A federal judge's approval this month of a class action settlement is good news for representatives from Securities America Inc. whose disgruntled clients named them in arbitration complaints over sales of private placements that went bust.
On Aug. 4, U.S. District Court Judge W. Royal Furgeson Jr. in Dallas signed an order to approve an $80 million settlement between Securities America and class action investors suing the firm over two series of private placements, Medical Capital Holdings Inc. and Provident Royalties LLC.
In April, a separate $70 million settlement was reached with investors who had filed individual arbitration claims against some brokers.
With the settlement approved, reps and financial advisers at Securities America whose employment records were tarred with open or pending arbitration claims due to MedCap and Provident sales can now see closure.
“We are very pleased to put this matter behind us,” said Janine Wertheim, a spokeswoman for the firm. “To the extent an individual arbitration claim required disclosure on a representative's U4 when the arbitration was filed, the settlement of each arbitration will be treated like any other settlement and will likewise be disclosed as being resolved by the firm for a given amount with no contribution from the representative.”
A form U4 is the registration statement used to file information about the broker with the Financial Industry Regulatory Authority Inc.
Firms are less likely to recruit a broker if he or she has open or pending arbitration claims, industry observers said.
The settlement of an arbitration claim “means the lawsuit can't come back and bite a new recruiting broker-dealer,” said Larry Papike, president of Cross-Search, a recruiting firm. “The status of pending arbitration was a big problem for brokers.”
Securities America brokers from 2003 to 2008 sold about $700 million of MedCap notes. Although other broker-dealers sold the notes, Securities America was by far the biggest distributor of the private placements.
The Securities and Exchange Commission in 2009 alleged that both Medical Capital and Provident Royalties had committed fraud.
Mr. Furgeson also approved more than $18 million in fees for the class action lawyers, which will be deducted from the $80 million settlement.
BIG-DEAL DEPARTURES
Separately, two of Securities America's top advisers, including the head of its largest financial adviser group, walked out the door last week to join rival LPL Financial LLC.
Donald Patrick, president of Integrated Financial Group of Atlanta, has joined LPL. His group has about 50 brokers and annually produces about $10 million in fees and commissions, according to industry executives and recruiters.
Meanwhile, Bobby White left Securities America to join LPL. He is chief executive of Reliance Financial Group LLC, which is based in Birmingham, Ala., and produces about $6 million in fees and commissions each year, according to industry executives and recruiters.
Ms. Wertheim declined to comment about the brokers' production of fees and commission.
The moves by Mr. Patrick and Mr. White occur against the backdrop of Securities America's continued attempts to find a buyer. Ameriprise Financial Inc., the independent broker-dealer's parent, put the firm up for sale in April, days after reaching the settlement agreement.
As the firm has negotiated with a steady stream of suitors, a stream of brokers have departed. Losing a star such as Mr. Patrick, however, is a more significant blow.
“When the No. 1 guy in a group of 1,800 advisers goes, if I'm an adviser in the top 10 or top 20, I'd start asking questions,” said Phillip Flakes, managing partner at StarPoint Consulting Group LLC, an industry recruiter that has recently moved brokers from Securities America to other positions.
Reps and advisers at Integrated Financial Group who generate close to 25% of the group's annual production — or about $2.5 million — won't move to LPL but stay with the firm, Ms. Wertheim said.
“Securities America has had a great relationship with Don Patrick and the advisers in his branch. We're happy to have been a part of their success and wish them all the best,” Ms. Wertheim said.
“We wish Bobby White and the advisers who are leaving with him the best,” she said. “The advisers that are staying say they don't want to give up the tremendous value they receive from Securities America.”
Mr. Patrick is traveling and couldn't be reached for comment.
“We had made the decision to make a change within the next couple of years. The bad press around Securities America sped that up,” Mr. White said.
He said that his firm had started its own registered investment adviser and that LPL's hybrid business model for both brokers and investment advisers supports that kind of business nicely.
Competing broker-dealers have had some success picking off brokers from Securities America.
For example, Commonwealth Financial Network recently landed three practices of Securities America reps that annually generate $4.2 million in fees and commissions, and Cambridge Investment Research Inc. recruited reps who produce $3.8 million in fees and commissions. Both firms expect to land reps who produce millions more in fees and commissions by the end of next month.
Many reps, however, are sitting tight until the firm finds a new buyer with the hopes of winning a “stay bonus,” industry executives and recruiters said. Such a bonus is standard in the industry when one firm buys another in order to keep the brokers in their seats.
A spokesman for LPL didn't return a call by press time.
