$1.5M arb judgment forces B-D to declare bankruptcy, deregister

Private placements have slain another broker-dealer, with the firm deregistering from Finra two weeks after losing a $1.5 million arbitration claim in which an investor alleged unsuitable recommendations of limited partnerships.
Cambridge Legacy Securities LLC of Dallas lost the hefty arbitration claim March 30. On April 13, the firm filed its broker-dealer withdrawal request with the Financial Industry Regulatory Authority Inc. and a few days later, it filed for bankruptcy protection, according to documents filed in the U.S. District Court for the Northern District of Texas in Dallas.
In the arbitration case, a three-member Finra panel awarded Marvin Blum $445,000 in compensatory damages, $900,000 in punitive damages, $150,000 in attorneys’ fees and $12,000 in costs, as well as interest.
Cambridge Legacy Securities is owned by The Cambridge Legacy Group Inc. That firm’s chief executive, O. Ben Carroll, did not return a call Tuesday afternoon seeking comment. The broker-dealer’s president, Tommy Fincher, also did not return a call.
Mr. Carroll is being investigated by Finra for failing “to have reasonable grounds to believe that the private placements offered by Cambridge Petroleum Group and Cambridge Legacy Group pursuant to [Regulation D] were suitable for any customer,” according to his profile on Finra’s BrokerCheck.
Finra fined Mr. Carroll $25,000 in 2010 and suspended his privilege to act as a principal for three months. He is no longer registered with Finra.
Cambridge Legacy Securities may be out of business, but an affiliated RIA, Cambridge Legacy Advisors Inc., is open and running, noted Richard Lewins, the attorney for Mr. Blum.
The broker-dealer “sold my client nine different private placements over thirteen months” totaling $500,000, Mr. Lewins said. “They did no independent due diligence on any of the investments, and relied on the issuer to do the due diligence.”
Adding that his client was more than 70, had cancer and needed income when he bought the investments, Mr. Lewins said: “They just bankrupted the broker-dealer and left everyone with claims against them high and dry and are doing business as usual as an RIA.”
Mr. Blum has received no money from Cambridge Legacy Securities, Mr. Lewins said.
Cambridge Legacy Advisors has $130 million in assets and 1,523 customer accounts, according to its filings with the Securities and Exchange Commission.
The cost of defending litigation stemming from the sale of allegedly fraudulent private placements and failed real estate partnerships has decimated the small to midsize broker-dealer industry over the past three years. Dozens of firms have been forced to close after losing large arbitration awards to investors, and much of the litigation that has swamped firms stemmed from the sale of three products: notes issued by Medical Capital Holdings Inc., preferred stock from deals sponsored by Provident Royalties LLC and tenant-in-common exchanges manufactured by DBSI Inc.
The Securities and Exchange Commission charged the first two sponsors with fraud in 2008. A federal judge later closed the civil proceeding against Medical Capital, allowing a potential criminal investigation to proceed, while executives with Provident settled the matter with the SEC over the winter. DBSI entered bankruptcy in 2008, and several broker-dealers are facing millions of dollars of claims from clients over those investments.
Mr. Lewins declined to name the private placements that were sold to his client, except to say that neither Medical Capital or Provident Royalties were involved.
Cambridge Legacy Securities had 40 advisers and generated $3.6 million in revenue in 2010, the last year its records were available of the SEC’s website.

Related Topics: Financial Industry Regulatory Authority