At the same time that LPL Holdings Inc. and the three broker-dealers it bought from Pacific Life Insurance Co. were filing suit against the insurer, LPL was reaching out to its advisers to reassure them that the dispute wouldn't affect their businesses.
On Nov. 20, LPL sued Pacific Life, claiming that the latter was in breach of contract and trying to duck paying potentially millions of dollars of settlements and awards stemming from rogue brokers at the three subsidiaries, which were sold to LPL in 2007 for about $100 million in cash and stock.
In its lawsuit, filed in New York State Supreme Court in Manhattan, LPL said that “it is apparent that Pacific Life is merely seeking to avoid its express contractual obligations” over the payment stemming from arbitration claims.
The same day, LPL sent a note to its network of 12,000 advisers, telling them about the legal development.
“We do not expect this legal matter to have any bearing on your business, your access to Pacific Life products or how you serve your clients,” wrote Bill Dwyer, LPL's president for national sales and marketing.
Not 'an issue'
“I don't see this as an issue,” said Frank Congemi, an LPL adviser. Pacific Life needs the broker-dealers and reps to sell its products, he said.
Mr.Congemi also doesn't see how annoying LPL would be good for Pacific Life.
He was formerly affiliated with Mutual Service Corp., one of the former Pacific Life firms. Along with about 1,700 other advisers, his securities license was transferred to LPL Financial, the biggest broker-dealer in the network, in September.
That was when LPL moved the former Pacific Life brokers onto its platform entirely, and industry observers have said that the move may have added to the legal dispute between the two sides.
Although many advisers have no reason to worry about the matter, LPL has set aside money as a result of the transfer of representatives and client accounts from the Pacific Life broker-dealers to LPL. Regulators required LPL to put the cash aside, LPL said.
“As a requirement for the regulatory approval for the transfer, the affiliated broker-dealers were required to deposit $12.8 million into escrow accounts pending the resolution of certain matters,” LPL said in its quarterly earnings report this month.
According to the LPL lawsuit, Pacific Life, as part of the deal's purchase-and-sale agreement, agreed to indemnify LPL from settlements, judgments, awards and defense costs from investor claims against the three firms for actions occurring prior to the closing of the deal.
So far, Pacific Life has ponied up “millions of dollars of settlement and defense costs related to” investor claims, the lawsuit states. However, the firm has suddenly switched tactics, the lawsuit claims, and refused last month to pay $57,000 to fund a settlement involving one of the broker-dealers LPL acquired, Associated Securities Corp.
In addition to that firm and Mutual Service, Pacific Life sold Waterstone Financial Group Inc. to LPL.
The dispute over which company is responsible for paying investors first came to light in LPL's quarterly earnings report this month. In the report, LPL made veiled references to the dispute.
Caving in
According to the lawsuit, Pacific Life has been searching for a way to cut its liabilities for months. In March, it told LPL that it had no obligation to cover an arbitration award of $8.4 million that had been issued against Associated Securities, according to the lawsuit.
When LPL and Associated Securities challenged that position, Pacific Life “abandoned” its argument and paid for the settlement. Representatives of LPL and Pacific Life said that the lawsuit wouldn't affect their continued relationship.
“As happens from time to time in the best of business relationships, LPL and Pacific Life disagree on the interpretation of a certain contractual provision,” Pacific Life spokeswoman Milda Goodman wrote in an e-mail. “This dispute will now be resolved by the courts, and will not disrupt the ongoing favorable business relationship between LPL, their financial advisers and Pacific Life.”
Likewise, an LPL spokesman, Joseph Kuo, said that the company doesn't expect the dispute to have an effect on the relationship between the company and Pacific Life.
E-mail Bruce Kelly at [email protected].
