According to FINRA, Cova Capital Partners LLC has been censured and fined $30,000 for willfully violating Regulation Best Interest (Reg BI) in connection with its sale of three private placement offerings to retail customers.

The firm was found in violation of Reg BI's Care Obligation by recommending private placements without conducting sufficient due diligence. Before selling pre-initial public offering (pre-IPO) shares of a company, the firm failed to take reasonable steps to confirm that the issuer actually possessed rights to the shares being sold. Despite knowing that the issuer applied markups to the pre-IPO shares, the firm did not determine the amount of these markups.

Subsequently, the SEC filed a lawsuit against the issuer alleging fraud, including undisclosed excessive markups and not having enough pre-IPO shares to satisfy sales to investors. A federal court entered a preliminary injunction and appointed a receiver. The U.S. Attorney's Office later filed criminal charges against principals of the issuer, including fraud and conspiracy counts.

For two additional offerings, the firm failed to reasonably investigate the issuer's management (missing that one CEO was previously subject to regulatory actions for illegal robocalls to seniors) and failed to investigate SEC charges against individuals associated with another fund from which the issuer claimed to source shares.

The firm also violated Reg BI's Compliance Obligation by failing to establish adequate written policies and procedures for due diligence on private placements.

What Investors Can Learn: This case demonstrates the critical importance of due diligence before recommending investments. Investors purchasing private placements should ask their brokers what investigation was performed on the issuer and be cautious of pre-IPO share offerings.