The survival of independent broker-dealer Securities America could come down to a federal judge’s ruling on a class action suit stemming from the sale of private placement notes.
During a hearing in a Dallas federal court last Friday, judge W. Royal Furgeson, Jr., ruled against a $21 million settlement that Securities America had worked out with class action plaintiffs, in a civil case called Billitteri v. Securities America, Inc.
Had the settlement gone through it might have cut off enforcement actions against Securities America from securities regulators in Massachusetts and Montana over its role in the sale of private placements Medical Capital and Provident Royalties, Brian McNiff, a spokesman for William F. Galvin, secretary of the Commonwealth of Massachusetts, said in a telephone interview. The judge refused to halt the state’s cases.
Securities America’s chief financial officer testified that legal costs and arbitration awards from a class action suit could cripple the firm and force it out of business, according to press reports.
On Feb. 18, the Dallas federal court had temporarily stayed various arbitration actions against Securities America, according to a joint brief filed by securities regulators in Massachusetts and Montana.
"We are disappointed that the court in Texas did not approve the settlement on Friday, but remain committed to finding a solution to the Medical Capital and Provident Royalties matters for the company, its advisors and their clients,” according to an email statement from Janine Wertheim, Securities America’s senior vice president and chief marketing officer.
There are other investor lawsuits against Securities America separate from the Billitteri case, McNiff said. Judge Furgeson’s decision did not stop those from proceeding, either.
The implications of Securities America incurring tens of millions of dollars in damages from investor lawsuits also drew further action from its parent company, Ameriprise.
"Ameriprise has reached out to us to determine whether it can help the parties to find a reasonable resolution for all constituents,” according to Wertheim’s statement. “We hope to develop a process in the coming days that would facilitate exploration of such a resolution, and to have a good sense by the end of the week whether such a resolution is possible."
Many small broker-dealer firms have collapsed under the weight of investor arbitration claims concerning private placement investments. QA3 Financial is the most recent firm to be undone. Securities America, of course, would be the most visible firm to be taken out by those troubles. In 2010, Financial Planning ranked Securities America as the sixth largest independent broker-dealer, with its 1,800 affiliated representatives, and revenue between $400 million and $500 million.
Massachusetts and Montana, which both have arbitration claims against Securities America, were particularly concerned that the $21 million settlement would have undercut state regulators to enforce securities laws in their territories.
“Where courts have properly recognized that ‘states enacted securities regulation to protect investors,’ such investor protection would be rendered meaningless to the harmed consumer if the ability of the states to order restitution is enjoined,” according to the brief, which cited state law.