A U.S. District Court judge denied Securities America’s request Friday to bundle several arbitration claims and class action lawsuits into one $21 million settlement agreement related to allegedly fraudulent private placements sold by the company. (See Registered Rep.’s previous story.) This means that individual arbitrations against the company can proceed, which will likely result in increased obligations for SAI.
“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,” said Janine Wertheim, spokeswoman for SAI.The case has larger ramifications, says Philip Palaveev, president of Fusion Advisor Network in Elmsford, N.Y.
“It is very unsettling,” he says. “They have 2,000 reps that are trying to figure out what to do next.”
If the firm’s advisors decide to leave or the firm goes under, this would provide a significant opportunity for other b/ds looking to recruit. “If somehow SAI ends up in substantial trouble, the wave of advisors leaving could be the biggest migration ever.”
It could feed into the dominance of larger IBDs such as LPL Financial, Raymond James Financial Services, Commonwealth Financial Network, and Cambridge Investment Research. Or, “This could be a chance for smaller broker-dealers to catch up with them.”
At the same time, Palaveev says we haven’t seen the last of these issues, and advisors need to be careful of where they end up going. Many b/ds are dealing with financial troubles, while others face litigation.
SAI’s situation also highlights the risks of these private placements and how careful b/ds need to be when putting them on their platforms.
“If you want to be in that business, you have to make the investments to do that right.”
Alternatives are one of the primary differentiators between IBDs and RIA platforms, which have a harder time getting access to them. “But could those things be too dangerous to continue?”
But Palaveev said the industry shouldn’t overreact to the significance of SAI’s situation.
“They’re not going out of business today.”
Pleading Poverty
During Friday’s hearing, SAI argued that the firm did not have enough capital to meet the $400 million in outstanding obligations, said Joseph Peiffer, a partner at New Orleans-based Fishman Haygood Phelps Walmsley Willis & Swanson, which is representing about 20 SAI clients in arbitrations. But Judge W. Royal Furgeson Jr. of U.S. District Court for the Northern District of Texas concluded that SAI’s assets did not fit the legal definition of a “limited fund,” or when a claim is made that assets of the defendant are not sufficient to cover damages. In this case, part of the settlement would have been a percentage of SAI’s gross revenue going forward, and this is not definable, Peiffer said.
Now, the question is, “Is Ameriprise Financial (NYSE: AMP) going to support the sales staff at Securities America or not?”
If SAI is claiming poverty, it would only make sense for lawyers and investors to look at other defendants to recoup losses, including advisors, he said. Peiffer said he has already heard of some lawyers amending their arbitration claims against the b/d to include the broker involved.
Some lawyers typically do not name the broker even if he took part in the wrongdoing, but in a situation like this one where SAI claims it can’t pay, “they almost have to sue the advisor.”
It’s still unknown whether SAI’s parent Ameriprise will step up and help the firm out.
“I think Ameriprise would be crazy not to,” Peiffer said.
“The chance has increased that Ameriprise will have to step up eventually,” said Alois Pirker, Aite Group analyst.
According to a proxy statement released March 11, Ameriprise’s top five executives earned approximately $37.9 million combined last year. CEO James Cracchiolo took home about $17.7 million, while Donald Froude, president of the Personal Advisors Group, posted $4.1 million in earnings last year.
The next step is for advisors to evaluate whether they want to move to a new firm, and nowadays, advisors in the industry are moving very quickly, Pirker said. If SAI’s advisors feel the firm doesn’t create a trusted platform for their clients, this quickly becomes a liability for them.
“Ameriprise has reached out to us to determine whether it can help the parties to find a reasonable resolution for all constituents,” Wertheim said.
SAI hopes to have a better sense of whether such a resolution is possible by the end of the week, she added.
