In what can only be viewed as a surprise outcome, an independent broker-dealer has won a rare legal victory in the ongoing scrum over private placements that has forced several broker-dealers to shut down.
In federal court in Atlanta on Tuesday, a judge dismissed a class action against J.P. Turner & Co LLC, one broker-dealer among dozens that sold Provident Royalties LLC, an outfit which packaged oil and gas deals and was charged with fraud in 2009 by the Securities and Exchange Commission. While some broker-dealers recently have defeated individual arbitration claims stemming from failed private placements, J.P. Turner is the only broker-dealer to have a putative class action against it dismissed, said Terry Weiss, an attorney for the firm.
Significantly, U.S. District Court Judge Julie E. Carnes of the Northern District of Georgia agreed with J.P. Turner that no facts or legal authority had been cited to support the investors' allegation that the B-D owed a duty to confirm the accuracy of Provident's statements in the private placement memoranda, Mr. Weiss said. According to the court order, Ms. Carnes did not find “any Georgia authority that imposes a duty on a broker to conduct due diligence concerning the investment materials it provides to clients."
The decision could have a positive impact on broker-dealers facing other complaints stemming from investor losses in Provident Royalties, said Mr. Weiss, a partner with Greenberg Traurig LLP. “This is the first time [in the Provident class action litigation] where the judge actually decided the issue that a brokerage firm, which was not an underwriter of the securities — did not owe the kinds of duties and due-diligence obligations that were alleged in the complaint,” Mr. Weiss said.
“I don't believe the courts in other cases got to that question,” he said. “I think this is a significant win.”
Other investor lawsuits against broker-dealers over Provident Royalties and another failed series of private placement, Medical Capital Holdings Inc., are winding their way through federal courts in Texas and California. Regulators, including several states, the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc., also have investigated or sued broker-dealers that sold the products. Many broker-dealers that sold the products – including QA3 Financial Corp., GunnAllen Financial Inc. and Okoboji Financial Services Inc. — have gone out of business or moved to settle class actions because of the crushing legal costs of investor lawsuits.
In total, Provident Royalties raised $485 million from investors before collapsing in early 2009. It filed for bankruptcy protection a few weeks before the SEC charged it with fraud. It now is in receivership. J.P. Turner sold the preferred stock of Provident from September 2006 to January 2009, according to the lawsuit. (Click here for a list of 50 indie B-Ds that sold Provident, as well as the commissions earned.)
The suit was filed against J.P. Turner in September 2009. Investors Ron Brown and Vivian Garcia alleged that the firm was “guilty of failing to disclose a multitude of material facts, which J.P. Turner was, or should have been aware of,” according to the complaint.
The material facts that they alleged included:
ˆ Provident allegedly commingled investor funds.
ˆ Money raised from the offerings allegedly was not invested as stated in private placement memoranda.
ˆ Money from clients who invested in later Provident offerings were being used to pay dividends and returns of capital to other investors, a classic sign of a Ponzi scheme, the complaint said.