A sprawling case of alleged securities fraud involving an independent broker-dealer and two brokers may wind up costing an insurance company $10.3 million.
A sprawling case of alleged securities fraud involving an independent broker-dealer and two brokers may wind up costing an insurance company $10.3 million.
VSR Financial Services Inc., a broker-dealer in Overland Park, Kan., last month settled a $10.3 million claim involving inappropriate sales of private placements, but in an unusal arrangement, National Union Fire Insurance Co. of Pittsburgh now faces liability for paying the claim.
The insurer, a unit of New York-based American International Group Inc., underwrote VSR's directors' and officers' insurance coverage.
“It's the first time we've ever done anything like this,” said Mike Stanfield, VSR's chief executive. At the heart of numerous claims against brokers Rebecca Engle and Brian Shuster was an allegation that the two sold high-risk private placements to more than 200 unqualified investors, many from the same rural area in Nebraska.
The case has spawned dozens of arbitration cases, with VSR being named in 14 claims, and three lawsuits against Ms. Engle in state and federal courts. She was affiliated with VSR from May 2006 to February 2007.
Last month, she and Mr. Shuster were charged with eight counts of securities fraud by the Nebraska Attorney General's Office. Fraudulent practices in connection with the sales of securities are a felony with a penalty of up to five years in jail, a $10,000 fine or both.
Aware of the financial burden that hefty fines and settlements place on their practices, many broker-dealers are working with lawyers and aggrieved clients to craft settlements that shift the liability to insurers, one plaintiff's attorney said.
“When they get the [arbitration] complaint, an increasing number of smaller broker-dealers and reps are saying they have insurance,” said Scott Silver, an attorney with Blum & Silver LLP in Coral Springs, Fla. “And there's a willingness to let investors know what the policy does and does not cover.”
Such openness among arbitration antagonists may be occurring more frequently because carriers that underwrite errors and omissions policies for representatives and firms are denying an increasing number of claims, Mr. Silver said.
“Generally speaking, broker-dealers will work with clients to make a claim with a carrier when a complaint comes in,” he said.
In settling a claim against his firm in such a way that the onus for settlement falls on its insurer, Mr. Stanfield noted that VSR's approach was unusual. But he stressed that the particulars of the case involving Ms. Engle stood out because they involved actions that took place before the broker became affiliated with the firm.
Ms. Engle was based in Nebraska City, Neb., and worked for three firms in a short time span before joining VSR in 2006. From 2002 to 2006, she was affiliated with the now-defunct Capital Growth Financial of New York; from 2000 to 2002, she worked for the former Wachovia Securities Inc. of Richmond, Va., now part of Wells Fargo Advisors of St. Louis; and from 1998 to 2000, she worked for the now-defunct Kirkpatrick Pettis Smith Polian Inc. of Omaha, Neb.
Mr. Stanfield said the private-placement investments at the heart of the matter were sold by Ms. Engle when she worked for Capital Growth. In the recent arbitration claim against the firm, investors alleged that VSR failed to supervise her.
The 14 arbitration claims against VSR exhausted the firm's errors and omissions policies, so the $10.3 million settlement was aimed at the firm's directors and officers, who are covered by other insurance. As part of the settlement, investors have agreed not to take any further action against VSR.
E-mail Bruce Kelly at bkelly@investmentnews.com.
