Ameriprise Financial filed an 8-K statement with the SEC on Thursday announcing that it would pay $150 million to settle arbitration and lawsuit claims against its independent broker-dealer subsidiary, Securities America Inc., over the sale of certain private placement notes from Medical Capital Holdings and Provident Royalties LLC.
In its 2010 annual report filing, Ameriprise previously said it had set aside $40 million to help settle the claims and charged that amount against its 2010 fourth-quarter earnings. In the April 21 SEC filing, Ameriprise said the settlements and provisions for other claims related to MedCap and Provident would result in an additional $118 million pretax charge to the company’s first quarter 2011 results, which are scheduled to be announced April 25.
Ameriprise declined to comment for this article, but Janine Wertheim, senior VP and chief marketing officer for Securities America, said in a prepared statement, "We are very pleased to have reached a comprehensive settlement agreement to resolve these matters." Further, she wrote that "the frauds allegedly committed by Medical Capital and Provident Royalties have harmed many investors and companies, including Securities America."
The settlement arises out of claims that Securities America and some of its representatives sold certain private placement notes from Medical Capital and Provident without conducting the proper due diligence. Both companies were charged with fraud by the SEC, and both companies are now in receivership. Multiple individual buyers of those securities sued Securities America and its management, led by CEO Jim Nagengast (left), some in a class action, and at least two states—Montana and Massachusetts—also took legal action against Securities America. In January, a FINRA arbitration panel awarded $1 million to a claimant who had accused Securities America and one of its reps with breach of fiduciary duty and financial elder abuse over the sale of promissory notes of Medical Capital.
The Ameriprise filing with the SEC included a statement that the settlement does not include any admission of wrongdoing by Securities America, but that “management determined that a reasonable and expeditious solution to this unfortunate situation was in the best interest of all constituents.”
The filing also indicated that the settlement agreements remain subject to “participation requirements for claimants to be covered by the settlements, and preliminary and final review and court approval of the class action settlement.”
Court approval would come from U.S. District Court Judge Royal Furgeson sitting in Dallas, who on March 18 rejected a class action settlement by multiple claimants who said they had lost $400 million in gas investments from Provident and medical receivables debt from Medical Capital that were sold by Securities America reps. Under that proposed settlement, Securities America would have paid $21 million to settle the charges of failing to conduct the proper due diligence on the private placement securities, and the federal court would have preempted the states from taking separate legal action.
In the original complaint by the SEC, Provident was charged with running what was in essence a Ponzi scheme, selling $485 million of notes to 7,700 investors nationwide through many broker-dealers. Medical Capital sold a total of $76.9 million in notes, according to a SEC complaint, which charged that a Medical Capital subsidiary was already “defaulting on interest and/or principal payments” on certain of its notes “in the same month” that it was selling other notes.
In Thursday's prepared statement, Securities America's Wertheim said that with the settlement, "We can now move forward in strong financial condition to serve our advisors and their clients."
See a recent AdvisorOne article for more on the repercussions of the Securities America case for the company and the IBD industry as a whole.