In what can only be viewed as a surprise outcome, an independent broker-dealer has won a rare legal victory in the continuing scrum over private placements that has forced several broker-dealers to shut down.
In federal court in Atlanta last Tuesday, a judge dismissed a class action against J.P. Turner & Co LLC, one broker-dealer among dozens that sold notes from Provident Royalties LLC, a firm that packaged oil and gas deals and was charged with fraud in 2009 by the Securities and Exchange Commission. Although 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 broker-dealer owed a duty to confirm the accuracy of Provident's statements in the private-placement memoranda, he said. According to the court order, Ms. Carnes didn't 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,” he said.
“I don't believe the courts in other cases got to that question,” Mr. Weiss said. “I think this is a significant win.”
Other investor lawsuits against broker-dealers over Provident Royalties and another failed series of private placements from Medical Capital Holdings Inc., are winding their way through federal courts in California and Texas. Regulators, including several states, the SEC 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 GunnAllen Financial Inc., Okoboji Financial Services Inc. and QA3 Financial Corp., 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. The firm filed for bankruptcy protection a few weeks before the SEC charged it with fraud. (Click here for a list of 50 indie B-Ds that sold Provident, as well as the commissions earned.)
Provident Royalties is in receivership. J.P. Turner sold the preferred stock of Provident Royalties from September 2006 to January 2009, according to the lawsuit. 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.”
Their allegations against Provident included:
• The alleged commingling of investor funds.
• Money raised from the offerings allegedly wasn't invested as stated in private-placement memoranda.
• Money from clients who invested in later Provident offerings was being used to pay dividends and returns of capital to other investors, a classic sign of a Ponzi scheme.
E-mail Bruce Kelly at email@example.com.