Three independent broker-dealers are suing their insurance carriers for failing to cover investors' legal claims, with one charging that its carrier has exposed it to “financial ruin.”
The broker-dealers, which include Next Financial Group Inc., Berthel Fisher & Co. and
Brecek & Young Advisors Inc., allege the insurance carriers are falling far short in paying the maximum insurance coverage for claims filed by investors over losses suffered because they were steered into private placements, real estate investments and unsuitable investment products.
The insurance carriers, however, claim that the maximum amount covered by their policies is millions of dollars less than the broker-dealers seek because the investors' lawsuits are related to each other and arise, at least in the case of Next Financial and Berthel Fisher, from the failure of a specific product.
For example, in Next Financial lawsuit against Arch Specialty Insurance Co. in U.S. District Court in Dallas, the amended complaint filed by the broker-dealer in January claims it has liability limits of $2 million per occurrence and a total coverage limit of $15 million per policy period.
Next Financial has $9.5 million in claims stemming from its sales of Provident Royalties LLC private placements, and wants Arch to cover them. Arch, in its counter-claim, alleges the maximum amount it should pay is $2 million because all of the claims are related to one specific product.
Next Financial is one of the firms named in a class action, also in federal court in Dallas, alleging damages by broker-dealers due to the sale of Provident private placements. Next Financial is alleging Arch is in breach of contract, and that its position makes resolution of the class action, Billitteri v. Securities America, “impossible and exposes Next to financial ruin.”
In total, Next Financial sold $43 million of Provident and received more than $3 million in commissions and fees. (See:
The 50 largest IBD sellers of Provident) Provident, which raised $485 million and sold its oil and gas deals through dozens of independent broker-dealers, was charged with fraud in 2009 by the Securities and Exchange Commission.
Barry Knight, chief executive of Next Financial, did not return calls seeking comment.
Conflicts between broker-dealers and insurance carriers over whether claims can be bundled together or “inter-related” are becoming more prevalent, executives and attorneys said. If broker-dealers are thinly capitalized and have little cash reserved for legal costs and lawsuits, the results could prove debilitating, executives said, particularly if firms suffer big dollar losses in arbitration claims.
Before it closed its doors this month, QA3 Financial Corp.
was also in the middle of a lawsuit with its insurance carrier, Catlin Specialty Insurance Co., disputing the extent of its coverage over private investments, claiming it faced bankruptcy if the matter was not resolved.
In the dispute between Berthel Fisher and Arch Specialty Insurance, Berthel is claiming $7 million in aggregate coverage, while Arch is claiming a $1 million limit to all related claims. Berthel's lawsuit is in federal court in Cedar Rapids, Iowa. (See the full company profile here for
Berthel Fisher in the
InvestmentNews B-D Data Center.
Like Next Financial, the Berthel claims stem from client lawsuits from one product. In this case, it wasn't a private placement but a series of real estate deals known as tenant-in-common exchanges that were packaged by DBSI Inc., which filed for bankruptcy protection under Chapter 11 in November 2008.
The trustee in the DBSI bankruptcy is seeking to claw back $49 million in commissions from broker-dealers that sold DBSI. (See the full list here of
IBDs that sold TICs from DBSI)
Berthel reportedly generated $5.6 million in commissions from DBSI, according to bankruptcy court documents. According to the Berthel Fisher and Arch lawsuits, investors have filed up to 20 different arbitration claims against Berthel Fisher with the Financial Industry Regulatory Authority Inc.
Tom Berthel, chief executive and owner of Berthel Fisher, would not comment on the firm's lawsuit against Arch, saying only, “I hope there is a resolution to it. I think there can be.”
“We're not interested in going out of business,” Mr. Berthel said.
He said recent chatter among broker-dealers included “bad-mouthing” some firms, particularly after the collapse of QA3 Financial.
“There's talk of who's next,” he said, adding he had no interest in indulging in such speculation. “Let's figure out what caused some of the issues with insurance carriers,” he said. “I'm a little disgusted” with the recent industry gossip about broker-dealers' potentially closing, he said.
Regarding QA3, he said it was “not good for the industry to have a firm go down like that,” and that for it to happen was particularly harmful to advisers and clients who had to scramble to find a new firm to land their accounts.
Attorneys for Arch in the lawsuits by Next Financial and Berthel Fisher did not return calls seeking comment.
Brecek & Young is suing Lloyds of London Syndicate 2003 over an arbitration claim it settled in 2009 for about $1.4 million, which includes a settlement with investors and legal costs. Lloyds has paid only $390,000 towards Brecek & Young's defense and indemnity expenses, according to court filings. Brecek & Young is suing Lloyds in federal court in Kansas City, Kan.
David Buchanan, an attorney for Lloyds, did not return a call seeking comment.
Securities America Inc. acquired Brecek & Young in 2008, and Janine Wertheim, a spokeswoman for Securities America, said the lawsuit “involves Brecek & Young pursuing coverage for a previously known case that arose prior to Securities America's acquisition” of the firm.
