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Reg D offerings enable smaller businesses to enter capital markets and attempt to raise capital without the resources and expenses required to achieve full SEC regulation. The process of gaining an exemption is simple and relatively risk-free, enabling organizations to focus on raising funds rather than spending them.
However, it is widely accepted that Reg D offerings can be particularly risky. Perhaps it says it all that the regulations around such offerings specifically stipulate that they may only be made available to sophisticated investors.
While inherently risky at the best of times, they can be even more challenging for investors when they are manipulated or used as a funding source to place large bets. When investors are more likely to foot the bill when a company has to shift losses than they are to profit handsomely from the biggest wins, this can naturally lead to potential legal claims.
HJ Sims appears to have carried out such manipulation, as brought to light in a November 2022 report from SLCG Economic Consulting. SLCG’s report identified discrepancies and unexpected activity in HJ Sims’ Reg D portfolio, including an unusually high likelihood of failure.
While potentially an efficient way to raise capital, a Reg D program can also represent an opportunity for fraud.
While a “family-owned brokerage firm” implies a wholesome, caring nature, it can also mean collusion and insider trading. With multiple red flags already identified involving HJ Sims’ ability to handle investor funds, Zamansky LLC opted to open an investigation.
Have You Suffered Losses as a Result of HJ Sims’ Reg D Offerings?
Zamansky LLC is currently actively investigating HJ Sims over sales of Reg D offerings over the last ten years. A November 2022 report by SLCG Economic Consulting (SLCG) identified and discussed “potential Reg D mischief” at the firm.
The investigation is ongoing, but there are already signs that HJ Sims may have previously breached its duty of care to investors and may continue to do so.
The best way to stay informed as the investigation proceeds or to commence legal claims against Herbert J. Sims & Co. Inc. is to reach out to Zamansky LLC for an initial free consultation. By doing so, we can continue work on our investigation with additional information and provide context to concerns investors may have about securities held with the firm.
In cases where legal claims are likely, this will naturally lead to FINRA arbitration, and you can be assured of our full support as the process plays out.
We would like to speak to anyone that believes they have potential legal claims against HJ Sims, having invested in their Reg D offerings. Reach out to our offices at 212-742-1414 for an initial discussion, or email Jake Zamansky at jake@zamansky.com.
Understanding Reg D Offerings
Regulation D (Reg D) is a Securities and Exchange Commission (SEC) regulation that enables relatively small companies to sell securities to investors without the need to register directly with the SEC.
In accordance with the Securities Act of 1933, any offer of the sale of securities must be registered with the SEC or qualify for an exemption. Reg D provides the framework for such exemptions and is primarily designed to ensure that access to capital markets is not cost-prohibitive.
HJ Sims’ ability to potentially manipulate its Reg D offerings stems from the fact that there must be no general solicitation. As such, this can enable such offerings to avoid broader public scrutiny, especially when a company is the sole brokerage firm to offer such securities.
Reg D Warning Signs
Reg D investment opportunities have long been most relevant to more sophisticated investors. They are often inherently riskier projects than those available on public exchanges, and there is always a realistic chance of failure or default, especially given that the businesses involved are typically smaller and, therefore, unable to simply absorb losses and overcome cash flow interruptions.
However, the inherent risk of these investments was thrust into the spotlight in August 2022 when the Securities and Exchange Commission elected to issue an Investor Bulletin through its Office of Investor Education and Advocacy.
Specifically, the SEC wanted to highlight the fact that unregistered offerings were a relatively easy target for fraudsters seeking the ideal vehicle for investment scams.
The bulletin commented on the usefulness of Reg D as a concept, something that has drawn widespread praise since its implementation for the inherent simplicity that is so often lacking in the financial services industry. Indeed, companies only need to submit a single sheet to the SEC detailing basic information about the firm, what it wants to achieve, and how much capital it seeks to raise.
Of course, that simplicity, combined with the high-pressure sales tactics investors have virtually come to expect from such fundraising, makes them ripe for manipulation.
There are prospective plans in place to potentially revise Reg D regulations, particularly a change to what being an accredited investor means – undoubtedly in an effort to protect retail clients from a financial product that is potentially far more complex than the application process implies.
