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Securities America scores huge victory in Reg D case

2/18/2011

InvestmentNews

Judge combines private-placement arbitration claims with class actions; plaintiff’s attorney decries decision

Securities America Inc. scored a huge legal victory this morning when a federal judge in Dallas halted three upcoming Finra arbitration cases against the firm and its brokers over the sale allegedly bogus private placements.

Judge W. Royal Furgeson Jr. of U.S. District Court for the Northern District of Texas instead combined the arbitration hearings with two class actions.

He ordered Securities America, which is owned by Ameriprise Financial Inc., to create a $21 million settlement fund for investors suing the firm in those class actions, which stem from the sale by Securities America brokers of private-placement notes from Medical Capital Holdings Inc. and Provident Royalties LLC

The ruling is significant to Securities America in that it helps to limit the broker-dealer’s liability in the private-placement cases.

In total, Securities America sold about $700 million of Medical Capital notes and $18 million of Provident shares, according to court documents. (Click here for a breakdown of B-D sales of Provident, as well as commissions booked on these sales.)

Mr. Furgeson placed a temporary restraining order on three Financial Industry Regulatory Authority Inc. arbitration claims proceedings against Securities America, which were to start over the next two weeks. The investors were seeking $4.8 million in damages for buying private placements issued by Medical Capital and Provident, both of which the Securities and Exchange Commission charged with fraud in 2009.

“We are pleased that the judge is willing to consider the agreement reached by the parties,” wrote Janine Wertheim, a spokeswoman for Securities America. “We believe this represents good progress as we pursue a resolution to this matter.”

Many plaintiff’s attorneys had dreaded Judge Ferguson’s decision, fearing that the amount of money their clients could receive from a class action settlement would be far less than what they could win in an individual arbitration.

A plaintiff’s attorney representing Securities America investors blasted the decision. “In my opinion, it’s a corrupt settlement,” said Ryan Bakhtiari, a partner at Aidikoff Uhl Bakhtiari. “It strips the rights of the investors to arbitrate claims and have claims heard by arbitration panels. Instead, they could receive a payment of pennies on the dollar” for their claim, he said. He added that his clients will appeal the settlement.

Ms. Wertheim did not respond to a phone call seeking comment about Mr. Bakhtiari’s statement.

Securities America is by the largest independent broker-dealer that sold Medical Capital and Provident notes. It has about 1,900 reps and advisers and generated close to $500 million in fees and commissions last year.

On Dec. 31, a Finra arbitration panel awarded almost $1.2 million in damages and legal fees to a client who sued Securities America and a broker over the sale of Medical Capital private placements. The firm was facing up to 150 Finra arbitration claims over the next 12 to 18 months, lawyers said in January.

Mr. Furgeson’s reasoning in halting the arbitration cases against Securities America is similar to his decision last month to halt arbitration claims against Capital Financial Services Inc., another broker-dealer that was part of a class action involving the sale of the same private placements. In that case, the firm’s pot of money from excess net capital and insurance was extremely limited, about $1.5 million, so arbitration cases against it had to be halted to protect plaintiffs in the class action, Mr. Furgeson argued.

The decision today is similar regarding the claims against Securities America, and the order is a way to protect the pot of potential money available to all investors, not only those who were first in line through securities arbitration.

“If the arbitration were to proceed, it would expend funds for legal defense that would otherwise be made available to class members,” Mr. Furgeson wrote in his order. “Additionally, if the claimants in these arbitrations are fully successful, they could receive a significant portion of the funds available to potential class members under the proposed settlement agreement.”

The judge wrote: “Should the arbitration be temporarily restrained, funds that would otherwise be equitably distributed to members of the potential settlement class would not be depleted.”

About 20,000 investors bought Medical Capital notes through dozens of independent broker-dealers, but it is not known how many have filed arbitrations against those firms.

Mr. Furguson ordered a hearing about the motion for March 3.


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