Teetering on the edge, CapWest Securities Inc. lost a costly Finra arbitration case this month. The ruling is potentially dire news for a firm which was a leading seller of failed private placements over the last decade.
In March, the brokerage reported in its annual filing with the Securities and Exchange Commission that a number of events, including three straight years of losses, a decline in net capital and a surge in lawsuits, “raise substantial doubt about the company's ability to continue as a going concern.”
The filing reported that the firm had net capital of $80,420. On Monday, a Finra arbitration panel awarded clients of CapWest and an ex-broker, Attila Toth, $438,000 in damages, plus interest and $130,000 in legal fees.
According to
Financial Industry Regulatory Authority Inc. rules, a firm has 30 days to pay an arbitration award and confirm that it has made the payment. Finra has the authority to suspend firms and individual reps who do not pay arbitration awards.
CapWest was a big seller of two series of private placements that the SEC in 2009 alleged were fraudulent. CapWest brokers sold $22 million in private placements issued by Provident Royalties LLC and $30.6 million of Medical Capital Holdings Inc. notes, according to court documents (Click on the following link to see a list of other
B-Ds that sold MedCap notes). In the latest arbitration claim, four clients claimed negligence and misrepresentation in the sale of oil-and-gas ventures Striker Petroleum and Provident (Click on the following link to see
a list of B-Ds that sold Provident notes.)
The possibility of CapWest's shutting down due to the litigation was raised as the case proceeded, said Salvadore Ongaro, the lawyer for the claimants. “We would probably push them out of business was what I was told, if we got an award,” he said.
While CapWest did not refer to ceasing operations during the arbitration proceedings, the B-D had made that point over the past year to investors and clients, Mr. Ongaro added.
“It's really a black mark on the industry if they do withdraw.”
When broker-dealers shut down, they file a form dubbed a BDW — for broker-dealer withdrawal — with Finra.
“It's difficult for CapWest to argue they have no money when they made so much money from private placements,” Mr. Ongaro said. “The award will test the wherewithal of CapWest and its parent company [CapStone Financial Group Inc.], if they want to keep [CapWest] in business.”
Dale Hall, chief executive of CapWest, said last night that the firm had not filed withdrawal papers with Finra and was not planning to do so this week.
Mr. Toth, the broker in the matter, worked for CapWest from February 2007 until July 2008 before taking a job at another firm. He no longer is affiliated with a broker-dealer. Finra suspended him in May for failing to comply with a separate arbitration award, according to his profile on the BrokerCheck system. Mr. Toth did not return a call today seeking comment.
