Lawsuits suck air out of Securities America’s cash cushion

As it tries to build up a war chest with hopes of settling lawsuits from clients over private placements that have gone bust, Securities America Inc. has seen its capital on hand plummet 86% in the past year, according to the annual report of its parent company, Ameriprise Financial Inc.
The 10-K filing indicated that Securities America had $2 million in “actual capital” on hand at the end of 2010. A year earlier, the firm had $15 million, according to the report. And according to other filings with the Securities and Exchange Commission, Securities America had net capital of $17.4 million in 2008.
According to filings with the SEC, Securities America has a minimum net capital level of about $250,000.
A spokeswoman for Securities America, Janine Wertheim, said the reported drop in capital levels was related directly to a host of legal disputes stemming from clients who bought Reg D offerings for Medical Capital Holdings Inc. and Provident Royalties LLC.
The drop in Securities America’s capital level occurred because the firm “has set aside additional capital for the potential resolution” of the lawsuits, she said. She declined further comment about the firm’s capital levels.
Last month, Securities America reached a preliminary $21 million settlement with class action plaintiffs suing the firm over the failed private placements, while a federal judge froze all arbitration claims against the company. A hearing on the proposed settlement is scheduled for March 18.
According to federal court documents detailing the agreement, the brokerage contributed $7 million of its excess net capital into that fund, with the rest coming from reserves ($2.3 million), future earnings ($11 million), and available cash ($800,000). In addition, potential excess coverage from liability insurance may boost the pot of money by $4 million.
The Financial Industry Regulatory Authority Inc. has eyeballed the potential settlement, according to the documents. Finra has determined that the $7 million payment from excess net capital “will not place the company in imminent jeopardy of a net capital deficiency,” the settlement document states.
According to Ameriprise’s annual report, Securities America clients lost about $400 million from investing in two series of private placements from 2003 to 2009. In 2009, the SEC charged the sponsors of those deals, Medical Capital and Provident Royalties, with fraud.
Regulators at Finra have been watching broker-dealers’ capital levels very closely in the past year. Because net capital hinges on transactions, the figure can vary wildly from firm to firm. For many small broker-dealers, net-capital requirements can be as low as $5,000.
If lawsuits, along with potential fines and claw-backs from regulators, turn into actual losses, broker-dealers need to show enough capital on their balance sheets to pay those losses and meet overall industry standards in order to stay open.
Meanwhile, Securities America’s parent, Ameriprise Financial, said yesterday in its annual report that it was setting aside $40 million in legal reserves for class actions and legal claims arising from the sale of allegedly bogus private placements by Securities America.

Related Topics: Ameriprise Financial, Securities America Inc.