Providence Financial accused of fraudulent sales

A US company linked to a provider of a popular retail investment in the UK is being investigated for selling “fraudulent” securities.

Providence Financial Investments has been accused by the Securities and Exchange Commission, the US regulator, of offering "ongoing fraudulent and unregistered" securities, and ordered to stop trading.

Providence Financial is part of the same group of companies as Miami-based Providence Global Ltd, whose subsidiary company Providence Bonds II recently offered UK investors a so-called “mini-bond” – a high-yielding investment product.

The UK mini-bond documents were approved by Independent Portfolio Managers, a Financial Conduct Authority regulated firm. IPM also approved documents and acted as a security trustee for the collapsed Secured Energy Bonds (SEB) mini-bond, which left UK retailer investors more than £7million (€8m) out of pocket.

The FCA is writing to the SEC for more information on the investigation into Providence, according to a person aware of its plans.

Hard to get redress

In June 2015, IPM said that despite being linked to the collapsed SEB bond, it had “tried to increase the oversight” it had of Providence Bonds. IPM did not respond to requests for a comment on this story.

Mini-bonds have attracted thousands of retail investors over the past two years with projections of high returns.

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

According to an SEC filing, Providence Financial told US investors that their money would be spent on “factoring” accounts in Brazil, returning 12 to 13 per cent to investors.

When “factoring”, investors buy unpaid invoices from companies at a discount, and rely on the invoice being paid in full to make a profit.

The SEC said it found Providence spent “at best” less than 68 per cent of investors’ money financing Brazil factoring transactions, and that the company had been “unable to account” for how it spent the remaining money.

Money to ‘insiders’

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

The SEC also found that Providence Financial owed investors $64 million (€56.5m) in 2015, almost six times the $10.6 million it had invested. Providence Financial’s current situation “appears extremely tenuous”, said the regulator.

In response to the FT’s questions, 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.

A separate Guernsey-based fund run by Providence has been placed into administration in recent weeks.

In a letter to the Guernsey fund's investors, administrator Andrew Isham, a partner at Deloitte, said he was not yet able to provide details of the fund's value but said an "urgent" review of money lent to the company's Brazilian arm – Providence Fomento – was being undertaken.

Antonio Buzaneli, the chief executive of Providence Companies Group, is prominently listed on both the websites of Providence Bonds II, the UK mini-bond company, and Providence Financial, the US company under investigation.

Mr Buzaneli declined to comment.

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 an attempt to raise £25 million.

– Copyright The Financial Times Limited 2016