The Case Against HJ Sims
Reg D offerings are not inherently bad, and smaller businesses that may be unable to afford SEC registration can raise capital in an efficient way from those that believe in their model. However, there is a legal basis for the belief that HJ Sims has manipulated the Reg D concept in exactly the manner warned about by the SEC in their bulletin.
Maintaining Control as the Sole Brokerage Firm
Of the information gathered so far, perhaps the most interesting is the fact that many of the companies through which the Reg D offerings were issued were either owned by or strongly linked to HJ Sims executives.
This could be considered a conflict of interest even if everything about the offerings was above board. However, it is also important to look at the numbers. According to recent findings from the investigation, HJ Sims sold a total of 93 Reg D offerings in the past ten years. They were the sole brokerage firm to sell 84 of them. Again, the very fact that 84 of 93, or over 90 percent of all Reg D bonds, were internalized indicates the capacity for manipulation, even if it fails to prove the intention.
Breaches of State Laws and Financial Industry Regulatory Authority Rules
Furthermore, it has come to light that of the Reg D offerings available to HJ Sims clients, at least 43 have failed to file their annual registration forms, which immediately sees them falling foul of state law covering HJ Sims’ headquarters in Fairfield, CT.
Meanwhile, most of the offerings appear overvalued by conventional investment metrics, with at least ten already known to have defaulted. Defaults are not uncommon in Reg D offerings, especially when a smaller business tries too hard to raise capital at the expense of optimizing day-to-day operations. However, few legitimate companies that have ever defaulted have done so without some form of warning.
Typically, the bond price drops significantly before the first default occurs. However, this was not the case, with no warning signs and ultimately perilous financial situations that caught even the most experienced investors by surprise.
Profiting from Both Sides
HJ Sims derives a significant proportion of its income from commissions and fees. This means that the business was always going to profit from convincing investors to back these “unique” opportunities. If things then went well, the businesses were positioned to thrive, and those that controlled them were likely to profit further. As noted, it would appear that those in control of these businesses were, in fact, HJ Sims executives.
Should the offering not succeed, the capital risks to the business are minimal. Indeed, Reg D offerings are not necessarily a case of “speculate to accumulate”. There is not even a filing fee when submitting a Form D notice with the Securities and Exchange Commission.
Meanwhile, the nature of paying commissions for successful sales, especially to a motivated salesforce, ensures that a significant portion of any risk is borne by the firm’s clients’ money.
Where the Case Stands Today
HJ Sims appears to have covered all bases in profiting from the Reg D program. Bond sales positively impact the bottom line, and the investments funneled into the businesses issuing the bonds allegedly enter the control of senior insiders within the firm.
It is important to note that the majority of these companies are clearly financial vehicles in their own right, and it is not out of the question to assume that funds raised through Reg D offerings have enabled finance professionals already working in the industry to make large bets on riskier projects.
Furthermore, as the investments focus on bonds, those making the investments may be unaware of what the operating companies are doing with the funds raised. A bond is more akin to a loan to a company or organization rather than an investment, and they do not confer voting rights in the manner that conventional stocks and shares might.
As such, investors must trust that their return on investment will be driven by the continued success of the company rather than specific wins and losses. High risk generally means high reward, and it is possible that some firms thrived to the point that there were plenty of profits remaining after meeting bond commitments. However, it also means an unusually high likelihood of failure, which will naturally lead to a default.
It goes without saying that promoting investment opportunities that enable those making commissions from sales to gamble is not becoming of any investment bank. It is also unacceptable not only in the eyes of Zamansky LLC, but also in those of the Financial Industry Regulatory Authority and the Securities and Exchange Commission.
Such is the evidence against HJ Sims that even when operating companies have made legitimate losses for retail clients, there remains the prospect of potential legal claims.
As such, if you have witnessed the failure of a Reg D offering in the HJ Sims portfolio and suffered financial losses as a result, FINRA arbitration may be the next best step. Contact Zamansky LLC for a free consultation and the support and guidance you need to put things right at 212-742-1414.
