bad financial advisors are responsible for an estimated $10 billion to $40 billion in investor losses annually. This staggering figure highlights the need for investors to remain vigilant and proactive in researching and monitoring their investments and the professionals managing them.
In fact, a recent report by Forbes reveals that investment fraud and bad advice from financial advisors cost Americans billions of dollars each year. The report emphasizes the importance of conducting thorough research and filing complaints against unethical or negligent advisors to help prevent future losses.
If you have suffered investment losses due to a broker-dealer’s failure to perform due diligence or comply with regulations, it’s essential to understand your rights and potential avenues for recovery. Consulting with experienced securities attorneys can help you navigate the complex legal landscape and determine the best course of action for your unique situation.
