Mediation is set to take place on Thursday in Chicago between Securities America, parent-firm Ameriprise Financial and plaintiffs’ attorneys involved in a class-action settlement rejected March 18 by a federal judge in Dallas.
But for the independent broker-dealer industry, the ramifications of the case – which entailed private-placement shares of Provident Royalties – and similar lawsuits (namely those tied to the private-placement of Medical Capital Holdings’ shares) are likely to be felt for some time, experts say. (See a full list of IBDs who sold Provident at the end of this article.)
“The vast majority of IBDs do not have such a parent and are thinly capitalized,” said Chip Roame of Tiburon Strategic Advisors near San Francisco, in an interview with AdvisorOne.
“They will also be far more threatened,” Roame noted. “I do expect more IBDs to go under in 2011 — and more to sell out just before they go under.”
Other industry experts agree. “As more independent firms become subject to lawsuits from sales of these private placements, it remains to be seen if they will have the capital to handle them and if some will be forced out of business,” said Mark Elzweig, an executive-search consultant in New York, in an interview.
For those IBDs that choose to stay in the private-placement game, “They will probably move to ramp up their due diligence and be more skeptical of such offerings. In other words, they will need to be a lot more careful,” Elzweig (left) explained, and this is particularly true for those IBDs that don’t have a large parent company.
“Financial products are becoming more complex by the day,” Roame said. “This is not a one-time thing related to Medical Capital. This is a long-term trend of more complicated products requiring better due diligence.”
Recently, these private-placement lawsuits have contributed to the demise of QA3 LLC in February 2011 and GunnAllen in May 2010.
As Ameriprise said in a statement on Wednesday, Securities America is one of "many firms that distributed Medical Capital and Provident Shales securities."
Widespread IBD Issue
A January 2004 Form D filing with the SEC, for instance, listed the following broker-dealers as potential sellers of shares in Medical Capital Holdings of Anaheim, Calif.: First Security Financial Advisors of Venice, Fla.; Great Northern Financial Services Inc., of Veradale, Wash.; WFP Securities Inc., of San Diego; and First Montauk Securities of Red Bank, N.J.
An August 2009 court document associated with sales of Provident Royalties’ shares named the following defendants in the lawsuit brought by Joseph Billiterri against Securities America: CapWest Securities, Ameriprise, Capital Financial Services, GunnAllen Financial, National Securities Corp., Capital Financial Holdings Inc., Capstone Financial Group Inc., GunnAllen Holdings Inc., National Holdings Corp., NEXT Financial Holdings Inc., QA3 LLC., QA3 Financial Corp., and NEXT Financial Group.
Furthermore, close to 50 IBDs and investment firms are highlighted in a document from the case brought by Milo Segner against Provident Royalties filed as part of the company’s bankruptcy proceedings in June 2010 in Dallas. (See the full list at the end of this article.)
Many of these IBDs, like Investors Capital Corp., though, were much less exposed to liabilities than Securities America and some of the now-defunct broker-dealers.
“The company had limited sales of Provident Royalties, as compared to some other broker-dealers, like Securities America or QA3,” said Melissa Tarentino, general counsel and chief risk officer of Investors Capital Corp., in a statement. “A total of 22 ICC advisors sold $4.99 million of Provident Royalties, selling it to their clients or investing in the product themselves.”