A broker-dealer that was a prominent seller of high-risk private placements that wound up going bust has almost wiped the slate clean of costly litigation that could have impaired the firm's financial condition.
Workman Securities Corp. this month reached an agreement with the
Financial Industry Regulatory Authority Inc. to pay $700,000 for partial restitution to more than a dozen clients who had sued the firm over investments in Medical Capital Holdings Inc. and Provident Royalties LLC — two series of private placements that the Securities and Exchange Commission charged were fraudulent in 2009.
Both the Medical Capital and Provident deals were widely distributed by dozens of independent broker-dealers, some of which have shut down because they were unable to face the burden of litigation costs.
“Workman views this as a terrific resolution so it can move forward,” said Benjamin Skjold, partner at Skjold Barthel PA and attorney for Workman, which has 171 reps. The firm has “effectively” paid the $700,000 and now turns to face about a half dozen remaining individual securities arbitration claims from clients.
Workman's insurance carrier, Catlin Specialty Insurance Co., has paid $2.3 million to clients who sued the firm, Mr. Skjold said, adding that the process of settlement and restitution took about a year. “We've worked diligently internally, with the insurance carrier and with Finra to get claims resolved,” he said.
Workman's reps sold a little more than $9 million of Provident Royalties private placements,
according to U.S. bankruptcy court filings from last summer in the Northern District of Texas. The amount of Medical Capital notes the firm's reps sold to investors is not known. (To see a list of more than 50 B-Ds that sold Provident, as well as the commissions earned on these sales,
click here.)
According to Workman's profile on Finra's BrokerCheck system, the firm's supervision and due diligence when selling Regulation D private placements had big holes.
“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” Finra alleged. “The firm failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.”
(Read the full Finra letter of acceptance, waiver and consent with Workman.)
Broker-dealer sales of Reg D private placements are very high up on Finra's watch list. In a meeting of brokerage executives this month in Phoenix, James Shorris, executive vice president and executive director of enforcement with Finra, Regulation D private placements and non-traded real estate investment trusts are listed as the first and second areas of focus for Finra, respectively. (For more, read
'Private deals at the top of Finra's hit list'.)
Mr. Skjold declined to comment about specific Finra allegations.
Other broker-dealers have not fared well in settling the gusher of litigation that erupted after the SEC charged Medical Capital and Provident with fraud. On Friday, QA3 Financial Corp., another leading seller of Provident deals,
submitted a request with Finra and the SEC to terminate its license as a broker-dealer. QA3 and its insurance carrier, also Catlin, had been sparring in court and exchange lawsuits in the past six months about the amount of coverage owed to the firm.
