Securities America Faces Settlement Hearing Friday; Legal Liabilities Up in the Air

Securities America will face a federal court judge Friday to decide whether the independent broker/dealer gets preliminary approval for a $21 million settlement agreement related to allegedly fraudulent private placements sold by the company. Firm says FA retention is nevertheless still strong.

Securities America will face a federal court judge Friday to decide whether the independent broker/dealer gets preliminary approval for a $21 million settlement agreement related to private placements sold by the company. Securities America got caught up in the private placement deals from Medical Capital and Provident Shale Royalties, which were accused of fraud by the Securities and Exchange Commission in 2009; this resulted in a slew of arbitrations and class action suits filed against Securities America, its reps, as well as other broker-dealers that had exposure to the deals.

On Feb. 17, the plaintiffs in the class action suits filed to subsume all the arbitrations and class actions into one settlement, in which Securities America would pay $21 million. According to an annual report by Ameriprise (NYSE: AMP), SAI’s parent, the independent b/d is on the hook for about $400 million in outstanding obligations. If the settlement goes through, investors would get about 5 cents on the dollar, according to Joseph Peiffer, a partner at New Orleans-based Fishman Haygood Phelps Walmsley Willis & Swanson, which is representing about 20 SAI clients in arbitrations.

Friday, Judge W. Royal Furgeson Jr. of U.S. District Court for the Northern District of Texas will decide whether to grant preliminary approval of the settlement agreement and whether to halt all pending arbitrations until a final hearing of the settlement, Peiffer said. Furgeson will also decide whether the arbitrations against SAI should wait for the class action or not.

But things are still up in the air in terms of what SAI’s legal obligations will be and how the firm will pay it out. According to the annual report, SAI had $2 million in excess capital as of the end of 2010, down from $15 million at the end of 2009. Ameriprise said it has put aside $40 million in legal reserves to cover litigation related to the private placements.

“Clearly it is an impact on [SAI’s] financials,” Aite Group analyst Alois Pirker. “They might have to go back to the mothership to get backing.” Pirker expects Ameriprise to step up to help SAI, because an IBD is a hot commodity these days and it’s a key part of Ameriprise’s overall business.

One SAI advisor, who declined to be named because he’s going to be leaving the firm soon, said he doesn’t expect Ameriprise to bail out the firm, based on its past behavior. In September 2008, Ameriprise shelled out $33 million to clients who were invested in The Primary Fund, a money market mutual fund that “broke the buck.” However, the payout did not cover Securities America’s advisors and clients. He said Ameriprise has often treated SAI as its “stepchild.” Ameriprise did not return calls seeking comment.

“They [Ameriprise] have proven time and time again that clients and reps come second to profits,” the advisor said.

He plans to leave the firm because he said he doesn’t want to be associated with a company that doesn’t put clients first. He had exposure to Medical Capital as an advisor recommending the investment as well as an investor himself. “I ate my own cooking.” His firm’s exposure was about $500,000. He declined to say whether anyone has filed legal action against him.

Reputational risk is very important to advisors in these types of situations, said Aite’s Pirker. “Certainly the brand [advisors] use or are associated with is something that could be a liability on their business.”

But there are still a lot of questions about the firm’s ultimate liability and how much SAI would end up paying out, Pirker added. If the amount ends up being larger than the firm can swallow, this would likely create nervousness among advisors. “You could see that this could spark advisors to move to a different firm.”

Several SAI brokers did not return phone calls seeking comments on their plans, while some declined to comment. Another SAI advisor, who also declined to be named, said he’s staying loyal to the broker/dealer as long as the firm exists. If SAI disbands, he’ll either retire, go out and find another b/d or sell his business. He said he has a good relationship with SAI, and he believes Ameriprise will back the firm financially.

Mark Penske, chairman and CEO of wealth management firm United Advisors, an affiliate of SAI, said the broker/dealer continues to operate as business as usual. He’s not worried by the private placements problems, and he believes the firm will weather the storm, although he doesn’t know whether Ameriprise will help out with the obligations.

“While some of our representatives have voiced their concerns regarding the litigation, our advisor retention remains very high, we are recruiting new advisors to the firm, and our advisors are engaged in their work serving their clients,” said Janine Wertheim, spokeswoman for SAI. She declined to comment on the legal proceedings.

According to Peiffer, it’s rare to see several actions against a company rolled up into one case. This is a special case because SAI contends that it doesn’t have the cash to pay the judgments, he said. Peiffer disagrees, and says that SAI has access to capital. The proposed settlement has made many investors angry because, if it goes through, no one would be permitted to bring individual claims against the firm.

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