Independent broker/dealer American Beacon Partners was shut down in May by its parent holding company Beacon Acquisition Partners (BAP), which then conducted a mass transfer of the IBD’s 90 reps to another of its subsidiaries, Allied Beacon.
The trail from one firm to another is somewhat difficult to follow, however, as each firm was renamed by the parent company after purchase. American Beacon was originally named Pavek Investments, which BAP purchased in March of 2010. BAP knew that some of Pavek’s reps had sold real estate deals from the now bankrupt DBSI as well as underperforming oil and gas partnerships from Ridgewood Energy, but didn’t know the extent of it. After investigating things further, they decided to shut the firm down. Allied Beacon, meanwhile, is the reincarnation of Waterford Investor Services, an IBD that BAP purchased earlier this year. Allied Beacon now has a total of 190 reps.
Allied Beacon President and CEO James Hintz said that considering the number of arbitrations attorneys are filing against IBDs these days, and with firms going out of business left and right, BAP decided to close down American Beacon and start fresh with Allied Beacon. Shuttering American Beacon, Hintz claims, kills any potential liabilities related to the bad investments, and gives the firm’s former advisors a clean slate. They could still be subject to arbitration, but Hintz said Allied Beacon would not be liable because it’s a separate entity that had no business ties with American Beacon.
It has been a difficult environment for IBDs, with arbitrations and litigation erupting all over the place due to troubled private placements, DBSI and other problematic alternative investments. It seems like a different firm goes belly up every week, leaving some advisors with limited options. Hintz said many firms involved with these legacy issues are hanging on by a thread, especially because errors and omissions carriers won’t cover certain type of investments.
American Beacon does have two outstanding arbitration claims related to reps that sold DBSI, one claiming $220,000 and the other $100,000, Hintz said. (FINRA suspended American Beacon’s membership as of June 19 for failure to pay arbitration fees, filings show.) Laurence Landsman, a securities attorney with Block & Landsman, said the arbitrations could still move forward and there could be an award against the firm, even though it has been dissolved. But the claimants just might have a more difficult time seeking compensation if the b/d has no assets or insurance.
According to Hintz, there was no smoking gun with DBSI; it was just a product of the economy, as opposed to other investments that have blown up. From a due diligence perspective, “no one could’ve seen anything coming.”
Hintz claims there was no transfer of interest or assets to the new broker/dealer, so the liabilities should die with the corporate entity. Since BAP is not a member of FINRA, if any potential liabilities were to come up, the claims wouldn’t be tried under FINRA’s arbitration system; any litigation would go to Canada, he argues. Landsman said it’s true that FINRA only takes claims asserted against an actual member, but that doesn’t mean claims could only be tried in Canada. Depending on the situation, the firm could be subject to jurisdiction in state and federal courts where the investors are located, he said. Assuming Allied Beacon is a new entity, that b/d wouldn’t be liable for investments made by the rep prior to the move, he added.
Landsman believes it’s a defensive measure to limit their liability, but it doesn’t mean they’re totally off the hook. The firm’s liability depends on the nature of the acquisition, the new corporate structure and the relationship between the parent company and the b/d that closed down.
Hintz believes the new structure is the best way to protect the firm from future litigation. He said the company invested about $300,000 in American Beacon before it shut the firm down, including spending on a clearing firm relationship, advisory platform, back office and compliance systems, software and personnel.
“We learned the hard way how to protect our firm,” Hintz said.
Despite the troubles, the firm is looking to grow to around 350 reps in the next 12 months through an asset purchase. Hintz declined to comment further.