On July 18, 2018, the SEC filed a lawsuit in the District of Connecticut naming Temenos Advisory, Inc. (“Temenos”) and George L. Taylor (“Taylor”) as Defendants and essentially alleging that Defendants made improper recommendations of certain private placement investments to their investment advisory clients. A copy of the SEC Complaint is accessible here: SEC v Temenos & Taylor
Temenos, founded by Taylor, is a Connecticut corporation headquartered in Litchfield, CT, with additional offices located in St. Simons Island, GA and Scottsdale, AZ. Temenos has been registered with the SEC as a registered investment advisor (RIA) since 1999, and is owned by Mr. Taylor and a trust that was purportedly established for purposes of benefiting Taylor’s former business partner.
As alleged by the SEC, prior to 2014, Temenos’ business was largely focused on the sale of traditional financial products to its clientele, including “[m]utual funds, exchange traded funds, variable annuities, and publicly traded stocks.” Like many RIAs, Temenos charged an advisory fee to its customers based upon a percentage of assets under management. However, as alleged in the Complaint, beginning in 2014 Temenos began recommending private placement investments to its clients: “Between 2014 and 2017, Defendants placed more than $19 million in investments by their clients and others in [the securities of] four private issuers … And they did so without ever sufficiently examining the marketing claims, financial statements, or business activities of those companies.”
As discussed in several recent blog posts, with increasing frequency retail investors have been solicited to invest in so-called private placements. According to a recent Wall Street Journal article, “In 2017 alone, private placements using brokers totaled at least $710 billion….” A private placement, sometimes called a non-public offering, is simply an offering of a company’s securities that are not registered with the Securities & Exchange Commission (“SEC”). Pursuant to federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration applies.
Perhaps the greatest risk associated with private placement investments concerns the lack of transparency and information available to the retail investor. On the one hand, when an investor decides to purchase publicly traded common stock or shares in a mutual fund or ETF, he or she will have the opportunity to first review a prospectus, as required by the SEC. However, with respect to private placements, no such prospectus is filed with the SEC — rather, private placement securities are typically offered through a Private Placement Memorandum (“PPM”). Ultimately, it is incumbent on the brokerage firm or RIA offering a private placement investment to its customers to conduct adequate due diligence on the investment in order to determine its suitability.
As alleged by the SEC, Temenos recommended unsuitable and risky securities in four private placements, as follows:
- “Company A marketed an emergency response communications product. Between February 2014 and February 2017, Temenos solicited approximately $11.2 million of investments in Company A from their advisory clients and other individuals.”
- “Company B purported to be building a fiber optic connection between locations along the east coast of the United States. Between September 2014 and March 2017, Temenos solicited approximately $7 million of client investments in Company B.”
- “Company C marketed itself during the relevant time period as a crowdfunding investment portal. Between March 2016 and January 2017, Defendants solicited $805,000 of client investment in Company C.”
- “Company D purported to have developed a new water purification technology. From in or about December 2014 to in or about July 2015, Temenos, through Taylor, solicited investments in Company D.”
As alleged in the Complaint, Temenos failed to conduct even basic due diligence on the four private placement investments marketed to its customers: “Throughout the relevant period, Taylor made statements to clients that misleadingly suggested that the private placement investments… had been carefully vetted and selected from a large group of potential offerings based on their favorable risk/return potential, and were suitable for any wealthy investor.” The SEC has further alleged that Temenos failed to inform clients that the RIA was receiving compensation from the recommended private placement companies.
Investors who have purchased unregistered securities through a private placement may have legal claims if the investment was solicited through a misleading sales presentation or if the recommendation to purchase the investment was unsuitable. Investors may contact Law Office of Christopher J. Gray, P.C. by telephone or email email@example.com to schedule a no-cost, confidential consultation.