The tentacles of litigation stemming from a series of oil and gas private placements that failed two years ago have ensnared a giant in the clearing and custody business, National Financial Services LLC, a unit of Fidelity Investments.
Milo H. Segner, the trustee overseeing the liquidation of assets of Provident Royalties LLC, which the Securities and Exchange Commission charged with fraud in 2009, last month requested that a federal judge in Dallas issue a subpoena to NFS.
In the court filing, he said that he wants access to retirement account documents of clients of four broker-dealers that sold preferred stock of Provident and used NFS as a clearing firm.
Dozens of broker-dealers sold the Provident offerings from September 2006 to January 2009, raising $485 million. Regarding NFS records, Mr. Segner said that he wants documents of 579 clients who bought $39.1 million of Provident from four firms: J.P. Turner & Co. LLC, Milkie/Ferguson Investments Inc., National Securities Corp. and Securities America Inc.
A spokesman for NFS, Steve Austin, said that the firm typically doesn't comment on matters involving its correspondent-clearing broker-dealer clients.
Clearing firms don't sell securities but rather hold them for broker-dealers and their clients.
Calling Provident a “massive Ponzi scheme,” Mr. Segner claimed that the “trustee is entitled to information concerning the relationship between the broker-dealers and their respective clearinghouses, and how those funds were transferred, paid for and accounted for by the clearinghouses,” the court filing stated.
Separately, he is suing a due-diligence analyst who assessed the series of Provident offerings, seeking to claw back about $430,000 in fees that the company paid to the analysis firm, Mick & Associates PC LLO.
In a common business practice that has drawn the scrutiny of regulators, product sponsors of private placements, not the broker-dealers, commonly pay an outside due-diligence firm for a report assessing the deal. In turn, product sponsors also pay broker-dealers a 1% “due diligence” fee when selling the deal.
“Mick's grossly negligent actions, failure to detect and/or ignorance of the Provident Ponzi scheme, and failure to adhere to fiduciary standards vitiate any good faith on its part,” according to the complaint.
Calling the trustee's legal reasoning “specious,” Mick & Associates said that it will vigorously defend itself.
Mr. Segner last year sued dozens of broker-dealers to claw back revenue and commissions from the sale of Provident.
Michael Rochelle, a lawyer for Mr. Segner, didn't return a call seeking comment.
E-mail Bruce Kelly at email@example.com.