Securities America Inc. could go out of business if a federal judge does not approve a $21 million class action settlement related to private-placement litigation against the company.
Kelly Windorski, the independent broker-dealer's chief financial officer, testified in a Dallas courtroom last Friday that if federal judge W. Royal Furgeson Jr. does not approve the settlement, it could spell the end for Securities America, according to four attorneys at that hearing who are representing individual investors in the matter.
“"End of the firm' was the sum and substance” of Mr. Windorski's testimony, said John Chapman, a plaintiff's attorney who represents 70 Securities America investors with losses of about $25 million.
In his testimony, Mr. Windorski said that if a settlement is not approved, it will be a matter of months — or even weeks — before the firm might have to close due to legal costs and arbitration awards.
Mr. Furgeson was expected to issue a ruling on the matter as early as last Friday.
From 2003 to 2008, Securities America sold $400 million of private placements that are in default. As a result, dozens of investors have sued the firm seeking damages.
Friday's hearing was part of a process to determine whether Securities America clients who lost money in private placements could continue their individual lawsuits against the firm or be required to drop those claims and become part of a class action.
That class action also involves
Ameriprise Financial Inc., Securities America's parent.
Ameriprise said recently it had reached a preliminary settlement of $28 million with the class plaintiffs.
Janine Wertheim, a Securities America spokeswoman, did not return telephone calls Friday afternoon to comment.
The firm has about 1,800 reps and advisers who generate $500 million in revenue annually.
The outcome of the case is significant. Critics of Mr. Furgeson contend that his decision to halt legal actions brought by two states against Securities America will have a chilling effect among state regulators and leave investors vulnerable to securities fraud and abuse.
In a legal brief filed last week, the North American Securities Administrators Association Inc. objected to the temporary freeze of administrative actions against Ameriprise brought by Massachusetts and Montana over the sale of the failed private placements.
Mr. Furgeson last month ordered a temporary halt to the states' actions, as well as three arbitration cases against Securities America, while he ruled on a proposal to combine all legal claims against the broker-dealer into a single class action.
Last year, Massachusetts and Montana sued Securities America over its sales of Medical Capital Holdings Inc. notes, which now are in default. The former's administrative proceeding is close to concluding, while the latter's starts next month.
In its brief, NASAA argued: “The request by the [class action] plaintiffs to enjoin the state regulators will not only terminate the efforts of the Massachusetts and Montana regulators, but it will have a chilling effect on all state securities regulators in that, despite their clear statutory authority to take steps necessary to police illicit conduct in their states, they potentially face having that authority impaired by defendants who would run to federal courts to plead poverty.”
NASAA also took aim at the class action lawyers in the case and Ameriprise.
“This case reflects an instance wherein the prospect of gigantic fees has set the terms of the negotiations,” according to the brief. “Presumably to effectuate a speedy resolution to collect fees that would have otherwise been lost to other actions, plaintiffs' counsel has offered Securities America terms that allow Securities America to maintain the minimum net capital to be able to continue to operate after the settlement.”
The potential liability also is “certainly an amount that under even the most extreme circumstances would be less than the total assets of Ameriprise, a multibillion-dollar enterprise,” the NASAA brief said.
At issue is the potential money the investors — and their lawyers — can collect. Investors who are part of the class action could get between 15 and 20 cents per dollar on the amounts that they lost investing in Medical Capital Holdings and Provident Royalties LLC private placements.
Investors suing in arbitration potentially could get 100 cents on the dollar or nothing — depending on the merits of the claim and the Finra arbitration panel.
Attorneys recently said that halting individual investors' right to sue a broker-dealer through arbitration would run counter to legal precedent.
At the center of the dispute is the amount of money Securities America has on hand to pay investors. The firm has settled a handful of arbitration claims arising from the sale of the private placements by its brokers.
At the end of December, the broker-dealer lost a $1.2 million
Financial Industry Regulatory Authority Inc. arbitration claim to an elderly investor who purchased Regulation D offerings from the brokerage firm.
The class action plaintiffs, whose lead lawyer is Dan Girard, argue that stopping legal actions against Securities America was “necessary to protect Securities America limited funds from further depletion,” according to the NASAA brief.
“The settlement with Securities America does not seek to limit the ability of the states to take regulatory actions against Securities America,” Mr. Girard said.
“The states remain free to impose whatever regulatory penalties on Securities America ... they deem appropriate. The problem is that the weight of the pending cases and arbitration proceedings will put Securities America out of business in a matter of months, if not weeks,” Mr. Girard said.
E-mail Bruce Kelly at [email protected].
