Securities America met with plaintiff’s attorneys on Thursday to negotiate a resolution to investor claims against the company related to its sale of allegedly fraudulent private placements. The outcome of the mediation was unknown at press time, as key players involved didn’t return phone calls. Other media outlets have not reported on the results.
The proceedings, held in Chicago and mediated by Retired U.S. District Judge James M. Rosenbaum, were aimed at reaching a financial settlement between the independent broker/dealer and investors in a class action suit. Last Friday, a judge denied the firm’s request to bundle several arbitration claims and class action suits into one $21 million settlement agreement. The firm now faces individual arbitrations as well as class actions against it.
It has been highly debated whether Ameriprise Financial (NYSE: AMP), SAI’s parent company, will bail it out and how much the firm will contribute. In its annual report, Ameriprise said it set aside $40 million in legal reserves to cover litigation related to the private placements. The report also said the IBD was on the hook for about $400 million in outstanding obligations.
“While Ameriprise Financial has no obligation to participate in Securities America’s settlement discussions, we have reached out to Securities America to determine if we can help the parties find a reasonable resolution for all constituents,” Ameriprise said in a statement to investors Monday. “As we work to help the parties come to a reasonable resolution, we will balance the best interests of all Ameriprise constituents.”
While it’s still unclear how the mediation will play out, it draws attention the dangers of working for a sinking broker/dealer. Securities America was certainly not the only b/d involved with these bad investments, and others are likely to continue to struggle with the fallout. Philip Palaveev, president of Fusion Advisor Network, offers some tipsfor dealing with an imploding broker/dealer.
The situation also points to the importance of knowing how much excess capital your b/d has. According to Ameriprise’s annual report, Securities America’s excess capital was down to $2 million at the end of 2010.
It also raises questions of whether the pendulum will swing towards demonizing an entire asset class—private placements—that may have a place in certain kinds of client portfolios. While there have been a few bad apples, namely Medical Capital and Provident Royalties, this has drawn negative attention to the asset class, causing investors and b/ds to be increasingly skeptical and focus on the risks of these investments. These private placements are also key to the asset formation of the companies that file them with the SEC.
