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Securities America, Ameriprise Said to Be Near Settlement With Plaintiffs

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Securities America told its representatives in an e-mail message on Tuesday that it was making “very good progress toward finalizing a settlement of the Medical Capital and Provident Shale matters,” referring to the sale by Securities America reps of certain Regulation D private placement securities from MedCap and Provident.

Moreover, Janine Wertheim, the broker-dealer’s senior VP and chief marketing officer, wrote to reps that the firm expected to file a settlement agreement on the class action suits “within the week,” and that Securities America is “receiving good support of settlement terms from clients."

On March 18, federal judge Royal Furgeson in Dallas rejected a class action settlement by multiple claimants who said they had lost $400 million in gas investments from Provident Royalties LLC. and medical receivables debt from Medical Capital Holdings Inc. that were sold by Securities America reps.  Both companies have been charged with fraud by the SEC. Both are also in receivership.

That earlier settlement would have allowed Securities America to pay $21 million, or about $0.05 on the dollar, to settle the charges. The judge’s decision also allowed arbitration cases to proceed in states such as Montana and Massachusetts where securities regulators have brought action against Securities America and its management.

Reports in The New York Times and Reuters, which AdvisorOne could not independently confirm as of press time, put the new settlement figure at $180 million (The Times) and $150 million (Reuters). Both reported that “hundreds” of clients (The Times) and “dozens” (Reuters) have agreed to the settlement, enough to finalize the deal. “The deadline for clients to sign on was Sunday,” wrote New York Times Dealbook’s Susanne Craig Tuesday night, “and the vast majority of clients agreed to the settlement.” Reportedly, Securities America parent company Ameriprise Financial would likely contribute the greater share of any settlement.

Reuters’ Joseph Giannone wrote Tuesday night that attorney Daniel Girard of San Francisco-based Girard Gibbs, “confirmed there was an agreement in

principle to settle the class action suit for $80 million.” He also wrote that “Securities America separately agreed to pay $70 million to investors currently pursuing claims in industry arbitration.” Should those numbers be accurate, it would translate, wrote Giannone, to a “recovery rate of 40 cents on the dollar, net of fees.”

An Industry-Wide Misjudgment?

“The settlement appears to have taken place because the plaintiffs’ attorneys did the simple math. Thirty percent of zero is zero. If they’d pushed it too far, the plaintiffs could have ended up with nothing,” said executive-search consultant Mark Elzweig, in an interview  with AdvisorOne on Wednesday.

“It’s really hard to make the case that Securities America is guilty of any particular malfeasance," Elzweig (left) said, since these products "were sold by more than 30 broker-dealers. It’s the instance of an industry-wide misjudgment; many other BDs made the same mistake.”

As for the long-term impact of the case, Elzweig said that on the one hand, “It could blow over rather quickly. Ameriprise stepped in, resolved it and will continue to do so, which is a strong positive going forward for Securities America.”

A veteran financial advisor, who requested anonymity and at one time was affiliated with Securities America, said in a telephone interview with AdvisorOne on Wednesday, “My impression is that even if Securities America completes this settlement, it is not necessarily done with the issue. Other state regulators could bring separate cases and actions against it. Securities America will get hit with this again.”

“Regardless of how the settlement plays out," the advisor continued, "there’s a feeling that Securities America has been misleading its advisors all along as to the extent and depth of the problem, associated issues involving its net capital, etc. Its reputation is on the ropes, because it has demonstrated a consistent pattern of behavior.”

Houston-based recruiter Rick Peterson reported Wednesday that he had been "speaking with a few Securities America advisors on behalf of LPL Financial, and these talks are ongoing.” Peterson said he "fully expects" to attemp to recruit "any and all advisors with Securities America, as unsettling as this is. The adverse publicity has to be affecting their clients.”

“The damage is already done, regardless of the settlement. For the advisors, the easiest thing to say [to a client] is, ‘We moved [to another BD] in your best interests.’ ”

But Elzweig draws a different conclusion. “We need to wait and really see how many reps they lose in the coming six months,” Elzweig said. “I don’t think it will be so many.”

He also put Securities America's woes in a broader perspective. “The true effect of this is that, going forward, independent broker-dealers will be extremely careful about the kind of

deals or products they allow on their platforms. This could potentially change a lot of things, and there should be a whole new level of due diligence. Again, this is an industry-wide problem. We saw that at 30-plus firms, these due-diligence processes didn’t work well."

The Background to the Case

Furgeson, who rejected the class action settlement by multiple claimants, would need to approve any new settlement.

In Investment Advisor magazine’s annual directory of independent broker-dealers, in 2010 Securities America ranked 11th in number of reps among independent BDs—1,906 as of April 1, 2010—and fifth in revenue, with $412 million in gross revenue. Securities America ranked 17th in average annual production per rep—at $167,961 gross production—and had $14.4 billion in fee-based assets under management. Securities America also reported in Investment Advisor's annual directory that 17% of its reps had their own RIA.

In the 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 the 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.


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