Facing bankruptcy and a potential net capital violation, QA3 Financial Corp. told its 400 brokers late on Friday afternoon it will close in a week.
In an e-mail that landed in brokers in-boxes about an hour after the close of the market, Steve Wild, QA3's owner and CEO, wrote: “In light of the arbitration award rendered against QA3 on January 14, and the fact that our errors and omissions carrier has not yet provided coverage set forth in our policy, we have made the difficult decision to cease conducting business as a broker-dealer effective as the close of business on February 11.”
One industry source, who asked not to be named, summarized the e-mail to InvestmentNews. A broker with QA3, who also declined to be identified, read the e-mail to InvestmentNews.
The broker said that he had recently been a target of recruiters and was disappointed about the firm's closing.
According to a number of industry sources, QA3 has been in discussions with other independent broker-dealers about a potential sale of the firm's assets, but ultimately, a deal failed to materialize.
Mr. Wild did not return phone calls on Thursday and Friday to comment about the future of the firm.
QA3, which at its peak did $50 million per year in gross revenue, would be one of the most substantial independent broker-dealers to exit the business in the past year. (For a profile of QA3's rep count and recent financials, click here.)
According to InvestmentNews, about two dozen firms last year decided to shut down or were forced to shut down, facing rising legal costs and a tough regulatory environment.
Mr. Wild has been one of the most successful entrepreneurs in the independent-contractor broker-dealer industry. In 1998, he sold Securities America Inc. to American Express in a time when insurance companies were paying premiums for independent broker-dealers. It is not known how much American Express paid Mr. Wild for Securities America.
QA3 has been unraveling for quite some time. It was one of the leading sellers of Regulation D private placements in the last decade, and two of those deals, Medical Capital Holdings Inc and Provident Royalties LLC, face fraud charges from the Securities and Exchange Commission.
The firm tried to raise money in 2009, offering Regulation D private placements notes. According to filings with the SEC, the firm was looking to sell $3 million in debt to complete acquisitions — but also said it had raised no money for the deal as of July 2009.
In September, the firm claimed it faced bankruptcy because of a dispute with its insurance carrier over the amount of coverage that the independent broker-dealer has for legal claims stemming from its sale of high-risk private placements.
The company claimed that it has coverage for $7.5 million of legal claims, damages and expenses stemming from the sale of Reg D offerings. Its carrier, Catlin Specialty Insurance Co., said that the coverage is capped at $1 million.
Then, in January, QA3 lost a $1.6 million arbitration award to an elderly couple who invested in real estate deals that went bust. It appears that decision was the arbitration award Mr. Wild mentioned in his e-mail to brokers late on Friday.
Regulators with the Financial Industry Regulatory Authority Inc. have been watching the firm's levels of net capital quite closely as of late, as losses of securities arbitration claims have to be recorded in a firm's net capital calculations. 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.