SEC Orders Providence Financial to Stop Trading after UK Investors Lose £7m

The US firm has been accused of selling fraudulent securities and ordered to stop trading.

The US Securities and Exchange Commission (SEC) has accused Providence Financial Investments of selling fraudulent and unregistered securities and has ordered the firm to cease trading, according to the Financial Times today.

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Sold Fraudulent Securities

The company is part of Providence Global Ltd, whose subsidiary company Providence Bonds II recently offered UK investors a ‘mini-bond’ high-yielding investment product.

The UK mini-bond documents were approved by Independent Portfolio Managers (IPM), a Financial Conduct Authority (FCA) regulated company.

IPM also approved documents and acted as a security trustee for the collapsed Secured Energy Bonds mini-bond, which left UK retailer investors more than £7 million out of pocket.

The FCA has reportedly written to the SEC for further information on the investigation into Providence Financial.

Case History

Mini-bonds have attracted many retail investors in the last two years due to their projections of high returns.

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They are not eligible for the Financial Services Compensation Scheme and in the event of defaults, investors have found it hard to obtain redress. Holders of the Secured Energy Bond were told by two UK financial regulators that their case could not be examined.

According to a SEC filing, Providence Financial reputedly told US investors that their money would be spent on “factoring” accounts in Brazil, delivering a return of between 12-13 percent to investors.

The SEC said it found Providence spent no more than 68 percent of investors’ money financing Brazil factoring transactions, and that the firm was unable to account for how it spent the remainder of the funds.

The watchdog said the company had used funds to pay “millions of dollars” to Providence Financial “insiders”, and had not disclosed to investors a 6 percent annual commission paid to “unregistered brokers” for selling its investment.

It also found that Providence Financial owed investors $64 million in 2015, nearly six times the $10.6 million it had invested.

In response to questions posed by the FT, Providence Financial said its operations in the US were separate from its operations in the UK, and that its US company was continuing to work with the regulator.

Providence said its UK bond offerings had met all of their interest payments to date, although a separate Guernsey-based fund run by the company has recently gone into administration.

According to the Financial Times, the UK’s Providence Bonds II, the fund run by Providence Financial in the US and the suspended Guernsey fund, aim to make returns by deploying cash raised from investors in its invoice financing operations in a range of countries, including Brazil. The four-year mini-bond is part of its plan to raise £25 million.

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