Frequently Asked Questions
As an ongoing case, investors could be forgiven for having questions about HJ Sims, its Reg D offerings, and what they have done differently from other brokerage firms leading to the investigation taking place.
You will find the most common questions and accompanying answers below, but we invite any investors with further queries to reach out to our law firm at 212-742-1414.
Who Are HJ Sims?
Herbert J. Sims & Co. Inc. is a family-owned brokerage firm that also acts as an investment bank. Headquartered in Fairfield, CT, the company was founded in 1935 and, as of 2022, claims to have approximately $2.2 billion of clients’ money under management.
The business was initially founded during the Great Depression to aid infrastructure development through fixed-income investments and has grown to offer clients a range of financial strategies, including the Reg D offerings for which it is currently being investigated.
Why is HJ Sims Being Investigated?
The report from SLCG Economic Consulting (SLCG) identified that, contrary to the intended nature of Reg D offerings, which are designed to enable operating companies to efficiently raise capital, HJ Sims saw it as an opportunity to essentially gamble their clients’ money.
Furthermore, even when these large bets were won, it is speculated that the gains were kept by HJ Sims executives. Meanwhile, those same executives were happy to shift losses resulting from bad bets onto their retail clients. While this act alone is a clear breach of the firm’s duty of care to its clients, it is only part of what has spurred potential legal claims. It is believed that a perceived immunity to losses encouraged those executives to place large bets on high-risk securities and riskier projects with an unusually high likelihood of failure.
SLCG states that at least ten of the Reg D offerings noted in the report have defaulted on either principal payments or interest. SLCG’s report states that while these bonds were likely almost worthless, HJ Sims maintains a value on them of $75 on average.
Which Reg D Offerings are Under Investigation?
SLCG’s report discussed ten specific Reg D offerings, including:
- Cypress Point Funding LLC
- Gryphon Finance I LLC
- Hawkeye Village Finance I LLC
- HJSI Athena Portfolio Finance LLC
- Madison Funding I LLC
- Poet’s Walk Funding I LLC
- Riverchase Funding LLC
- Sims Cathcart Funding LLC
- Tuscan Isle ChampionsGate Holdings LLC
- Tuscan Isle Holdings I LLC
While these offerings are currently the driving factors behind the investigation, HJ Sims’ Reg D losses may be far more severe given that they were the sole brokerage firm to sell a total of 84 private securities offerings under Regulation D in the last ten years. Given that the firm sold 93 Reg D offerings in total, the numbers are more than sufficient to arouse suspicion.
While there is already a firm focus on the securities outlined above, the ongoing investigation aims to discover whether HJ Sims’ ability to build capital through its risky strategy while passing on losses and fees to investors spread beyond the Reg D offerings already identified.
What Can I Expect If I Take Legal Action Against HJ Sims?
Ultimately, the goal for our clients is to enable them to enter FINRA arbitration if they have suffered losses as a result of the actions of HJ Sims executives. This arbitration is already available to qualified investors – contact us for a free consultation at 212-742-1414 to find out more about the process.
Contact Zamansky LLC With Your HJ Sims Concerns
We are eager to speak to investors that have been involved in the Reg D program at HJ Sims. If you have experienced material capital losses after deciding to invest based on advice from the firm, this will undoubtedly be of interest not only to our law firm but also to the Financial Industry Regulatory Authority and the Securities and Exchange Commission.
HJ Sims appears to have overlooked its own values over the past decade. While the SLCG Economic Consulting report only came to light recently in November 2022, there is every possibility that investors may have been recommended positions in what is effectively a junk bond at any point in recent years.
Zamansky LLC investigates Herbert J. Sims & Co. Inc. because we have reason to believe that investors may have suffered losses through no fault of their own, in conflict with the stated HJ Sims values, and in violation of the rights that financial advisors are legally obliged to protect.
If a bond you have held with HJ Sims has defaulted or significantly dropped in price, we are interested in hearing from you and supporting you in seeking a resolution from the firm.
We offer an initial free consultation with all clients, and the most efficient way to get in touch is by calling the Zamansky LLC offices at 212-742-1414.