QA3 Financial Corp., an independent broker-dealer that was a leading seller of high-risk private placements over the last decade, in a recent lawsuit said its insurance carrier was pushing it into bankruptcy by failing to back up its coverage.
The legal tussle between QA3 and its insurer, Catlin Specialty Insurance Co., continues. QA3 filed its initial suit against Catlin in September in U.S. district court in Miami alleging that Catlin was not living up to its insurance contract and the firm had coverage of $7.5 million for legal claims, damages and expenses stemming from private placements.
QA3 then pulled the suit in early November due to a legal technicality but intends to file another lawsuit, executives with the firm said.
Catlin then sued QA3 in U.S. district court in New York in late November, asserting that its coverage for QA3 private-placement claims was capped at $1 million. That suit is still playing out.
In the September lawsuit, QA3, which houses about 450 independent reps and advisers, said it was facing bankruptcy due to the dispute with Catlin.
“As a result of Catlin's erroneous coverage position[s] and failure to fully and properly defend and indemnify QA3 as required under the policy, QA3 has suffered, and continues to suffer, damages and is facing bankruptcy,” QA3's lawsuit stated.
Stephen Wild, QA3's CEO and principal owner, is keeping mum about the dispute. “On advice of counsel, I can't respond to anything that's in the lawsuit,” he said.
QA3's lawyers were not getting paid, said Greg Bolton, the firm's general counsel.
“At the time the complaint was filed, Catlin hadn't paid law firms representing QA3 and its advisers. The lead firm was threatening to quit because they hadn't been paid anything. A partial payment has been made,” he said.
When asked if the firm is facing bankruptcy, Mr. Bolton, said: “There are multiple claims and multiple parties involved. We are actively managing the litigation [stemming from private-placement lawsuits]. We feel that there will be a positive outcome for all the parties.”
Catlin issued the insurance policy in question Nov. 1, 2008. The premium for the policy was $548,250 and it expired a year later, according to the lawsuit.
Catlin did not issue a new policy to QA3 in 2009, according to the lawsuit.
Catlin's spokesman, James Burcke, is based in London and did not immediately respond to an e-mail requesting comment.
Meanwhile, QA3 is enmeshed in arbitration claims from clients who bought private placements that went belly up. An exhibit in Catlin's lawsuit lists 59 separate Financial Industry Regulatory Authority Inc. arbitration claims and lawsuits against QA3, and its executives and brokers. The private placements listed included Medical Capital Holdings Inc., Provident Royalties LLC and DBSI Inc.
In 2009, the Securities and Exchange Commission charged Medical Capital and Provident with fraud, alleging that both were Ponzi schemes. Both are in receivership.
QA3 was a leading seller of Provident deals.
On June 21, the liquidating trustee for the Provident receivership, Milo H. Segner Jr., filed a lawsuit in federal bankruptcy court in Dallas against almost 50 broker-dealers, including QA3. The lawsuit alleged that the firms “failed miserably in upholding their fiduciary obligations” when selling the series of Provident private placements.
According to U.S. bankruptcy court filings in that case, QA3 sold $32.6 million of Provident, collecting almost $7 million in commission. The sales numbers may be misleading because it's not clear in the filing if that is the firm's total sales of the product or sales of private placements that defaulted.
Mr. Wild said that regulators have looked into QA3 and its practices, and nothing has come of it.
“When this issue with Provident first surfaced two years ago, we had the SEC investigators in our office, and they spent a good week in the office,” he said. “We provided them with every document that we had for Provident, and no action was taken.”
“We feel we exceeded all [due-diligence] standards from a regulatory standpoint,” he said. “There's nothing we're concerned about from a regulatory point of view. We do everything by the book, for starters, and generally exceed regulatory standards.”
In July, Mr. Wild said QA3 was indemnified from potential liabilities stemming from Provident, which was a series of oil and gas investments.
The fallout from sales of private deals has taken its toll on several independent broker-dealers. A number of broker-dealers that sold private placements issued by Medical Capital and Provident have folded. The most prominent is GunnAllen Financial Inc., which sold $22.3 million of Provident private placements, according to the court filings. GunnAllen filed for bankruptcy protection in April.