Another independent broker-dealer that sold high-risk private placements is hanging on by a thread, with the firm's management stating grave concerns about the B-D's future.
CapWest Securities Inc. reported in its most recent 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 raft of lawsuits — “raise substantial doubt about the company's ability to continue as a going concern.”
CapWest, which is owned by Capstone Financial Group, reported its audited financials as part of its annual Focus report to the SEC on March 1.
Dale Hall, the CEO of CapWest Securities, did not return messages seeking comment. The brokerage reported a net loss of $109,000 last year on revenue of nearly $3 million.
CapWest is not alone in its struggles. The Financial Industry Regulatory Authority Inc. put the total number of broker-dealers at 4,557 as of March 31. That's 9% fewer than five years ago.
Indeed, a number of broker-dealers that sold private placements
have gone bust in recent months, including QA3 Financial Corp. in February. As a result, securities cops have hiked their oversight of sales of illiquid private placements.
Like many small to midsize broker-dealers that were rocked by the market crash, CapWest's fundamental dilemma is a lack of capital. According to the SEC filing, the firm had net capital of $80,420 at the end of last year. (Click on the following link to see the
excess net capital of nearly 85 top independent broker-dealers.)
“If, as a result of losses from operations of from litigation, the company were to fail to meet regulatory net-capital requirements, it would be required to raise additional capital to continue operations,” the firm's management noted in the filing. “Although the company's parent may assist from time to time with funding for the company, there can be no assurance that the company will be successful in obtaining additional capital on terms favorable to the company, or at all.”
According to court documents, CapWest brokers sold about $22 million of private placements issued by Provident Royalties LLC, which the SEC charged with fraud in 2009. CapWest also sold an unknown amount of DBSI Inc., a packager of real estate deals that was popular among independent broker-dealers. DBSI is now in bankruptcy court. (See a list of
50 B-Ds that sold Provident, along with the commissions generated from these sales. Also, see a list of
B-Ds that sold DBSI.)
CapWest is working with its insurance company to settle several outstanding legal actions against the firm, and faces other claims in Finra arbitration this year, it said in the filing. It also faces five pending civil actions in court.
The firm is working through many of the claims, it said. “Management believes that certain of the pending actions are fully defensible and will result in no liability to the company or insurer,” it said. “Management expects the remaining actions to be settled by CapWest's insurance company, with no additional liability to CapWest.”
