Securities America Inc. is offering investors who filed arbitration claims against the broker-dealer over allegedly fraudulent private placements almost half their money back to settle the claims, according to a source with knowledge of the negotiations.
Securities America and its parent company,
Ameriprise Financial Inc., have offered arbitration plaintiffs 45% to 48% of the value of their claims, according to the source. That represents a significant increase from the 15% to 20% they rejected as part of a class action settlement.
It is not known if the offer, if accepted, would resolve the threat to Securities America's future, since it would apply only to existing arbitration claims, and not affect any outstanding class actions, the source said. However, a lawyer familiar with the matter said an offer close to 50 cents on the dollar would need to be considered seriously by plaintiffs' lawyers.
Securities America has been trying to resolve in one sweep the $400 million in legal claims tied to its sale of two failed private placements, Medical Capital Holdings Inc. and Provident Royalties LLC. The Securities and Exchange Commission charged in July 2009 that the investments were fraudulent. Securities America, which was one of several broker-dealers that sold the investments, has said it was unaware of any problems with the private placements when they were selling them.
A proposed settlement that would have combined the class actions and those of the individual arbitration plaintiffs was rejected by a federal court judge in Dallas this month. Under that deal, plaintiffs would have received about 15 to 20 cents on the dollar. Last week, a mediator met with those involved in the litigation, and this latest settlement offer is a result of those negotiations.
If there is a settlement, it is not known how much the total offer would cost Securities America and Ameriprise. Securities America had offered to settle the class actions for $21 million, and Ameriprise said in a recent SEC filing that it had set aside $40 million in connection with the claims.
Janine Wertheim, a spokeswoman from Securities America, said she had no comment over the continuing mediation.
Meanwhile, Securities America's dire financial position has begun to come into sharper focus. According to a transcript of a March 18 hearing in Federal Court in Dallas, it was revealed that Securities America's auditor had serious concerns about the firm's future.
During questions to Kelly Windorski, the firm's chief financial officer, a Securities America lawyer, Nicholas Christakos, cited a letter attached to its 2010 financial statements from auditor Ernst and Young. Mr. Christakos quoted from the Ernst and Young letter, citing “the ‘company's uncertain legal contingencies' raising substantial doubt about its ability to continue as a going concern.'”
Mr. Windorski then testified that the “going concern” is Securities America's “ability to continue operations to meet its ongoing liabilities.” He added that “uncertain contingencies” are “the matters related to Medical Capital and Provident.”
As the mediation talks continue, James Nagengast, Securities America's chief executive, is trying to allay the fears of 1,800 tense and anxious reps and advisers.
In a conference call with advisers this morning, Mr. Nagengast said that the firm “would not try the Medical Capital and Provident cases in the media, and that the legal strategy ‘was too complex' to explain in 30-second sound bites, ” according to a broker, who asked not to be identified.
