In a highly unusual legal maneuver, the trustee overseeing the receivership of private placements that went bust last year is suing 49 broker-dealers seeking to claw back $285 million in claims, including commissions, from the firms.
On June 21, the liquidating trustee, Milo H. Segner Jr., filed the lawsuit in federal bankruptcy court in Dallas against the broker-dealers, alleging they “failed miserably in upholding their fiduciary obligations” when selling the series of Provident Royalties LLC private placements.
(See the full list of B-Ds named in the suit, as well as their sales of Provident and commissions collected.)
The Securities and Exchange Commission last summer charged Provident and its leading executives with fraud in running a $485 million Ponzi scheme based on allegedly phony oil-and-gas investments. From June 2006 to January 2009, dozens of independent broker-dealers sold the Provident investments to some 7,700 investors. A court-appointed receiver was then put in charge of the Provident assets.
The trustee's lawsuit is on behalf of investors who bought $251 million of private placements and paid $34 million in commissions to the broker-dealers and their representatives.
“It is incredibly unique to see a receiver” take such an action, particularly as it involves dozens of third-party broker-dealers, said Scott Silver, a plaintiff's attorney who is suing broker-dealers on the behalf of individual investors who bought the Provident Royalties private placements.
The trustee is looking to take back the commissions that reps earned on the products.
“The commissions, fees and payments received from Provident Royalties encouraged and played a substantial role in the negligent and/or grossly negligent conduct of the broker-dealers,” according to the lawsuit.
Included as exhibits in the suit are two lists — one of the broker-dealers that sold Provident Royalties and the amount of sales, and another of the total commissions generated. The leading sellers were Capital Financial Services Inc., with $33.7 million in sales, Next Financial Group, with $33.5 million, and QA3 Financial Corp., with $32.6 million.
QA3's general counsel, Greg Bolton, said the firm would “aggressively defend” itself from the trustee's complaint and would contest the trustee's standing to file such a lawsuit.
Gordon Dihle, an attorney for Capital Financial Services, said he could not comment because he had not yet seen the lawsuit.
Ami Shah, general counsel for Next Financial, declined to comment.
