It's been a tough year for some independent broker-dealers, with at least nine closing shop, some due to a lack of capital. Steve Wild, the chief executive and principal owner of besieged QA3 Financial Corp., which faces $42 million in legal liabilities, said his firm won't be number 10 on the list.
In an e-mail to InvestmentNews. Mr. Wild wrote that QA3 Financial, which has about 450 reps and advisers, will not become another of this year's failed brokerages such as GunnAllen Financial Inc., which collapsed after failing to meet industry net-capital requirements,
Unlike some now-defunct firms, QA3 is indemnified from potential liabilities from failed private placements, Mr. Wild said. Essentially, that bolsters its financial position as it contends with a variety of lawsuits and arbitration claims against the firm, he wrote.
Mr. Wild wrote the e-mail in response to a July 12 InvestmentNews article that examined the net-capital levels of broker-dealers that were leading sellers of Provident Royalties LLC private placements.
“What this means is that if the named broker-dealers are found liable and if there are any awards made to investors, then QA3's portion will be paid by Provident Royalties,” Mr. Wild wrote. “More simply, for every dollar the trustee collects from QA3, the trustee will be paying the exact same amount back to QA3.”
Last summer, the Securities and Exchange Commission charged Provident Royalties with securities fraud, and the company then filed for bankruptcy protection. Last month, the bankruptcy trustee sued for damages the broker-dealers that sold the notes, including QA3, which sold $32.6 million of Provident.
According to its 2009 audited financial report, QA3 had $118,000 of excess net capital at the end of last year. The firm faces other lawsuits and arbitrations due to different failed private placements.
Some attorneys questioned Mr. Wild's assertion that an indemnification from a bankrupt entity, particularly one charged with fraud, has any worth. Indemnification clauses are written with very specific areas of coverage, noted Mark Bane, partner and head of the bankruptcy and business restructuring group at Ropes & Gray LLP. “I have never seen an indemnity clause that covers intentional fraud,” he said.
QA3's attorney, Thomas Dahlk, a partner at Husch Blackwell Sanders LLP, acknowledged that the indemnification is a complicated legal issue and questions the Provident trustee's legal standing in its suit against QA3 and dozens of other broker-dealers.
Meanwhile, Mr. Wild, QA3's owner and CEO, made it clear that his firm is in a different class than those that have failed.
In his e-mail, he wrote: “Maintaining net capital is something we take very seriously, but please don't put us in the same category as GunnAllen or Okoboji [Financial Services Inc.],” which sold, respectively, $22.3 million and $21.9 million of Provident notes. Those two firms were shut down this year.
“GunnAllen was notorious for running a loose ship. In fact, whenever QA3 was in the process of recruiting an adviser, if they did not meet our standards, we would refer them to GunnAllen,” he wrote.