B-Ds fight back against litigation on Reg D offerings

Seek to break up mass-arbitration complaints; plaintiffs say that it is a delaying tactic

Feb 21, 2010 @ 12:01 am

By Bruce Kelly

Two broker-dealers are coming out swinging against investors and securities regulators who are looking for redress over the sale of private placements that went belly up last year.

Capital Financial Services Inc. and Securities America Inc. have been named in mass investor arbitration complaints over the sale of private placements, including Medical Capital Holdings Inc., a series of deals totaling $2.2 billion and sold to 20,000 clients from 2003 to 2009. The Securities and Exchange Commission charged Medical Capital with fraud last summer.

Both broker-dealers want to break up those group claims and conduct a series of individual arbitration hearings — a move, plaintiff's attorneys argue, that would slow down the arbitration process and potentially harm investors.

Meanwhile, Securities America responded to a lawsuit filed last month by the Massachusetts Securities Division for allegedly misleading investors over the sale of Medical Capital's private offering. Last Tuesday, the firm sent a stinging reply, telling Massachusetts regulators that the state's lawsuit “misstates facts and miscomprehends the regulatory structure” of such deals, known as Regulation D offerings.

Aggressive responses from brokerage firms in lawsuits, including some involving auction-rate securities, have recently proved successful, said attorney Dennis Concilla, a partner in Carlile Patchen & Murphy LLP.

“Sometimes the best defense is a strong offense,” he said.

In general, there are two ways for broker-dealers to handle such “mass litigation,” Mr. Concilla said. “They can try to get it resolved or they can take the scorched-earth policy.”

He added that neither way is clearly superior and that tactics depend on the facts of the case, and the temperament of the attorneys and their clients.

Securities America's response to Massachusetts, obtained by InvestmentNews, claims that the lawsuit against the company is full of holes — and that the state's regulators don't understand the workings of private placements and Reg D deals.

The lawsuit “mischaracterizes or simply ignores the role of selling securities [by] broker-dealers who are not underwriters [such as Securities America], outside analysts' reports, private-placement memoranda, subscription agreements and selling agreements,” Securities America said in its formal reply to the complaint, which was filed in January.

Brian McNiff, a spokesman for the Massachusetts Securities Division, did not return a phone call requesting a comment.

Both Securities America and Capital Financial are taking clear legal action to push back against arbitration claims brought by investors.

This month, the two firms filed motions with the Financial Industry Regulatory Authority Inc. to “sever,” or separate, the investors' claims. Plaintiffs' attorneys grouped together clients into large lawsuits against the broker-dealers. If approved by Finra, each investor would go before a separate Finra arbitration panel.

That would slow down the arbitration process and extend hearings in the matter for as long as five years, said Jeffrey B. Kaplan, a partner in Dimond Kaplan & Rothstein PA. He and his firm are representing 15 investors in a mass-arbitration case against Capital Financial and 17 investors in a group filing against Securities America.

“We believe that the brokerage firms are seeking to sever merely as a delay tactic,” Mr. Kaplan said. “Finra would be overwhelmed with the number of individual cases if grouping ... of various, very similar claims were not permitted.”


Finra likely could not handle the flood of thousands of individual cases that would be filed, he said. “What's more, Finra arbitration ... [is] supposed to foster efficiency and avoid contradictory results. The brokerage firms' motions to sever would run counter to those goals.”

The investors' complaint against Capital Financial was filed in November and alleges that they were sold unsuitable investments. It seeks damages of $5.2 million. The complaint against Securities America, which charges that the investments the plaintiffs were sold were “unsuitably risky and illiquid,” seeks $3.7 million in damages.

The brokerage firms certainly don't see their strategy that way.

“Because of the myriad factual situations giving rise to [investors'] claims, and the fact that there may be different counterclaims and defenses to each of those claims, [Capital Financial is] making this motion to sever those claims,” the firm said in its Finra filing. The 15 investors “have improperly attempted to join together their unique and separate individual arbitration claims.”

The Securities America motion echoes Capital Financial's. Investors in the claim share little, if anything, other than the fact they bought private placements that went bad, including, for some, Medical Capital notes, the motion states.

“They made these investments in different states, through different registered representatives, at different times and under different circumstances,” it states. “The claimants have no more connection among them than any other investors who purchased the private-placement products,” the motion states.

Janine Wertheim, senior vice president and chief marketing officer for Securities America, declined to comment on the firm's legal strategy.

Brian Boppre, president of Capital Financial, was unavailable to comment last week.

E-mail Bruce Kelly at bkelly@investmentnews.com.


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